Why Are There So Many Cryptocurrencies?

OVIDIU POPESCU

02 March 202210 min read

There are currently around 17,791 cryptocurrencies in circulation according to CoinMarketCap. That’s an increase of about 1,300 cryptos a year since Bitcoin debuted about thirteen years ago!

To put things in perspective, let’s compare these numbers with fiat currencies. By many accounts, there are about 180 fiat currencies in circulation, a number that has been fairly stable for the better part of the past sixty years.

Since the launch of Bitcoin in 2008, the cryptocurrency market has undergone a series of milestones. To understand the exponential growth in cryptocurrencies, and even how to separate the best cryptocurrencies from the rest, let’s first examine some of the major milestones in the crypto sphere by looking at a brief timeline.

2008–2013: The Formative Years of Crypto

The domain name bitcoin.org was registered on August 18, 2008. Only a few months later on October 31, the pseudonymous inventor Satoshi Nakamoto published the Bitcoin Whitepaper: “Bitcoin: A Peer-to-Peer Electronic Cash System.” These two foundational events led to the birth of cryptocurrency as we know it today.

On January 8, 2009, Bitcoin’s code was made public. On January 12, the first-ever bitcoin transaction was also recorded when Satoshi Nakamoto sent 10 BTC to Hal Finney. Within a couple of years, the viability of bitcoin led to the emergence of rival cryptocurrencies known as “altcoins” as well as to crypto exchanges, which precipitated the rapid rise of decentralized and encrypted currencies (e.g., Litecoin (LTC) became the first altcoin., launching on October 7, 2011).

The first cryptocurrency exchanges—Bitstamp and Kraken—launched in 2011. By providing centralized, easy access, crypto exchanges have likely played one of the most significant roles in making cryptocurrencies mainstream.

In October 2013, the first-ever bitcoin ATM was launched in Vancouver. During this period, the number of cryptocurrencies in circulation increases to 67.

cryptocurrencies, growth

Source: Statista

2014–2020: Crypto’s Dominance and the Rise of DeFi

The rapid rise of cryptocurrencies started with Ethereum’s massively successful ICO in 2014. The flip side, of course, is that Ethereum’s success effectively started the ICO craze (we’ll take a look at this craze at the end of the article). With its support for blockchain-based smart contracts and dApps, which signaled the beginning of DeFi, Ethereum effectively became the rockstar of cryptocurrencies in the eyes of many. Some even argue that most altcoins owe their existence to Ethereum. By the end of 2016, there were 644 cryptocurrencies!

It is during this period that several EU countries strategize on ways forward regarding the regulatory framework of cryptocurrencies. Samsung also confirmed that it would make chips designed to mine cryptocurrencies, signaling the fact that cryptocurrencies were here to stay.

Japan also passed a law in 2017 that recognized BTC as a legal payment method. BTC is accepted as a payment system and an investment asset in Norway.

2020-Present: Crypto Goes Mainstream?

It might seem premature, but some are already referring to the past couple of years as the Golden Age of Cryptocurrencies. NFTs seemed to be everywhere, DeFi edged closer to the mainstream, and an unprecedented number of businesses and organizations began accepting crypto as payment, including Microsoft, Starbucks, and Tesla, among many others.

In 2020, Ethereum launched ETH 2.0, which, among other things, is set to replace the Proof-of-Work with the Proof-of-Stake consensus mechanism. The staking concept introduced in ETH 2.0 enhances scalability and further stretches DeFi’s capabilities. In January 2022, Ethereum rebranded ETH 2.0 as “Consensus layer” in order to reflect the changes made to the network.

As DeFi hit historic highs with an eye-watering value of $236 billion, several cryptos and protocols emerged to absorb the influx of capital into the crypto space. By the end of 2020, there were 4,501 cryptocurrencies in circulation, and by February 2022, that number had more than doubled to over 10,300.

Reasons behind Crypto’s Explosive Growth

So why cryptocurrencies? And why now? Let’s take a look at some of the underlying reasons behind the impressive and continued growth of cryptocurrencies and their increasingly widespread adoption.

Open-Source Code

This might very well be the most important reason behind crypto’s exponential increase. Simply put, the code underlying each major cryptocurrency and open blockchain project is developed as open source software. Writing for Coin Center in 2017, Peter Van Valkenburgh noted the software’s many advantages, as it is “collaboratively produced, shared freely, published transparently, and developed to be a community good rather than the property or business of a single company or person.” In the absence of any governmental or corporate gatekeepers, anyone anywhere in the world with the requisite skills can interact with open-source software.

When the pseudonymous Satoshi Nakamoto published the Bitcoin Whitepaper, the blockchain's source code became public, which obviously meant that anyone could copy and improve upon the code. The benefits are obvious: programmers can collaborate in real time to identify and fix any potential bugs quickly, encouraging users to modify the code, add newer features, and launch new cryptocurrencies.

