With the meteoric rise of Bitcoin over the last four years, and the hype around the seemingly volatile price swings leading to massive gains and losses, crypto newcomers often ask, “what are cryptocurrencies?”
The term “cryptocurrencies” is used to describe digital tokens or coins that are often used as a means of peer-to-peer payment or within a particular digital ecosystem. The space grew in popularity after the 2008 Global Financial Crisis (GFC) which saw financial institutions around the world struggle, along with governments and central banks introducing a raft of stimuli in an attempt to keep countries and economies afloat.
In October 2008, and at the peak of the GFC, a pseudonymous person called Satoshi Nakamoto posted the whitepaper titled, “Bitcoin P2P e-cash paper”, which provided the foundation for the creation of Bitcoin – a decentralised digital currency without the need for an intermediary. The first Bitcoin transaction subsequently occurred on 3 January 2009.
There are now more than 11,000 different digital tokens and cryptocurrencies actively traded around the world. From small beginnings, the total market capitalisation for cryptocurrencies is now in excess of $2 trillion, with the average daily volume of trade around $100 billion dollars.
Are all cryptocurrencies the same?
It is important to note that not all cryptocurrencies are the same. The cryptocurrency ecosystem is diverse with tokens and coins serving many different purposes. Given the broad extent of applications, we have outlined the top five categories of cryptocurrencies, however, as the space grows, more categories and use cases will arise.
1) Stored Value Coins
These cryptocurrencies and digital assets are often purchased by investors on the basis that the cryptocurrency or token will increase in value over the long term. In a traditional investment sense, the most common example outside of cryptocurrency is gold.
For cryptocurrency, Bitcoin is the most popular and well-known cryptocurrency akin to a stored value, particularly due to its high demand and limited supply.
These cryptocurrencies often represent a decentralised financial ecosystem, for example in the form of a blockchain, that support other cryptocurrencies and token. These blockchain ecosystems are similar to how a Microsoft Windows or Apple Mac OS operating system allows users and third parties to build and run applications on their platform. Ethereum is prime example of this, and facilitates the creation of smart contracts, decentralised applications and other cryptocurrencies within its ecosystem via the Ethereum blockchain.
Stablecoins are cryptocurrencies that are pegged to a fiat currency or an asset. By its name, these cryptocurrencies are touted as being “stable” in value as compared to other types of digital currencies. The most common stablecoin is USD Tether, which is pegged one-to-one to the US dollar. USD Tether is most commonly used in trading pairs with other digital assets and cryptocurrencies or as a means to transfer payments.
4) Utility Tokens
Utility tokens are a category of cryptocurrency whereby a user can use a particular token within a certain ecosystem. The use of these tokens varies but often include access to products or services. The ecosystems in which utility tokens are used can range from real time gross payment ecosystems, as evident in the use of XRP within the RippleNet payments ecosystem, or Enjin coin, which is used within the gaming industry. These cryptocurrencies often serve two purposes, one being an investment into cryptocurrencies and the other being the use of such tokens within the ecosystem.
5) Meme Coins
Meme coins are a recent category of cryptocurrencies that have gained popularity on the basis that there is no inherent value to these cryptocurrencies or are often inspired by jokes. One of the most successful meme coins is Dogecoin, which has a market capitalisation of over $31 trillion. Dogecoin is based on the “doge” Internet meme and contains a Shiba Inu as its logo. It was initially created as a fun cryptocurrency, but its popularity has led to Dogecoin becoming one of the world’s most well-known cryptocurrencies.
The cryptocurrency team at Salerno Law are specialists in all areas of the law particularly cryptocurrency. This includes launching and operating a cryptocurrency exchange, the regulatory framework applicable to cryptocurrencies and advising on creating and launching a cryptocurrency token.
By Krish Gosai
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.
Salerno Law is managed by Emma Salerno, Managing Partner and CEO, who has a wealth of experience from operating her own businesses across Australia as well as a range of in-house and commercial experience both in Australia and overseas.