THE LUMIN LAB

6 Different Types of Cryptocurrency: A Quick Guide for Banks and Credit Unions

by Fred Decker

Throughout most of its history, the banking sector has been a bastion of stability and slow, conservative change. That’s no longer the case, as competition from aggressive fintechs and pressure from a generation of impatient, digital-native consumers have forced financial institutions into a cycle of rapid adaptation. 

Some of these challenges, like remote deposit and improved user interfaces, were relatively straightforward to implement. Support for cryptocurrencies is more challenging, in part because crypto was explicitly created with the goal of sidelining governments and banks. So what are the different types of cryptocurrency, and what roles do they play in the current financial marketplace? 

This quick overview will help you orient yourself in this sometimes-quirky (but potentially lucrative) marketplace. 

1. Bitcoin: The Foundational Cryptocurrency

Bitcoin is the original cryptocurrency, launched in 2008 in conjunction with a brief white paper written by a person (or group of people) using the pseudonym Satoshi Nakamoto. Nakamoto retreated from the project a few years later and remains unknown, but Bitcoin has become the foundation stone of the cryptocurrency market as a whole, and remains the market leader. As of January 2022, Forbes estimated its market cap at $882 billion

Nakamoto initially conceived Bitcoin as a currency (hence “cryptocurrency”), something people could spend and use like money. While you can make purchases with Bitcoin, in practice it’s not well suited to the task. Transactions are slow and costly, and any subsequent rise in the coin’s value can make purchases look extremely bad in retrospect (the infamous 2010 pizza delivery being an outstanding example). 

Where Bitcoin has found its primary niche, instead, is as an investment. There will only ever be 21 million Bitcoin, so while “miners” will continue to profit for the foreseeable future, the coin’s real future lies in its status as an investment and store of value. The buying, selling and management of Bitcoins and Bitcoin-based derivatives, in the booming secondary market, is where financial institutions can expect to make money as intermediaries. 

2. Ethereum: A Crypto “Swiss Army Knife”

Ethereum is the second biggest player in cryptocurrency, valued by Forbes at a market cap of “over $447 billion” in January of 2022. Ethereum isn’t the currency as such — that’s called Ether — but the blockchain platform, which can be leveraged for a lot of other purposes. Your institution could use the platform to float its own bespoke cryptocurrency through an initial coin offering, for example, if you had the resources and the inclination to do so. 

The Ethereum blockchain can be used for a lot of other things, as well. One of the most important is its ability to house smart contracts, something your business and investment customers may inquire about. A smart contract is simply a contract that’s expressed in software form rather than as a document, and can be automatically triggered by external events. These contracts have a number of uses, but the most interesting from the financial perspective is that they can function in much the same way as a traditional futures contract. 

Other blockchain platforms offer many of the same features, but Ethereum’s scale and reliability make it the front-runner. 

3. Binance Coin: A Special-Purpose Offering

Cryptocurrencies aren’t all intended for general-purpose use. Some serve more limited roles, and Binance Coin is the leading example of that type. Binance itself is a major cryptocurrency exchange, where other crypto products are bought and sold. Binance Coin — with a market cap estimated by Forbes at over $86 billion in January 2022 — is the market’s internal currency, which you can use to pay fees or make purchases on its exchange. 

Users of the platform could, for example, sell Bitcoin to make a profit, roll those funds into Binance Coin and then use that in turn to purchase Ethereum or some other currency. 

4. Tether: Stability by Design

Most cryptocurrencies soar and crash cyclically, driven by the winds of supply and demand (and the occasional deflation of a bubble). Not all investors — individual or institutional — have an appetite for that, which is why there are “stablecoins”: cryptocurrencies that are anchored to the value of a specific fiat currency. 

Tether is the biggest of those, with a market cap estimated by Forbes at over $78 billion in January of 2022. Its value is “tethered” to that of the US dollar, which means it’s at least hypothetically a more predictable, reliable investment option than other leading cryptocurrencies. 

That may not play out as planned in the real world, but at least the promise of greater stability may be appealing to your institution’s clients (and its board). 

5. Dogecoin: The Joker in the Deck

There are several possible reasons to start a cryptocurrency. Pioneers like Bitcoin were grounded in libertarian utopianism, wanting to wrest control of “money in the abstract” from governments and banks. Newer coins often just want to cash in on a hot category. 

And then there’s Dogecoin. Named for a popular social-media meme featuring a Shiba Inu dog, it was literally launched as a joke, a way to mock the hype around crypto and its earnest evangelists. Ironically, Dogecoin’s growth — fueled primarily by the support of an enthusiastic community — may be the truest expression of crypto’s egalitarian dream (though occasional boosts from Elon Musk certainly don’t hurt).

In January 2022 the Motley Fool estimated Dogecoin’s market cap at $63.4 billion, which puts it squarely among the leading cryptocurrencies at present. Given its engaged community of supporters and investors, and its ironic appeal to younger demographics (plus the halo effect of the charismatic Musk’s interest), support for this coin could serve your institution well. 

6. XRP: Crypto for the Financial Community

One of the really useful applications of cryptocurrency comes in the form of money transfers between nations. These often come with significant overhead in time and fees, so the relatively high per-transaction costs and slow transaction speed of conventional cryptocurrencies like Bitcoin are less of a deterrent in this context. 

Unsurprisingly, an enterprising cryptocurrency has targeted this niche. XRP was created by high-profile payment processor Ripple, specifically to facilitate international currency transfers by banks, credit unions, fintechs and other financial institutions. Accordingly, its fees for such transfers are relatively low by crypto standards, and transactions are completed in just a few seconds. 

The regulations governing cryptocurrencies are still evolving across jurisdictions, but they’re generally less stringent than those covering banks and credit unions. Before opting to play in this market, you’ll need to evaluate any potential areas where the divergence between bank regulation and crypto regulation might cause legal issues. 

Change is Coming

There are thousands of cryptocurrencies out there; the six profiled here were chosen because they’re among the largest and most representative (and their selection by no means constitutes an endorsement). The big question facing financial institutions isn’t which specific cryptocurrencies to support, but whether (and why) to support them. 

Lumin Digital is currently exploring cryptocurrency solutions to meet the future demographical needs. Stay updated on cryptocurrency education and trends by checking out our blog.

Sources

Bitcoin – Bitcoin – A Peer-to-Peer Electronic Cash System

The Robb Report – Why the Father of Bitcoin is Nowhere to Be Found

Forbes – Top 10 Cryptocurrencies in January 2022

Marketwatch – Bitcoin Pizza Day? Laszlo Hanyecz Spent $3.8 Billion on Pizzas in the Summer of 2010 Using the Novel Crypto

Investopedia – What Happens to Bitcoin After All 21 Million are Mined? 

U.S. Securities and Exchange Commission (SEC) – Spotlight on Initial Coin Offerings (ICOs)

IBM: What Are Smart Contracts? 

CNBC – Why Tether, the World’s Third-Biggest Cryptocurrency, Has Economists Worried

Know Your Meme – Doge

Barron’s – Dogecoin Started As a Joke. Now It’s Too Big to Laugh Off

CNBC – Dogecoin Jumps 9% After Elon Musk Says it Can be Used to Buy Tesla Merchandise

The Motley Fool – Types of Cryptocurrencies

Forbes – Meet Ripple & XRP, Cryptocurrency for Banks

Thomson Reuters – Compendium – Cryptocurrency Regulations by Country