Such changes can be positive or contentious. Blockchains, just like all software, develop over time and one of the results of their ongoing evolutions is referred to as “forking.” We've seen an increase in the number of "hard forks," which often happens when upgrading conventional chains. A hard fork creates two different transaction histories, resulting in the creation of new crypto by deviating from existing crypto. The most prominent hard forks from Bitcoin are Litecoin (LTC) and Bitcoin Cash (BCH).

Mainstream Acceptance of Cryptocurrencies

Over the years, cryptocurrencies, especially bitcoin, have evolved from little-known fringe assets to mainstream investment commodities and viable payment options. One result has been increased regulatory scrutiny, particularly by the United States. For example, in 2020, the US Office of the Comptroller of the Currency (OCC) authorized US banks to provide crypto custodial services. On November 9, 2020, for example, the US Securities and Exchange Commission issued their statement on DeFi risks, regulations, and opportunities. As mentioned earlier, it was during this period that giant payment companies such as PayPal, Visa, and Mastercard partnered with various blockchain companies to offer mainstream crypto services.

While the COVID-19 pandemic caused much of global business and life to grind to a halt, it had the opposite effect on cryptocurrencies. As The Economic Times reported, “The past year has been a significant one for cryptocurrencies and blockchain. In the face of such extremity and economic meltdowns, cryptocurrencies have proved to be remarkably resilient. Fortunately, the rapid increase in accessibility of global high-speed internet and digitization has created a ripe environment for digital currency.”

Institutional investors have also flocked to the crypto market. The majority of institutional investors now hold some crypto in their portfolios. As one analyst has argued, “Stablecoins can help bridge the gap between fiat currencies and cryptocurrencies, giving institutional investors reason to pour more capital into these hybrid currencies.” And according to a Coinbase report, we should expect to see growth in crypto funds and SEC-approved ETFs.

All of this suggests the imminent mainstream adoption of cryptocurrencies. It’s no longer a question of if, but when.

Cryptocurrencies as a Hedge against Inflation

Inflation has once again reared its ugly head. If you managed to save $10,000 or even just $1,000 USD, your money is now worth 7.5% less than it was a year ago thanks to inflation. But what exactly is it? Inflation is usually defined as the process by which the decreasing value of a currency, such as the US dollar, leads to an increase in the price of goods and services over time. In layman’s terms, your money is now worth less, resulting in a loss of purchasing power.

Cryptocurrencies are often seen as a store of value and hedge against inflation, which has only added to their popularity and explosive growth. As Binance explains, “Bitcoin is fundamentally a deflationary asset, which is why citizens of countries with unstable fiat currencies are increasingly using it as a store of value to protect against hyperinflation and rising costs of everyday goods and services. Unlike fiat, crypto can’t be manipulated to the same extent by changing interest rates and increased money printing. Most importantly, Bitcoin’s supply will never exceed 21 million which makes it an attractive store of value that is resistant to inflation.”

But cryptocurrencies are notoriously volatile, which is why certain types of cryptocurrencies (such as stablecoins) are seen as an inflationary hedge. Some have even gone as far as to describe stablecoins as “the New-Age Inflation Hedge.”

Different Categories of Cryptocurrencies

Cryptocurrencies come in all different shapes and sizes. Below is a summary of the many different types.

DeFi Tokens

Decentralized finance (DeFi) is an entire financial sector ecosystem based on blockchain and operates primarily on smart contracts. Users can lend, stake, and participate in liquidity mining and yield farming with DeFi. DeFi tokens are cryptocurrencies native to the dApp projects running on DeFi. Typically, every dApp on DeFi is like an ecosystem of its own, and the DeFi tokens are the currencies primarily used for transactions here.

The top DeFi tokens include LUNA, AVAX, WBTC, DAI, LINK, CAKE, and AAVE.

NFT Cryptocurrencies

NFT cryptos are tokens native to blockchain ecosystems that facilitate the minting of NFTs, blockchain gaming, and NFT marketplaces.

Some of the top NFT cryptos include MANA, AXS, SAND, XTZ, THETA, ENJ, and FLOW.

Security Tokens

Security tokens are traded like stocks or bonds since they offer pay-out such as dividends or shareholding in a business venture. Since security tokens represent real assets, they are subjected to security regulation laws. For example, companies are obliged to draw up a securities prospectus before they are allowed to issue security tokens, which the supervisory authorities must appove. The issuance of security tokens is then called security token offerings or STO.

Examples of security tokens are Bancor (BNT) and Blockchain Capital (BCap).

Utility Tokens

Utility tokens give holders the right to access a company’s product or services. Investors holding these tokens can easily access special deals from a company, which otherwise would have been expensive or inaccessible to them. Unlike security tokens, utility tokens are not subjected to rigorous securities laws and regulations.

Examples of utility coins include Filecoin (FIL), Civic (CVC), and Siacoin (SC).

