Many cryptocurrencies were created to facilitate work done on the blockchain they are built on. For example, Ethereum's ether was designed to be used as payment for validating transactions and opening blocks. When the blockchain transitioned to proof-of-stake in September 2022, ether (ETH) inherited an additional duty as the blockchain's staking mechanism.

Ripple's XRP is designed to be used by banks to facilitate transfers between different geographies.

Because there are so many cryptocurrencies on the market, it's important to understand the types of cryptocurrencies. Knowing whether the coin you're looking at has a purpose can help you decide whether it is worth investing in—a cryptocurrency with a purpose is likely to be less risky than one that doesn't have a use.

Most of the time, when you hear about cryptocurrency types, you hear the coin's name. However, coin names differ from coin types. Here are some of the types you'll find with some of the names of tokens in that category:

Utility: XRP and ETH are two examples of utility tokens. They serve specific functions on their respective blockchains.

Transactional: Tokens designed to be used as a payment method. Bitcoin is the most well-known of these.

Governance: These tokens represent voting or other rights on a blockchain, such as Uniswap.

Platform: These tokens support applications built to use a blockchain, such as Solana.

Security tokens: Tokens representing ownership of an asset, such as a stock that has been tokenized (value transferred to the blockchain). MS Token is an example of a securitized token. If you can find one of these for sale, you can gain partial ownership of the Millenium Sapphire.

If you find a cryptocurrency that doesn't fall into one of these categories, you've found a new category or something that needs to be investigated to be sure it's legitimate.

Are Cryptocurrencies Legal?

Fiat currencies derive their authority from the government or monetary authorities. For example, each dollar bill is backstopped by the U. S. government.

But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have primarily functioned outside most existing financial infrastructure.