A beginner’s guide to choosing the right type of cryptocurrency

What is cryptocurrency?

Before considering the right type of cryptocurrency, you first need to understand what crypto itself is, and why it matters. In simple terms, a cryptocurrency is a form of digital currency that uses cryptography for security — the mathematical and computational practice of encoding and decoding data. Unlike traditional currencies issued by governments (generally referred to as fiat money), cryptocurrencies operate on decentralised networks based on blockchain technology. The core idea is that crypto enables peer-to-peer transactions without relying on a central authority such as a bank or government.

Rather than being controlled by a single organisation, cryptocurrencies are maintained by global networks of computers, often referred to as nodes. These networks validate and record each coin's transactions on a public ledger called a blockchain - with the decentralised nature of cryptocurrencies making them resistant to censorship and fraud. 

The first cryptocurrency, Bitcoin, was launched in 2009 and laid the foundation for the thousands of altcoins that followed. Each cryptocurrency serves a different purpose, from being a means of payment to powering decentralised applications. Choosing the right one depends on your goals, understanding of how each crypto works and perhaps most importantly your risk tolerance. Of course, this is a very simple overview, and you might want to conduct thorough research before trading or investing in cryptocurrencies.¹

Types of cryptocurrencies

There are literally thousands of cryptocurrencies with strong potential use cases available to trade in but as a general rule all of them can be classified within six key categories:

Currency coins

Currency coins are designed to function similarly to fiat money and are used as a store of value or to make payments. They tend to use proof-of-work (PoW) consensus mechanisms, which require significant computing power, and correspondingly higher energy costs, to validate transactions.

On the plus side, this process does provide strong network security, making these coins popular with those interested in decentralised value transfer — whether trading price movements via contracts for difference (CFDs) or buying and holding crypto directly. For context, some currency coins are already accepted by various retailers, demonstrating ongoing real-world adoption.

Bitcoin, often referred to as ‘digital gold’ is the best-known currency coin due to its limited supply, though Litecoin and Bitcoin Cash have been noted for their relatively faster transaction times and lower fees.

On the risk side, currency coins are vulnerable to price volatility and regulatory scrutiny, especially given the environmental concerns associated with PoW models.

Smart contract platforms

Smart contract platforms are not just currencies but can function as platforms for building decentralised applications - known as dApps. Ethereum was the first cryptocurrency to introduce smart contracts, which are self-executing agreements with no need for a middleman.

Since then, Avalanche, Solana and Cardano among others have been launched, in an attempt to provide similar capabilities but with improvements in scalability and speed.

Smart contracts are key to many decentralised finance (DeFi) services, games and NFT marketplaces - including the Metaverse. They allow developers to launch tokens, applications and protocols that operate autonomously, making them essential to the growth of Web3.

If you’re gaining exposure to a smart contract platform, it’s important to analyse its developer ecosystem, scalability, transaction fees and long-term vision, because platforms with growing user bases and continued development could offer greater trading potential.

Key risks include bugs, hacks and network congestion issues, with each platform’s performance typically tied to adoption and scalability.

Stablecoins

Stablecoins are different to other crypto assets as they are pegged to real-world resources like the US Dollar or gold and are specifically designed to hedge against volatility. For instance, one USD Coin (USDC) is always meant to equal $1. These coins are commonly used to hedge against market swings or transfer value between platforms without converting back to fiat.

Stablecoins come in different types, including directly fiat-collateralised (like USDC), crypto-collateralised (like DAI, which is on the Ethereum blockchain and is also pegged to USD), and algorithmic.

Fiat-backed stablecoins are generally considered the most stable, while algorithmic versions can be viewed as riskier. Stablecoins are also critical to DeFi protocols, serving as liquidity and collateral in trading platforms. Understanding how a specific stablecoin maintains its peg is perhaps the most important consideration.

Perhaps the most important risk with stablecoins is the potential for a peg failure or collateral mismanagement, which can cause a rapid loss in value, especially for algorithmic projects.

Utility tokens

Utility tokens are designed for a specific use within a blockchain ecosystem. For example, Binance Coin is used to pay trading fees on the Binance exchange, Chainlink provides data to smart contracts and Filecoin is used to pay for decentralised data storage.

In addition, these tokens often grant access to exclusive features or services, with the value of utility tokens closely tied to the demand for the services they provide.

Before gaining exposure to a utility token, it’s important to look for strong partnerships, integration with other platforms and a sustainable business model. The more widely used the service, the more potential value the token can have. If usage is low, then it can indicate a problem.

Utility token value is highly dependent on platform usage, if adoption remains weak then token value can erode quickly.

Governance tokens

Governance tokens give holders voting power over protocol decisions like upgrades, fee structures and treasury allocations. Examples include Uniswap and MakerDAO.

Whether you're trading governance token CFDs or buying them directly, what matters is understanding that their value is closely tied to protocol adoption and governance activity. Strong community engagement and active development can drive price movements, while tokens with weak governance models or low participation may see limited price action. 

Focus on the protocol's user base, development activity and community sentiment when making your decision.

Meme coins

Meme coins are cryptocurrencies inspired by internet jokes, trends or online communities rather than being based on any specific use case or technological innovation. They usually begin as funny or speculative projects but can sometimes gain traction if they go viral, or their community grows quickly or perhaps through a celebrity endorsement.