Stablecoins

Stablecoins are altcoins whose value is tied to an underlying asset. In a way, they are like derivatives of other fungible assets and are designed to eliminate the volatility that characterizes cryptocurrencies. There are stablecoins collateralized by fiat currencies and by other cryptos as well non-collateralized ones, implying that their value's fluctuation is controlled by an algorithm that adjusts their supply depending on demand.

The most notable stablecoins are USDT, USDC, and BUSD.

Yield Farming Tokens

Yield farming involves lending or staking crypto assets to generate consistent interest or receive extra cryptocurrency in the form of rewards. Yield farming tokens are essentially used to provide liquidity in DeFi through smart contract-based liquidity pools. In return, these liquidity providers receive incentives for locking up their crypto assets. In this case, a liquidity provider deposits funds into a smart contract-based liquidity pool used for trading to earn rewards from their deposits.

The top yield farming tokens include XVS, SUSHI, UNI, CRV, and COMP.

Meme Coins

Meme coins are usually not tied to any crypto project, meaning that they lack the inherent utility of other cryptocurrencies. Typically, mainstream cryptos aim to solve a real-world problem, usually clearly detailed in their whitepaper or Litepaper. On the other hand, meme coins are created as purely speculative tokens, and most of them are usually linked with pump-and-dump schemes without any long-term goals or outlook. However, although meme coins start out as a joke, some of them end up finding real-world utility. A case in point is Dogecoin (perhaps the most infamous), which is currently accepted as means of payment by Tesla.

Other notable meme coins include SHIB, MONA, SAMO, ELON, and DOBO.

Shitcoins

A shitcoin is a cryptocurrency that has depreciated without any real or discernable purpose. Keep in mind that there are over 17,000 cryptocurrencies in circulation, and the overwhelming majority of these are shitcoins. The criteria for identifying shitcoins is simple: they usually have extremely low liquidity; have no useful technological value; are not listed on reputable exchanges; and have lost more than 70% of their value since their creation.

The EthereumMax scandal is an ideal example of the pump-and-dump schemes of Shitcoins. Following their launch, their success is mostly short-term, which is then followed by a sudden decline in prices brought about by investors who want to cash in on short-term income.

Governance Tokens

Governance tokens are cryptocurrencies native to a blockchain or DeFi protocol and are used to vote on various issues in the ecosystem. They give power to the community by allowing token holders to propose and decide on new features to the ecosystem, which can include things like changing the governance regulations or administering UI modification.

Blockchain projects with governance tokens are called decentralized autonomous organizations (DAOs). Typically, most crypto projects are DAOs.

Privacy Coins

A privacy coin is a cryptocurrency that deliberately obfuscates a blockchain transaction. Most mainstream cryptocurrencies such as Bitcoin are not entirely private and anonymous. With privacy coins, all transactions remain anonymous and cannot be tracked. This is accomplished by hiding a user's real wallet balance and address and bundling multiple transactions together, making it impossible to establish the transaction history.

Top privacy coins include XMR, AAAR, ZCASH, and DASH.

Additional Factors to Consider

There are a number of additional factors to bear in mind when thinking about the ongoing proliferation of cryptocurrencies.

Ease of Creation

Before the advent of the ERC-20 protocol, anyone who wanted to create crypto would have had to create a blockchain from scratch. Thankfully, this is no longer the case. Now, all one needs to do to create new crypto is to make a token that follows a few rules and integrate it on another blockchain. Typically, this has been done on Ethereum, but this may very well change in the future with the rise of so-called “Ethereum killers” such as Cardano. For anyone interested, there are countless tutorials available on the web outlining how you can create a token within minutes, which is precisely how several crypto projects have come to life. Nearly 95% of governance cryptos are ERC-20 tokens.

Lack of a Uniform Global Regulatory Standards

Although most regulatory bodies have started to embrace cryptocurrencies, there is still no legal framework to govern the entire crypto market. As mentioned above, only security tokens are required to file for regulatory approval before they are issued. Given the ease with which new tokens can be created, not to mention the extremely low costs of doing so, anyone can create a personalized token and list them for trading.

The ICO Boom

The ICO success of Ethereum marked the beginning of several other cryptos issuing ICOs driven by the public's appetite. In fact, its success led investors to flood the crypto space with cheap money, which attracted various crypto projects offering solutions to fill certain gaps in the crypto space, which accelerated the growth of DeFi as more and more projects began to emerge.

Conclusion

The explosive growth in the number of cryptocurrencies reveals a certain feedback loop effect: the more they continue to garner mainstream acceptance, the more their numbers increase. Generally speaking, the increase in the number of cryptos was precipitated by the growth of DeFi, which encouraged the creation of different types of cryptos to address pre-existing blockchain problems, including privacy, scalability, transaction speed, and high gas costs.

As more and more individuals add cryptocurrencies to their investment portfolios, whether as a hedge against inflation or simply to diversify, crypto exchanges such as Binance and FinTech startups are working hard to level the playing field by bringing powerful investment tools such as algorithmic trading to everyone. As crypto trading and investing become more popular thanks to such tools, the number of cryptocurrencies and people investing in them will only continue to grow.