Categories of Altcoin Opportunities

This guide is part of the “Guide to Altcoins” series.

Crypto may seem overwhelming at first, but through self-education people have been making money in this space. Everywhere you look, there’s crypto promising to disrupt finance, reinvent money, or simply troll the system with a dog logo (DOGE). The problem is that this sheer variety overwhelms the average person and even seasoned investors. If you cannot tell the difference between a token powering blockchain technology and a meme coin made up as a joke, you’re in the right place.

This is where we bring in a little structure to help make sense of things. By categorizing altcoins into clear groups based on their purpose, you will be able to make sense of the cryptocurrency ecosystem and understand what you’re buying and also how other people are making money with it right now.

Why do we categorize altcoins?

Altcoins are not all created equal. Some serve as the fuel for global crypto networks, others provide stability like cash (USDT), and some are a little more than internet fraud. Sorting them into categories is essential for three reasons.

The first is utility and purpose. Every coin has a role. Why was it made? A layer 1 (L1) blockchain token secures a network and pays validators, while a liquidity token in decentralized finance (DeFi) is used for trading and yield. Without these labels, you risk confusing apples and oranges.

Second is risk management. A stablecoin that tracks the US dollar has very different volatility than a meme coin. If you categorize them separately, you can measure risk properly.

Finally, for informed investing. Categorizing your assets gives structure to your portfolio design. You can build a foundational income staking with L1s, hedge our entire investment with stablecoins, and add growth through DeFi tokens, and take a position restacking on a new Ethereum protocol. Instead of a bag of random attempts, you have a strategy.

The core categories of altcoins

Altcoins can be grouped into core categories that highlight their unique use cases, competitive roles, and influence within the cryptocurrency ecosystem.

Layer 1 and Layer 2 tokens

Think of a layer 1 blockchain as the foundation of crypto. These are the base networks where transactions settle and smart contracts run. Ethereum, Solana, and Cardano fall into this category. Their tokens are used for staking, paying fees, and governance, making them some of the most systemically important assets in crypto.

But the problem is scalability. As more people use a chain, costs rise and throughput slows. Then people came up with the layer 2 scaling solution. These projects, like Polygon, Optimism, and Arbitrum, process transactions off the main chain before settling back onto it, reducing congestion and fees. 

Rollups in crypto are a type of layer 2 scaling solution built on top of an L1 blockchain (like Ethereum). Their main goal is to handle more transactions quickly and cheaply, without sacrificing the security of the base chain.

Investors can make money here in two ways: staking tokens to earn yield and betting on adoption. What adoption means is that when a chain attracts more developers, applications, and users, its token often rises in value. But competition in this space is brutal. Being the “Ethereum killer” is an often-used phrase, but history shows us that only a few networks capture lasting demand.

Prominent L1 & L2 examples

• L1: Ethereum (ETH), Solana (SOL), Cardano (ADA), Avalanche (AVAX), Cosmos (ATOM)
  
• L2: Polygon (MATIC), Optimism (OP), Arbitrum (ARB), Mantle (MNT)

Use cases

• L1: Security, consensus, base computational power, smart contracts.
  
• L2: Improve speed, reduce fees, enable new features (rollups, optimistic rollups, zk rollups).

Utility tokens

If L1s are the highways, a utility token is the toll pass. These tokens give you access to a specific service within a protocol. Their value is tied to the underlying service usage. The logic is simple, as more people use it, demand for the token rises. But it is not always that straightforward. Some projects have great tech but weak tokenomics, which limits their potential upside. 

One of the most straightforward strategies to make money here is by holding tokens while demand for the service grows. For example, Binance Coin (BNB) gained significant value as Binance expanded its exchange ecosystem and users needed BNB for trading discounts and network fees. Similarly, Chainlink (LINK) appreciated as more projects integrated its oracle services, driving up demand for its token.

Another strategy that is currently working for the average investor is staking or locking tokens into the network. Ethereum (ETH) now operates on a proof-of-stake system, which secures the network and validates transactions via the staking process.

This allows holders to earn rewards by staking and securing the chain. Cardano (ADA) and Solana (SOL) also pay staking rewards, while protocols like Curve (CRV) use “vote-escrow” locking models that incentivize long-term token commitments in exchange for higher rewards and governance power.

Finally, many projects allow holders to earn yield through revenue distribution. Uniswap (UNI) holders may vote to activate a fee switch that shares a portion of trading fees with token holders. SushiSwap (SUSHI) already does this by distributing a cut of trading fees to xSUSHI stakers. Aave (AAVE) distributes lending interest to liquidity providers, while PancakeSwap (CAKE) pays rewards in new CAKE tokens for staking or farming. These models create passive income streams tied directly to protocol activity.

Looking ahead, newer trends like liquid staking derivatives (Lido’s stETH, Rocket Pool’s rETH, or Frax’s sfrxETH) and restaking platforms (EigenLayer) are expanding yield opportunities even more to the broader audience. These let users not only stake, but also re-use their staked assets in DeFi for extra yield, compounding the money-making potential.

