Tokens & Coins Explained
So you’ve probably heard the words “coin” and “token” used within the crypto community pretty frequently. Unfortunately, many people who do not fully understand the difference between the two use them interchangeably. These words are actually quite different from each other in meaning and should be known by anyone who plans on understanding more about cryptocurrency as a whole. Let’s discuss what coins and tokens are, how they function, and the difference between them when it comes to the roles that they play.
This is not financial investment advice.
This article will compare and contrast the relationships between digital tokens and coins.
Altcoin (Coin): Altcoins (alternative coins) are all other cryptocurrencies launched after the success of Bitcoin. Generally, they project themselves as better substitutes to Bitcoin. The achievement of Bitcoin becoming the first peer-to-peer digital currency paved the way for many to follow.
Token: Crypto tokens represent a particular fungible and tradable asset or a utility that is often found on a blockchain. Terms like cryptocurrency, altcoins, and crypto tokens are often erroneously used interchangeably in the virtual currency world.
Blockchain: A blockchain is a digitized, public or private ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping.
Crowdsale: Crowdsales are the crowdfunding campaigns in the cryptocurrency world, where the digital currency platform sells the pre-mined crypto tokens for the platform under development in exchange for either bitcoin, ethereum or some other established digital currency.
ICO: An Initial Coin Offering, also commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for bitcoin and ether. It’s somewhat similar to an Initial Public Offering (IPO) in which investors purchase shares of a company.
Familiarize yourself with these terms in order to gain a better understanding of how coins and tokens differ.
As it turns out, the word “cryptocurrency” is actually a misnomer which is why people erroneously use words like “coins”, “tokens”, and “cryptocurrencies” interchangeably. So let’s start off with what a “coin” is and how it differs from the rest of these terms. As stated above, a coin (which includes altcoins) is a form of digital money created through encryption techniques which store value. With Bitcoin undoubtedly serving as the most popular coin, these digital assets are known as “digital money” and have quickly gained popularity over the past few years.
Blockchain is the underlying technology behind coins. The easiest way to understand blockchain is to think of it as a fully transparent and continuously updated record of the exchange of information through a network of personal computers, a system which nobody fully owns. This makes it decentralized and extremely difficult for anyone to single-handedly hack or corrupt the system, pretty much guaranteeing full validity and trust in each exchange of information. There are coins —Litecoin & Namecoin for example — based on Bitcoin’s original protocol created by Satoshi Nakamoto. There are also coins that operate on blockchains that have been created specifically for them — like Ripple & Monero.
Overall, coins have the same characteristics of money: they’re fungible, divisible, acceptable, portable, durable and have a limited supply. Many self-proclaimed crypto enthusiasts emphasize the fact that cryptocurrency will take over the world of finance, given the ability for coins to replace conventional forms of money. So what’s the best way to differentiate a coin from other assets? Well, they are tied to a public blockchain, may be sent, received or mined, and do not perform any functions beyond acting as money. If it hits all these points, then it, sure enough, is a coin.
A coin (including altcoins) is a form of digital money created through encryption techniques which store value. They are tied to a public blockchain, may be sent, received or mined, and do not perform any functions beyond acting as money.
So now that you know what a coin is and how it operates on the blockchain network, let’s go over what a token is and why it’s not a coin. Tokens are digital assets, issued by a blockchain-based project, which can be used as a payment method inside of its ecosystem, performing similar functions with coins. However, the main difference is that it also gives the holder a right to participate in the network.
Tokens can also perform the functions of a digital asset or represent a company’s share. To better understand how a token works, think about it as a concert ticket. In this case, it’s considered a kind of “real-life” token which you can only use at a specific place at a certain time. You can’t go to the restaurant and pay your bill with a concert ticket, as the ticket only holds value at the concert. Digital tokens are the same, as they have certain use cases only inside certain projects.
At the end of the day, tokens represent an asset or utility, so security and utility tokens are distinguished. Security tokens are designed to be the company’s share, while utility tokens have certain use cases inside the project. Creating a token is actually much easier than creating a coin, as you don’t have to create new code or modify already existing ones. All you have to do is use a standard template from platforms like Ethereum — the first to simplify the process — that are blockchain-based and allow anyone to create tokens in just a few steps.
Tokens are digital assets, issued by a blockchain-based project, which can be used as a payment method inside of its ecosystem, performing similar functions with coins. However, the main difference is that it also gives the holder a right to participate in the network.
So now that you’re aware of the difference between a coin and a token, let’s discuss their relationship and why people tend to get them mixed up. It is important to note that all coins or tokens are regarded as cryptocurrencies. However, most coins do not function as a currency or medium of exchange.
Remember, the term “cryptocurrency” is actually a misnomer since a currency technically represents a unit of account, a store of value and a medium of exchange. Bitcoin, for example, has all of these characteristics and any other coins conceived after it is generally considered a cryptocurrency. Yet, most do not fulfil the aforementioned characteristics of an actual currency. The most common categorization of cryptocurrencies are altcoins & tokens, which we now understand to be two completely different things.
Tokens and coins are two words that are used commonly in the cryptocurrency space. Unfortunately, many people begin to use them interchangeably and think of them as related terms. However, these are two completely different things and should be understood by anyone who wants to learn more about cryptocurrency. You can buy a token with a coin, but not the other way around, as tokens only have a specific use within a project. Hopefully, you won’t be caught misusing these terms now that you’ve understood the difference between them. As always, happy investing!
Now that you know the difference, will you still call everything a coin?
Old habits die hard!