The most famous meme coin is inarguably Dogecoin, which was originally created as a crypto parody, though it was swiftly followed by the nearly equally popular Shiba Inu (named after the dog breed and parroted as the ‘Dogecoin killer’).

Despite their unserious origins, both have now established significant trading volumes, with the latter even introducing decentralised exchanges and NFT integrations.

Meme coins are generally seen as extremely high-risk because their value relies primarily on hype or social media sentiment rather than any real fundamentals or potential long-term utility. However, they have historically shown extreme volatility with both significant gains and losses.

Many people active in crypto allocate a very small percentage of their activity to this segment of the market.

How to choose the right crypto for you

Once you understand how cryptocurrencies are categorised, it becomes easier to choose the right one. Consider these key factors when making your choice:

• Your approach – consider whether you're looking to trade on short-term price movements using CFDs, or buy and hold cryptocurrency directly over a longer period. A clear strategy focuses on your specific financial goals rather than market sentiment.
• Project fundamentals – analyse whether a coin has a clear use case and technical vision, with a competent team and strong, active community. This includes checking whether the project boasts external audits, partnerships or backing from venture capital
• Regulation and security – cryptocurrencies can be vulnerable to hacks, bugs and rug pulls. Check the security model (for example, PoW, PoS) and continually check regulatory trends as not all coins are treated equally, with some coins banned in certain jurisdictions
• Diversification – many traders prefer to spread their activity across different types of crypto, including Bitcoin, Ethereum and a few other altcoins. Diversification by category reduces the chances of all your positions moving in the same direction

Common crypto mistakes

It’s easy for beginners to fall into trading traps, especially when it comes to crypto. Common mistakes include:

• Chasing hype - gaining exposure to coins because they're trending on social media is not a strategy. Hype is not fundamentals, and fear of missing out is often the precursor to losses
• Forgetting research - many beginners buy tokens without understanding the project, its purpose or the team behind it. Thorough research helps inform your decisions
• Ignoring fees and speeds - some blockchains have high transaction fees that can eat into returns, especially with frequent activity. Slow processing times can also be a problem when trading short-term price movements
• Overtrading - crypto is volatile by nature. Setting realistic targets and using stop-losses can help you keep market sentiment from overriding your judgment
• Scams - from phishing attacks to rug pulls, scams are rampant in the crypto space. If something sounds too good to be true, it probably is
• Exits - without clear goals or a plan to take profits, you can ride gains all the way back down. Know when you plan to exit before you enter a position

How to trade and invest in cryptocurrencies with IG

With IG, there are two ways to get started with cryptocurrency – each suited to a different approach.

Investing in crypto¹

Buy and sell actual cryptocurrency directly through the IG Markets app. When you buy crypto this way, you hold the underlying asset. Your risk is limited to the amount you invest, but the value of your crypto can still fall significantly.

Here's how to get started with crypto investing:

1. Download the IG Markets app and open an account.
2. Research the cryptocurrencies available and decide which align with your goals.
3. Choose how much you want to invest – only invest what you can afford to lose.
4. Search for your chosen crypto and place your order.
5. Monitor your holdings and review your position regularly.

Please note: Crypto is unregulated and high risk. Investor protections do not apply. IG Digital Assets Australia Pty Ltd is registered with AUSTRAC. 

Crypto CFD trading

Trade on the price of cryptocurrency using contracts for difference (CFDs). You don't hold the underlying crypto – instead, you trade on whether prices will rise or fall, and can take a position in either direction. Leverage amplifies both potential profits and losses, and losses can exceed your initial deposit. You can trade on a selection of major cryptos or get wider market exposure with our Crypto 10 index CFDs.

Here's how to get started with CFD trading:

1. Open a live account or create a demo account online to access the cryptocurrency market through our platform.
2. Research different coins and learn how they move.
3. Build a trading plan that aligns with your goals, personality and risk appetite.
4. Search for your desired coin on our web platform or mobile app.
5. Choose your position size, then open and monitor your trade.

Please note: With CFDs you can lose more than you deposit, you do not have ownership in the underlying asset and you may be subject to margin close-outs if you do not maintain sufficient margin.

Crypto beginner’s guide summed up

• Start with the basics by understanding what cryptocurrency is, how blockchain and wallets work and why decentralisation matters
• Choose the right crypto by exploring key projects like Bitcoin, Ethereum and stablecoins based on your strategy and risk tolerance 
• Consider project fundamentals and diversification as you make your trading and investing choices
• Avoid common mistakes by not chasing hype and skipping research

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Footnotes
¹ IG Digital Assets Australia Pty Ltd (ABN 686 210 462) is registered with AUSTRAC as a Digital Currency Exchange provider. Cryptocurrency trading is highly speculative and volatile. The cryptocurrency market is unregulated and you do not benefit from Investor protections available for regulated financial products. Cryptocurrencies are not covered by the Australian Financial Complaints Authority (AFCA) scheme. You may lose all of your investment. The purpose of this website is solely to display information regarding the products and services available on the IG Markets App. It is not intended to offer access to any of such products and services. You may obtain access to such products and services on the IG Markets App. The information on this website does not take into account your objectives, financial situation or needs. You should consider whether cryptocurrency trading is appropriate for you in light of your circumstances and seek independent financial advice before deciding to trade.