3 Types Of Cryptocurrencies You Need To Know

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We are standing on the precipice of an entirely new world. In almost all recorded history only the elite have been able to participate and benefit from the major economic changes.

Today, things are radically different. The internet has created a democratization of those who can capture the upside of economic shifts. Nowhere is this fact more evident than in the volatile arena of cryptocurrencies. Nearly everyone, regardless of economic status, family pedigree, or connections, can take advantage of the opportunities in this nascent field.

Not only has the concept of money started to change, but we are also seeing the first steps of a completely new way of carrying out transactions and contracts.

A Brief History Of Monetary Change

The first major shift in the history of human transaction was from the physical trading of commodities and services to the use of commodities (precious metals or other valuable items) to represent and exchange value from one person to another.

Next, coins and paper money, backed by precious metals, made it easier to transfer value back and forth among users.

Fiat currency, money that is not backed by precious metals -- but only by faith in government, soon arose, enabling central authorities to control monetary supplies.

The global transfer of fiat currency via digitization led to the interconnectivity of the world's markets and supercharged their expansion into today's global economy.

Now, things have started to shift toward complete digitalization of currency. The world-changing creation of the blockchain ledger has eliminated the need for a central authority to back or issue currency.

Nearly impossible to scam, the blockchain demands trust in transactions thanks to its decentralized nature. Digital currencies built on the back of the blockchain ecosystem will forever change money and how we use it.

A Guide To Today's Cryptocurrencies

The huge run-up in bitcoin, ether, ripple, and others has focused the public's attention on the rapidly expanding world of cryptocurrencies.

People from every walk of life are jumping in and taking speculative risks on certain cryptocurrencies. Stories abound of folks buying a few hundred coins for under a thousand dollars, forgetting about them, and then being pleasantly surprised when their coins are worth millions a few years later.

Most of these winning investors are simply lucky -- a long shot speculation that paid off hugely.

At the same time, many others have made fortunes by building knowledge about the blockchain and cryptocurrencies. Knowledge, like with traditional investments, is the key to creating consistent profits in the new world of digital assets. When you understand the basics of how blockchain technology and cryptocurrencies work, it becomes easier to make intelligent decisions about investing.

Each cryptocurrency solves a particular problem and fits into one of three categories. These categories are transactional, platform, and utility . It is important to note that some cryptocurrencies can fit into more than one category.

Let's take a closer look at each of these categories and examples of each.

1. Transactional

This is the original category for cryptocurrencies. Transactional cryptocurrencies are designed to be used as money and exchanged for goods and services. Bitcoin , litecoin , and a host of others are transactional cryptocurrencies.

Transactional cryptocurrencies are intended to eliminate the need for government-issued currency. Indeed, some form of cryptocurrency will likely replace all fiat currency one day. But the replacement cryptos may still come from central banks -- Singapore's government, for one, is testing out this idea with its Project Ubin.

2. Platform

Platform cryptocurrencies are designed to eliminate middlemen, create markets, and even launch other cryptocurrencies. Platform cryptocurrencies provide the backbone for a host of future applications.

Ethereum is a prime example of a platform cryptocurrency. Ethereum is a decentralized platform that is used to run smart contracts. A smart contract is an application that runs exactly as programmed without the possibility of fraud, censorship, or even downtime.

Ethereum is also the building block of many of the new cryptocurrencies.

3. Utility

A utility cryptocurrency is designed for a particular task. Ripple (XRP) is an example of a utility cryptocurrency. Designed to facilitate fiat money transfer in an economical and highly efficient manner, ripple is used by multiple banks and institutions. Some of the names on their website include UBS, Santander, BMO and American Express.

Risks To Consider: Cryptocurrency investing is uncharted territory. While I am certain we are in the midst of radical economic changes, no one knows for certain which cryptocurrencies will survive long term.

Think about the dot-com boom: Many companies folded but a few survived creating extreme wealth for their early investors. The same thing will likely happen in the crypto space.

No matter how deep your knowledge base, only use the money you can afford to lose when speculating in cryptocurrencies.

Action To Take: Take the time to learn about cryptocurrencies and the technology behind them, as they will be a large part of the future.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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