Cryptocurrency is an extremely high-risk and complex investment. Don’t invest unless you’re prepared to lose all the money you invest. You are unlikely to be protected if something goes wrong.

Forbes Advisor has provided this content for educational reasons only and not to help you decide whether or not to invest in cryptocurrency. Should you decide to invest in cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.

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Since Bitcoin’s debut more than a decade ago, many new types of cryptocurrency have emerged. From stablecoins to non-fungible tokens (NFTs) to dog memes, a wide variety of cryptos are available today. What they share in common is the use of the distributed ledger technology known as the blockchain.

How many cryptocurrencies are there?

CoinMarketCap reports that there are approximately 22,932 cryptocurrencies, with a total market capitalisation of £855 billion ($1.1 trillion). That’s quite a crowd considering that Bitcoin only launched in 2009.

The first alternatives to the original crypto – later termed altcoins – didn’t appear on the scene until 2011, with the likes of Litecoin (LTC) for example. It wasn’t until Ethereum (ETH) launched that altcoins gained popularity.

Some cryptos, like Bitcoin, are used as investment vehicles. Many buyers consider them to be a store of value. Others are more transactional, like ETH. Developers can build all sorts of transactional tools, services and communities using the more transactional blockchains.

Crypto coins vs. crypto tokens

There’s also a distinction between coins and token. Bitcoin and altcoins like Ethereum that run on their own blockchain are considered coins. When most people think of cryptocurrency, they probably think of crypto coins like Bitcoin. 

Tokens are digital assets stored on the blockchain database. They are created on blockchains that already exist, and typically represent an asset or provide the holder a specific service or access to an application. A token is a digital unit that represents an asset or utility. For example, countless tokens run on the Ethereum network.

Types of crypto tokens

• Value tokens. These types of tokens are an object of value, such as a digital asset like art or music in the form of an NFT
• Utility tokens. These are tokens that help provide a service. They give users the right to perform actions on a blockchain network or a decentralised application
• Security tokens. This type of token represents ownership of an asset. Companies may use security tokens to raise capital by selling equity tokens. Since they represent ownership of a financial security, these assets are regulated by the Securities and Exchange Commission (SEC). They are different from NFTs and value tokens because they are fungible.

What are ERC-20 tokens?

ERC-20 tokens – the name comes from the Ethereum Request for Comment 20 – run on the Ethereum network. Popular ERC-20 tokens include the meme coin Shiba Inu (SHIB) and the stablecoin DAI (DAI).

ERC-20 is the technical standard for fungible tokens created using the Ethereum blockchain, It sets the rules developers must follow for a token to work on Ethereum’s platform. If you’re interested in learning more about how cryptocurrencies are created, check out our guide on new cryptocurrencies.

Altcoins

The definition of an altcoin had evolved since the early days of cryptocurrency when only a handful of crypto assets existed. Back then, anything but Bitcoin was considered an altcoin.

The world of cryptocurrency is much bigger today, with a variety of coins and tokens with use cases that go well beyond being a medium of exchange. Many of these cryptos are not necessarily Bitcoin competitors.

The leading altcoin today is Ethereum, which has a market cap of £177.1 billion to Bitcoin’s £456.7 billion. Other major altcoins include Solana (SOL) and Cardano (ADA). SOL and ADA are considered to be Ethereum competitors.

Altcoins can have different purposes beyond just serving as a digital currency. Whereas Bitcoin is intended to be a form of decentralised currency, Ethereum is a computing network that lets users run decentralised applications on the blockchain and host smart contracts.

Stablecoins

A stablecoin is a cryptocurrency with a value pegged to another asset’s price. If functioning correctly, a stablecoin pegged to the British pound should always be valued at £1.

One type of stablecoin is issued by a financial entity that holds collateral backing for each unit of stablecoin and the other uses derivative strategies to make sure the crypto asset maintains the value of the underlying government currency.”

Collateralised stablecoins. Collateralised stablecoins maintain a pool of collateral to support the coin’s value. An equal amount of collateral is taken out of the coin’s reserves whenever someone sells their tokens. Tether (USDT), which is pegged to the US dollar, is probably the most recognisable stablecoin, although people question the reliability of its reserves.

Algorithmic stablecoins. These stablecoins use algorithms to control their supply and thus maintain their price peg. An example is TerraUSD (UST), which was originally pegged at £0.78($1) by creating and destroying a sister coin called Luna. Every time TerraUSD was bought or sold, a respective amount of its sister token, Luna, was created or destroyed.

This strategy worked well – until it didn’t. When panic caused people to cash in their TerraUSD in a mass exodus, TerraUSD de-pegged from its £0.78($1) price and slid to near zero, along with Luna. In TerraUSD’s defence, the same panic caused Tether to slip from £0.78($1) per coin to £0.73($0.94) per coin.

Meme coins

Meme coins are the comedians of the crypto world. These coins gain popularity and traction through memes and social media. The term is also used somewhat jokingly for coins that blow up on social media.

The original meme coin that started it all is Dogecoin (DOGE), which was branded around the “doge” Shiba Inu dog meme. But what began as a joke became a verifiable cult asset as users flocked to the asset. As a result, more meme coins began to crop up.

More than 200 meme coins have been created since Dogecoin first launched. But while fun to conceptualise, meme coins can fall as quickly as they rise. DOGE today is worth only a tenth of its all-time high from just over a year ago. But this is an important lesson for all cryptocurrency investors to keep in mind.

Key takeaway

While crypto-assets represent an important technological, financial, economic, and computer science innovation, investing in them should be considered risky.

Investors should only invest capital they are willing to lose.

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Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.