Trying to Figure out Which Cryptocurrencies to Watch? Here Are the Major Categories

No matter how qualified a person might be, no one can predict the market. But what you can do is learn to spot trends. You just have to keep those trends in perspective, especially in crypto, where increased volatility makes accurate trend spotting nearly impossible. Where trends are particularly useful, however, is in working out what types of coins you might want to invest in. From there, though? You’re on your own. Here is our list of the larger types of currencies you may want to be aware of.

Bitcoin

The OG crypto has always been relevant. Launched 2009, it was the original cryptocurrency and commands a market capitalization close to a trillion dollars (above it, on a good day). That makes it the top crypto by market cap and the most valuable cryptocurrency. A crash in Bitcoin can trigger a cascading crash in other coins, made much sharper by leveraged traders and panic sellers. Correspondingly, a rise in Bitcoin’s price has tended to bring other digital coins with it.

There are a lot of things to be aware of with Bitcoin. The first is its declining dominance over the cryptocurrency market, which, in a roundabout way, signals that Bitcoin’s importance in the overall cryptocurrency market may be diminishing. Despite that, Bitcoin is still the most popular coin by market cap, and it’s by a lot. Consequentially, the launch of several Bitcoin futures exchange-traded funds in the U.S. in 2021 was of great benefit to the entire crypto market, since it allowed institutional investors to gain indirect exposure to Bitcoin. A spot ETF—one that lets people trade Bitcoin’s current price right on the stock market (rather than trading it through derivative futures contracts)—in the U.S. would likely reshape the market once again. That said, the U.S. Securities and Exchange Commission has delayed its decisions on several major ETFs until (at least) the spring of 2022.

Of particular concern to institutional investors is whether Grayscale will convert its mammoth Bitcoin trust into an ETF. In the absence of Bitcoin spot ETFs in the U.S., Grayscale has been unable to convert its $29 billion Bitcoin holdings into an ETF. This Bitcoin might be dumped on the market if Grayscale converts its trust to an ETF.

For years, investors piled money into the trust, and then Grayscale sold shares of it on the stock market. Until the launch of Bitcoin futures ETFs in the U.S., the Grayscale Bitcoin Trust was the easiest way for institutional investors to gain exposure to Bitcoin, or for retail investors to invest in Bitcoin from tax-sheltered accounts, like pension accounts. It was wildly successful and holds about $29 billion in Bitcoin (the exact amount depends on the price of Bitcoin), much of it from huge hedge funds and lenders.

While it was usually more expensive to buy Bitcoin through Grayscale’s trust—the shares in the trust traded at a premium compared to the price of Bitcoin—for most of 2021, shares traded at a discount.

Due to a legal loophole, investors struggle to redeem their shares for Bitcoin. Grayscale could try and resolve this, but Messari’s Ryan Selkis predicts that Grayscale has little incentive to work on letting investors redeem their shares for Bitcoin, since the firm earns a 2% management fee on holdings. A lot of money is therefore likely to remain in the trust for the time being. That means that when large-scale redemptions are possible—whether through a Bitcoin ETF or through an update to their governance structure—a lot of Bitcoin could suddenly reenter the market.

Bitcoin is also notable for being used as legal tender in El Salvador; the country’s president, Nayib Bukele, introduced this law in 2021. The introduction was not without controversy: There’s patchy evidence that people are actually using Bitcoin, and some people think that Bukele’s decision to force Bitcoin onto his populace is at odds with the decentralized ethos of Bitcoin.

Nevertheless, nations like Gibraltar, El Salvador, Singapore, Japan, and Portugal, as well as jurisdictions like Wyoming and Miami, are opening up their doors to crypto companies, enticing them with policies like low taxes, easy foreign direct investment, and few visa obstacles. More pro-Bitcoin policies could soon follow—but so could crackdowns from countries who look upon Bitcoin unfavourably, such as China.

If you ask people about the future of Bitcoin’s price, you will receive answers that range across the spectrum. Some people think it will crash entirely: As crypto critic Amy Castor wrote in her newsletter, “The higher it goes, the farther it has to fall. The question is not if crypto will plunge, but when.” Meanwhile, QCP Capital, a Singaporean crypto hedge fund, predicts that Bitcoin’s gains will be capped by tightening interest rates from the Federal Reserve. Some people think that Bitcoin will crash completely. Conversely, Fairlead Strategies told Bloomberg, “We are bullish Bitcoin long-term, based on our long-term trend-following gauges.”

Ethereum and the battle for the next smart contract blockchain

As of January 2022, Ethereum is the biggest smart contract-enabled blockchain. Its coin is the second-largest among all cryptocurrencies, and it dominates the decentralized finance industry. That said, high fees and slow speeds have sparked a war for the next popular smart contract-enabled blockchain. Smart contracts power decentralized applications, and many of these applications’ tokens promise to be the next big crypto.

