This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 12, 2022 - December 18, 2022

According to the most recent data by RinggitPlus, Bitcoin and Ether are the most popular cryptocurrencies among Malaysian investors. While people invest in crypto for a variety of reasons, from the desire to participate in a new financial system to diversifying their investment portfolios, it is important for us to know the similarities and differences between these digital coins. Only by having a better understanding of the unique functions, utility and purpose of these cryptocurrencies can consumers make educated investment decisions.

The value of digital currencies comes from their unique properties and characteristics, whether their scarcity, technical infrastructure or digital code. They are made secure through blockchain technology, which serves as the technical backbone for each crypto, ensuring that the information cannot be tampered with. Even among the nine cryptocurrencies approved by the Securities Commission Malaysia, their use cases vary.

At the heart of it all is the first cryptocurrency ever created, Bitcoin (BTC), which was released in 2009. It has evolved over the years from an alternative to traditional money to being considered the digital equivalent of gold. From there, we have seen the birth of various alternative coins (or altcoins) that have branched out as the digital assets landscape continues to develop.

One way altcoins can be formed is by forking an existing cryptocurrency. Simply put, a fork is a divergent path on a blockchain. Different types of forks create new developmental paths for cryptocurrencies, and they can emerge for a variety of reasons, from unanimous decisions to upgrade the blockchain software to disagreements within the coin community. Under a “soft fork”, the modified crypto is still compatible with the previous upgrade. On the other hand, a “hard fork” is a radical upgrade, creating a new permanent path diverging from the previous blockchain.

An example of a hard fork is when Bitcoin Cash (BCH) came about. To address concerns about scaling and efficiency, a new set of rules was established to diverge from Bitcoin, resulting in the formation of an entirely new altcoin. In short, some altcoins are created through forks, where new cryptocurrencies emerge from changes made to their predecessors.

To understand the different types of cryptocurrencies available on the market, it is also important to understand the difference between a coin and a token. Coins are the native cryptocurrencies of the blockchain they run on. An example of this would be Bitcoin (BTC) because it runs on its own native blockchain. On the other hand, tokens run on existing blockchains rather than a dedicated blockchain of their own.

Similar to Bitcoin Cash (BCH), Litecoin (LTC) was created using Bitcoin’s original source code. It was developed as an alternative to provide cheaper and faster transactions — four times faster to be precise — having been modified from the Bitcoin blockchain to make quicker payments. Both Bitcoin Cash and Litecoin are considered coins because they run on their own blockchains.

On the other hand, Ether (ETH) is the primary coin of the Ethereum blockchain, which in turn hosts a variety of other tokens with different purposes. Examples include Uniswap, the world’s largest peer-to-peer crypto exchange, which allows Ethereum wallet holders to swap tokens directly and has Uniswap (UNI) as its own native token. Another project built on the Ethereum blockchain is Chainlink, which bridges real-world data and resources with the blockchain, effectively acting as an intermediary, and also has a namesake native token, Chainlink (LINK).

Coins are also created to serve similar purposes as existing ones but with different motivations in mind. Much like Bitcoin, XRP was conceived as a method of managing transactions. However, unlike its predecessor, which was developed as an alternative form of payment for goods and services, XRP was designed to address inefficiencies in cross-border remittance and settlement. It is native to the Ripple network and cannot be mined, unlike other cryptocurrencies. Instead, it is backed by a predetermined supply that was issued during its launch in 2012.

As the pioneer smart contract network, the Ethereum blockchain has seen multiple aspirants. Smart contracts are an immutable, decentralised and transparent method of facilitating processes and executing agreements. Their value comes from their efficiency in simplifying tasks and saving costs, cutting out the middlemen and empowering a new mode of work that is decentralised and less reliant on third parties. Examples include the most recent additions to Luno’s digital assets portfolio, Cardano and Solana.

Often referred to as the “next-gen Ethereum”, Cardano (and its coin ADA) adopts a peer-reviewed, research-focused approach to overcome issues and roll out new projects. It was founded as a response to challenge Ethereum’s network efficiency and transaction costs. Similarly, Solana operates under a unique mechanism intended to challenge Ethereum from the perspectives of cost, speed and transaction volume. All three are similar in the context of enabling decentralised applications and smart contracts on their blockchains, but ultimately differ in their development vision.

Depending on the categorisation, coins and tokens can be put into different groups based on factors such as utility, store of value, digital infrastructure and sometimes as an extension of existing coins, either through forks or in the development of a new blockchain. However, things change and adapt over time.

Bitcoin has evolved from its original design as a medium of transaction into a digital asset. In September, the “merge” happened, where Ethereum transitioned from proof-of-work — a process of verifying transactions by solving complex cryptography — to proof-of-stake, a selection-based validation model that is less energy intensive.

Blockchain technology has come a long way and with it, the emergence of different coins and tokens. Existing or prospective crypto investors should first and foremost understand the digital assets landscape and see it as a means to equip themselves for a future where digital currency becomes mainstream, as opposed to just being a short-term investment opportunity. It is essential to learn the impact of each cryptocurrency and how it works, as well as to keep abreast of the most recent developments. Take the time to understand the technology behind the coins and tokens available on regulated digital asset exchanges in Malaysia and how investors can benefit from them.

Disclaimer: This article is for educational purposes only and readers should not construe such information as investment or financial advice. Investing in cryptocurrencies is high-risk and may result in the loss of capital as the value can fluctuate. Luno recommends that individuals consult with a licensed financial planner on whether cryptocurrency is a good investment option. The Securities Commission Malaysia’s approval of the listing of digital assets on Luno does not amount to or indicate that the SC has recommended or endorsed the product or service.

Aaron Tang is country manager of Luno Malaysia, the country’s first regulated cryptocurrency exchange

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