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.

For context, cryptocurrency generally uses two different cryptographic methods: one dedicated to generating its public-private key pairs, and another for the purpose of validating transactions. 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. 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.

Another key cryptocurrency concept is decentralisation. 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.

It's also worth noting that cryptocurrencies are stored in digital wallets, which can be either hot (connected to the internet) or cold (offline). Investors use private and public keys to access wallet funds.

Of course, this is a very simple overview, and you might want to conduct thorough research before investing in any crypto project.

How to invest or trade in crypto with us

1. Open an account online or download our IG Invest app. From there, you’ll be able to access the cryptocurrency market through our platform.
2. Learn more about how the cryptocurrency market works and choose a coin to research.
3. Build a trading plan that aligns with your personality and risk appetite.
4. Search for your desired coin on our web platform or app.
5. Choose your position size, then open and monitor your investment.

Remember that past performance is not an indicator of future returns, that the value of investments can fall as well as rise and that you could get back less than your original investment.

If you want to test out your strategy first without risking real capital, consider our demo account where you can practice your cryptocurrency trading tactics with virtual funds.

Cryptocurrency types

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

Currency Coins

Currency coins are designed to function like 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 investors interested in decentralised value transfer or holding assets long-term without relying on traditional banks. 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 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, to varying degrees of success.

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 considering investing in 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 investment 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 cryptoassets 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 investing in 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 are seen as democratic coins, because they give holders voting power over decisions that shape the future of their protocols. For instance, owning Uniswap or MakerDAO allows users to vote on upgrades, fee structures and treasury allocations.

These tokens are integral to decentralised autonomous organisations, which aim to replace corporate structures with transparent, community-driven governance. Holding governance tokens can provide a sense of ownership and influence over a project's trajectory, though participation requires time and understanding of protocol governance — so are perhaps niche for now.

It might make sense to avoid tokens that offer voting rights but have low community engagement or weak governance models, as this intriduces risks including ineffective voting power, which limits influence and potential returns.

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 decentalised exchanges and NFT integrations.

Meme coins are generally seen as extremely high-risk investments because their value relies primarily on hype or social media sentiment rather than any real fundamentals or potential long-term utility. However, they can sometimes generate short-term explosive gains.

Many crypto traders enjoy allocating a very small percentage of their portfolios to this segment of the market. 

Choosing the right crypto for you

Once you understand how cryptocurrencies are categorised, it becomes easier to choose the right one for your portfolio. Some of the more important factors include:

• Investing strategy — consider whether you’re more interested in a long-term store of value, investing in blockchain innovation, or stable coins. Having a clear strategy can help you to resist hype-driven trends and focus on your financial goals
• 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 investors prefer to spread their investment across different types of crypto, including Bitcoin, Ethereum and a few other altcoins. Diversification by category reduces the chances of your entire portfolio being wiped out by the failure of one investment

Crypto mistakes

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

• Chasing hype — investing in coins because they’re tending on social media is perhaps not the best idea. Hype is not fundamentals, and fear of missing out is often the precursor to losses
• Forgetting research — Many new investors buy tokens without understanding the project, its purpose or the team behind it. Always do your own research
• Ignoring fees and speeds — some blockchains have high transaction fees that can eat into your profits especially if you are making frequent trades. Slow processing times can also be a problem if you are trading short term price movements
• Overtrading — crypto is volatile by its nature. Setting realistic profit targets and using stop-losses can help you from letting market sentiment override 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, investors can ride gains all the way back down. Know when you plan to take profits before you place a trade

Crypto beginner’s guide summed up

• Remember to start with the basics, including 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 investing strategy and risk tolerance 
• Consider project fundamentals and diversification as you make your portfolio choices
• Avoid Common Mistakes by not chasing hype and skipping research