Prominent examples

• Binance Coin (BNB), Chainlink (LINK) oracle services, Filecoin (FIL) decentralized storage, Basic Attention Token (BAT) payments/ad attention

Use cases

• Enable access to decentralized services (oracles, storage, computing, bandwidth).
  
• Some provide discounts, priority, or resource access within protocol ecosystems.

Stablecoins

The crypto markets often move like a roller coaster ride, but stablecoins keep their value. They aim to hold a steady value, usually one USD per token, providing stability for trading in crypto, lending, or simply holding capital for some time.

Fiat-backed stablecoins like USDT and USDC rely on bank reserves. Crypto-backed versions like Dai use overcollateral with ETH and other coins. Experimental algorithms tried to engineer stability with code, such as Terra’s UST stablecoin. Unfortunately, it collapsed in 2022 after losing its dollar peg and wiping out billions in value.

With stablecoins, the way to make money is less about price appreciation and more about the yield opportunities they currently have. Because stablecoins are pegged to fiat currencies, traders don’t expect the token price to rise. Instead, the value comes from how they can be deployed inside the cryptocurrency ecosystem.

On platforms like Aave and Compound, stablecoin holders can lend their USDC, USDT, and DAI to borrowers and earn interest. This has created a large on-chain lending economy where demand for leverage drives returns. 

In addition, protocols such as Frax Finance and MakerDAO offer yield-bearing versions of stablecoins (like sDAI or sfrxETH), which automatically generate yield for holders by redirecting lending or staking rewards into the token itself.

Stablecoins also power liquidity provision. For example, by depositing USDC and USDT into a stablecoin pair on Curve Finance or Uniswap, users can earn trading fees whenever other traders swap between the two. Some protocols sweeten the deal with extra token incentives, turning stablecoin pools into consistent, even if modest, income streams.

As with all investments, you must watch the risks. Depegging episodes do happen, such as USDC temporarily slipping below $1 in March 2023, showing that stablecoins are not risk-free. Fiat-backed coins like USDT and USDC also face heavy regulatory scrutiny, particularly in the United States, which could impact their issuance or usage in DeFi.

Use case

• Provide predictable currency for trading, settlements, lending and DeFi interactions.
  
• Act as “cash” on chain.

Most popular stablecoins

• Tether (USDT), USD Coin (USDC), Dai (DAI), Binance USD (BUSD), True USD (TUSD)

Governance tokens

A governance token gives holders voting power over protocol rules, upgrades, and treasuries. Uniswap’s UNI, Aave’s AAVE, and Maker’s MKR are all classic examples of governance tokens. Instead of a company board, these decisions are made through token-weighted voting.

The idea here is decentralization. Users and stakeholders should guide a project’s direction, not just the founders. For traders, value comes both from speculation on adoption and from governance rights themselves. In some DAOs, voting power equates to influence over massive treasuries.

But it’s not always utopian. Governance suffers from low turnout and concentration. Whales can dominate votes, and active participation is rare. Still, for those willing to engage, governance tokens are more than an investment — they’re a ticket into the political economy of crypto.

Use cases

• Decentralized decision-making in DAOs / DeFi protocols.
  
• Align incentives between users, developers, and stakeholders.

Prominent Examples

• Uniswap (UNI), Aave (AAVE), Maker (MKR), Compound (COMP), Balancer (BAL), Aragon (ANT)

DeFi tokens

These are tokens tied to decentralized finance applications. DeFi turned crypto into a full-blown financial market of its own. Lending, borrowing, trading, derivatives, and yield farming all run on open protocols powered by DeFi tokens. Curve’s CRV, Lido’s LDO, and Synthetix’s SNX are prime examples.

These tokens are hybrid creatures, they often combine governance, utility, and reward functions. Investors earn by staking, farming, or providing liquidity. In 2025, DeFi has resurged strongly, with total value locked back above $120 billion after last year’s slump. The trend is now more towards sustainable yields, moving away from the unsustainable triple digits of 2021.

DeFi is starting to connect with new ideas like bringing real-world assets on-chain (for example, tokenized U.S. treasuries) and even projects that integrate artificial intelligence. The most successful platforms will be the ones that make it easier for money to flow smoothly and put capital to work more efficiently. For traders, this creates plenty of opportunities. DeFi tokens can swing in price a lot, but those who take the time to learn how the systems work often capture the biggest rewards.

Prominent Examples

• Curve (CRV), Lido (LDO), Synthetix (SNX)

Use cases

• They enable protocol mechanics like: yield farming, liquidity incentives, synthetic assets, staking derivatives.
  
• They often combine utility + governance roles

Meme coins

At some point, every new trader asks, what are meme coins? The short answer is they are tokens born from internet jokes, sometimes with a dog or frog on the logo, and they thrive on community hype rather than any technical utility. Dogecoin and Shiba Inu are the household names, but hundreds more come and go every year.

They are high-risk, high-reward speculations if you want to participate in them at all. Prices can soar 10x overnight from a viral campaign, then crash just as quickly when the crowd moves on. The way people make money here is simple but dangerous. Participating in a pump and dump scheme works like this: you buy early, ride the wave, and sell before the music stops. 

