But things changed when people caught onto Ethereum’s smart contract platform, as it can produce “smart contract tokens” — cryptocurrencies with the ability to perform intelligent tasks autonomously.
The community had to distinguish altcoins from tokens. Altcoins were now coins that had their own blockchain, and tokens were defined as cryptocurrencies created on smart contract platforms. The other factor now at work is that there are many blockchain projects that are scaling rapidly and decreasing Bitcoin’s dominance.
The community started noticing weaknesses in Bitcoin’s correlation to other coins as other interesting new projects popped up, which provoked the crypto world to rethink how it sees cryptocurrencies.
Now, every altcoin distinguishes itself on the market by offering a unique set of features related to things such as transaction management, scripting language, mining mechanisms and consensus algorithms. Although altcoins’ superior features may outperform Bitcoin in one way or another, their value is still completely dependent on Bitcoin’s market capitalization.
The community started to envision a world where various cryptocurrencies, not just Bitcoin, can disrupt the world. Now, with Ether’s (ETH) growing dominance in the market, it’s clear that Ethereum is the leader of crypto innovation. A large percentage of tokens today are Ethereum ERC-20 smart contracts, so the ways token minters classify their projects are easily normalized in the community.
Ethereum’s role in crypto classifications
Ethereum’s ecosystem is responsible for every crypto advancement and for mainstream interest, starting with initial coin offerings (ICOs) — which disrupted the initial public offering model by allowing anyone to buy a project’s coin at launch. The attention from ICOs led to many use cases for ERC-20 tokens, with developers making their next cryptocurrency an Ethereum-based token and crypto users having an incentive to learn more about the tech. With a wide variety of ERC-20 tokens, our human nature must intervene to categorize and associate things.
The term “altcoin” is no longer an acceptable way to define a project, as it’s ambiguous — especially now with decentralized finance (DeFi). People want to know what type of coin it is, whether it be a staking coin, liquidity mining coin, crypto derivative, stablecoin, utility token, etc. People are learning that cryptocurrencies do much more than send and receive payments.
“Meme tokens” vs tokens, NFTs, ERC-721
“Meme token” is a term most crypto users are familiar with due to Elon Musk tweeting to the world about Dogecoin (DOGE). This led to the community making distinctions between tokens and meme tokens, as cryptocurrencies are capable of highly intellectual activity. Tokens based on social media content could potentially affect how the crypto sector is perceived, so a further classification had to be established.
The rise of NFTs proved that the crypto community is ready to onboard and learn about new definitions. Imagine if non-fungible tokens were described as altcoins? By definition, they technically are, but there’s so much that NFTs can do that demonstrates their difference. The community acknowledges that NFTs are ERC-721 tokens, and recognizes the capabilities they possess. For starters, they’re structured to make cryptocurrencies unique, with no two tokens sharing the same value.
“GameFi” (gaming DeFi) is another term that was added to the crypto dictionary. It deals with merging blockchain technology with NFTs, liquidity mining and other DeFi protocols. The result is games where people can earn real crypto and trade assets. GameFi is still new, so there’s a chance that something trendy will come into existence and result in further classifications within the space.
The crypto community evolution
The crypto community’s collective understanding of the space is improving rapidly. Content creators, influencers and YouTubers are also good at converting complex jargon into easy-to-digest information. The community recognizes that correctly classifying cryptocurrencies increases the chances of finding good new projects early. For example, telling someone that a revolutionary NFT is just an altcoin will influence their first impression and possibly give the NFT less worth.
Classifying crypto helps when comparing
To effectively compare cryptocurrencies, you must know what they are and whether others are doing the same thing. That’s why you can’t compare Dash to something like ADA — one is a payment cryptocurrency, while the other is the utility token of a proof-of-stake smart contract platform.
Another argument for the collapse of the classification of Bitcoin vs. altcoins is the varying correlations between BTC and other coins. While the correlation is high within some pairs, others demonstrate weaker dependence on each other. For instance, ADA and XRP show a lower correlation with other digital assets, not to mention that stablecoins such as Tether (USDT) show negative correlations.
Classifications helps with diversification
Classifications also help with diversification. You can have your crypto distributed between several coins, but the phrase “don’t put all your eggs all in one basket” can apply to you if all your coins are under the same classification.
Although a growing number of new crypto concepts are emerging, we can still put them all — DeFi, GameFi, NFTs and meme tokens — under the umbrella of altcoins. From the traders’ perspective, many believe that altcoins will have a larger return in the future, though maybe there is a weaker consensus than there is with Bitcoin, for now.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.