The developers are working hard on an upgrade to the blockchain that will transition Ethereum from a proof-of-work chain (like Bitcoin) to a proof-of-stake chain, which lets those with the most coins validate transactions instead of those with the most powerful computers. However, the upgrade is still far from its final form, and the work has been slow going.

In the meantime, several rival blockchains want to knock Ethereum from its pedestal. Solana, Binance Smart Chain and Avalanche are three rival Layer 1 blockchains, so-called because they are the bottom tranche of a blockchain network, below applications and speed-boosts. These blockchains rose to prominence in 2021, with their native coins rising by hundreds if not thousands of percentage points. This is because they are very quick and cheap to use.

That said, some developers think that building on Ethereum is the right way to go. So-called scaling solutions make Ethereum faster and cheaper to use, usually by performing some of the computational work of the Ethereum blockchain elsewhere. Polygon’s token, called MATIC, is one of the most popular Ethereum scaling solutions, and it surged in popularity after it became a popular way to transact on Ethereum at a fraction of the cost. It’s a little cumbersome—if you want to use it as a scaling solution to Ethereum, you have to send your funds to Polygon, then do your business there before returning to Ethereum—but it’s a popular alternative to transacting right on Ethereum. Other scaling solutions, like Arbitrum and Optimism, became popular in 2021, although neither have coins. Boba and Loopring, some more scaling solutions, do. Loopring in particular increased in value in 2021. Boba crashed shortly after its launch.

Others think that the future is multi-chain. Forget building on Ethereum, some say—what the market needs is greater interoperability. As it stands, Solana can’t easily work with Ethereum, and Ethereum isn’t compatible with Bitcoin, and so on. Some blockchain projects face this project head on with bridges, as is the case with Polygon. But others, including projects like Cosmos and Polkadot, are so interoperable that they let smart contract applications run on their own independent blockchains. ATOM and CRO, two popular Cosmos coins, are interesting, as are DOT and any tokens from the parachains that run on Polkadot, another blockchain ecosystem that prizes interoperability above all else.

Stablecoins

Many regulators, chief among them the United States Securities and Exchange Commission, want to crack down on stablecoins. Gary Gensler, the head of the SEC, said these coins, most of which track the value of the US dollar but are printed by privately-run companies or minted by stablecoins, are no different from “poker chips at the casino.”

This is because companies like Centre, which mints USDC, and Tether, which mints USDT (also known as Tether), often withhold information about how they manage their vast reserves of US dollars, while minting billions of dollars of new coins on the regular. This opacity is concerning to regulators for two reasons.

First, companies like Tether have told fibs about their holdings; a New York Attorney General investigation into Tether revealed that the coins were, for a long time, not entirely backed by U.S. dollars. Second, the Federal Reserve uses monetary policy to determine the supply of U.S. dollars. Privately-run currencies undermine its ability to do so, and if they continue to grow could replace the authority of regulators to control the economy. Some people think this is fine, given the rate at which the Fed prints money; however, central bankers do not share this opinion. The Biden administration suggested that stablecoins should be regulated like banks, which would require greater oversight into their holdings and, potentially, protect investors from disaster-like scenarios.

Of separate concern, but no less interesting, is the rise of algorithmic stablecoins. Instead of being issued by privately run companies, these are, to greater and lesser extents, backed by volatile tokens. The ways they operate differ, but generally the idea is that you have two tokens, one of which is volatile and the other of which is stable, and the protocol mints and destroys these volatile tokens (or buys and sells them from the market) to keep the stable asset tied to its peg.

While some of these tokens simply do not work, others have proven remarkably resilient. One, in particular, sticks out: DAI, which weathered the 2020 COVID-inspired flash crash (albeit by sacrificing a portion of its decentralization for over a year).

One anxiety about decentralized models — and this includes OlympusDAO, Frax and others — is what can happen in the case of an economic crash. If it turns out that investors panic and sell the volatile token, the stablecoin could fall apart and may be knocked from its peg into a death spiral — this happened to LUNA, and its sister token, Terra USD, which saw their value plunge in May 2022. This makes the outcome and potential of these coins very uncertain.

Airdrops

Airdropped tokens are tokens given to early investors in a protocol. Popular airdrops include Uniswap, Ethereum Name System, Loot, and SOS (given to OpenSea users). The idea is that protocols reward anyone who believed in them from their conception by issuing free tokens to early adopters, then using these tokens as the backbone of a decentralized governance system. Not all of these tokens are officially tied to the project, but some, like OpenSea’s SOS and Loot’s AGLD tokens, took off nonetheless and became the latest hottest cryptocurrency. It has become a (lucrative) game among investors to try and determine which protocol or company will airdrop tokens next.