In 2025, meme coins are still alive and well, with investment firm Grayscale launching a Dogecoin trust. Some are even experimenting with adding actual products, but the truth is that most are driven purely by sentiment or hype.

Prominent Examples

• Dogecoin (DOGE), Shiba Inu (SHIB), Pepe (PEPE), MongCoin (MONG)

Privacy coins

On transparent blockchains, anyone can trace your wallet. A privacy coin flips that script. Projects like Monero and Zcash obscure sender, receiver, and transaction amounts using advanced cryptography. For those who value financial confidentiality, these are your essential coins.

The main risk here is regulation. Privacy coins face delistings and scrutiny from governments, which limits their adoption in mainstream exchanges. Traders here typically profit from niche demand spikes or arbitrage opportunities when liquidity dries up. While their use case is powerful, investors need to understand the political risk that hangs over this category.

Use cases

• Privacy-preserving transactions, censorship resistance, and fungibility protection.

Prominent examples

• Monero (XMR), Zcash (ZEC), Dash (DASH)

Security tokens

Security tokens are an attempt to bring traditional finance onto the chain. Instead of a startup token with speculative value, these represent regulated ownership in real-world assets like stocks, bonds, and even real estate. The fundraising process is often done through a security token offering (STO), which is like an IPO but in crypto.

This category blurs the line between Wall Street and Web3. Investors can earn dividends, interest, or rental income, depending on the underlying asset. Growth in this area is tied directly to regulatory clarity, and 2025 has seen steady progress. We have already seen several tokenization pilots from major banks and asset managers. While this seems less flashy than meme coins, these tokens could quietly unlock trillions of dollars in traditional markets.

Use cases

• Tokenizing traditional securities (stocks, bonds, Treasuries), enabling fractional ownership, providing liquidity, and borderless trading.

How to use this knowledge

Understanding these categories is like having a framework for investing. A balanced crypto portfolio might have a 60% allocation on an L1 blockchain for growth, and keep a 20% portion in a stablecoin for liquidity, sprinkle in utility tokens tied to real usage, and take a small 20% bet on emerging sectors like privacy and tokenized securities.

The other critical rule is DYOR, do your own research. Categories give you a map, but within each map square, there are strong projects and weak ones. To pick a successful project, look at developer activity, community strength, tokenomics, and governance before committing your capital.

Also, watch the narratives. Today’s hot category may cool off tomorrow, replaced by new sub-themes like decentralized physical infrastructure, AI integrations, or tokenized treasuries. The faster you can recognize which category is rotating into the spotlight, the better you can position yourself to benefit from it.

Putting the chaos in order

The altcoin market is a set of parallel arenas, each with a different set of rules. Stablecoins act like a safe haven, L1s and L2s are the building blocks, DeFi tokens turn crypto into a financial marketplace, meme coins ride social energy, privacy coins protect your identity, and security tokens tie us back to real-world assets.

By breaking down altcoins into categories, you start asking smarter questions like what problem does this coin solve, what category does it belong to, and how does that category usually make money?

Crypto will keep evolving, new categories will emerge, and some old ones will fade. But the simple act of putting coins into buckets gives you clarity in a market built on confusion. And in a space where hype moves faster than logic, this clarity is your edge.

Altcoins categories table at a glance

Category	Use case	Altcoin	Main risks	How to make money
Layer 1 blockchain	Base networks for transactions & smart contracts	Ethereum, Solana, Cardano, Avalanche	High competition, network congestion	Staking, token price appreciation
Layer 2 scaling solutions	Off-chain scaling for speed & low fees	Polygon, Optimism, Arbitrum, Mantle	Reliance on L1 security, fragmented liquidity	Speculating on adoption, yield incentives as bonus rewards
Utility tokens	Access to protocol services	Chainlink, Filecoin, BAT, BNB	Weak tokenomics, low service demand	Usage growth, staking rewards (locking coins for interest)
Stablecoins	Price stability (usually $1:1 peg)	USDT, USDC, Dai	Depegging risk, regulation	Earning interest by lending out coins or supplying them for trades
Governance tokens	Voting rights and protocol influence	Uniswap, Aave, Maker, Compound, Aragon	Whale dominance, low turnout	Buying low to sell high, plus small payouts for voting in protocol decisions
DeFi tokens	Power decentralized finance apps	Curve, Lido, Synthetix	Market cycles, liquidity risk	Farming, staking, liquidity provision
Meme coins	Speculation, driven by internet culture	Dogecoin, Shiba Inu	Extreme volatility, hype collapse	Jumping in before hype takes off, and cashing out while demand is hot
Privacy coins	Confidential transactions	Monero, Zcash	Delisting, regulatory bans	Keeping coins long-term and trading when privacy demand spikes
Security tokens	On-chain ownership of real assets	STOs, tokenized real estate	Regulatory uncertainty, low liquidity	Receiving payouts from real assets, and benefiting if their value rises

Fig. 1 – Altcoin categorized and summarized

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