What are the differences between cryptocurrency coins and tokens? Discover the different characteristics and functions of both, and learn how investors can distinguish between the two.
The terms “coin” and “token” are often used interchangeably within crypto, but it is important for investors to understand the differences between them.
What are crypto coins?
A crypto coin is a virtual currency. It exists as a unit of value and can be used as a payment method and medium of exchange in the same way that fiat currency can. Unlike fiat currency, however, crypto coins offer investors an alternative to traditional and centralised banking.
Bitcoin, the world’s largest cryptocurrency, is perhaps the best example of a crypto coin. It exists upon its own, decentralised ledger – the Bitcoin blockchain – and is often referred to as “digital gold”.
What are crypto tokens?
Crypto tokens differ from crypto coins. A crypto token is a digital representation of an asset, built on a blockchain, and its primary purpose is to be used within the wider blockchain ecosystem (often referred to as the “metaverse”) to facilitate interaction and innovation within a network’s community.
Crypto tokens are usually made available to investors in an ICO (initial coin offering). ICOs provide investors with crypto tokens in exchange for an initial investment, but crypto tokens can also be traded amongst users, or distributed to users over time by a network’s development team, perhaps as a reward for participation within a blockchain network.
What are tokens used for?
Crypto tokens are commonly used to power decentralised applications (dApps). Just like applications you might have on your phone, these are blockchain-based applications that can take many forms, from games and social media to DeFi platforms. Crypto tokens can also help to facilitate smart contracts.
The potential utility of crypto tokens overall is endless, but exactly how specific tokens are used depends on the type of token itself. Given the vast choices, an investor should consider their intentions for buying tokens, this might depend on personal interests or investment strategy.
For example, a crypto gaming company might issue security tokens that signify a stake in their company. Investors who are seeking to expose their portfolio to the blockchain gaming industry could buy these to gain ownership rights in the company, or to prove affiliation with the sector. Others, such as those wanting to play blockchain-based games themselves, might buy utility tokens for the more practical reason of using them in-game.
Security vs utility tokens
Security tokens are a type of investment instrument, considered a digital asset in their own right, that represent ownership rights. The value of a security token is influenced by the value of the external asset to which it is linked. For example, a security token might offer investors part ownership of a digital company.
Tip: Investors often liken security tokens to shares of stock within a digital company.
Utility tokens are different in that they are considered “user tokens”, designed to encourage interaction with a crypto network and to potentially unlock access to something within it. They are not intended to become a store of value, but are popular among crypto start-ups seeking early investment.
The difference between coins and tokens
It can be useful for investors to break down the key differences between coins and tokens, to better understand the value of each.
| Coins | Tokens |
|---|---|
| Primary function is to be used as a digital currency or store of value | Diverse range of functions, from representing ownership to enabling access to services |
| Self-sufficient networks built on independent blockchains | Reliant upon the infrastructure of existing blockchain platforms |
| Gain value based on their own scarcity, utility and adoption | Derive value from the success of projects upon the network in which they operate |
| Can be transferred between wallets | Requires wallet compatibility with the platform they operate on |
The different types of crypto coins and tokens
As is the case with traditional financial instruments, many different types of crypto coins and tokens exist.
Stablecoins
A stablecoin is a cryptocurrency with its value pegged to another asset’s price. For example, a stablecoin pegged to the US dollar should — in theory — always be valued at $1. Fiat-backed stablecoins tend to be the most popular type of stablecoin as they retain steady prices, meaning they can potentially help crypto investors to protect themselves from market volatility.
Altcoins
When the crypto market was in its infancy, anything other than bitcoin was considered an altcoin (as an “alternative” to bitcoin). As the crypto landscape has evolved, with thousands of coins and tokens now in existence, investors typically interpret altcoins as crypto coins other than bitcoin, differentiated from crypto tokens by the fact that they each have their own, independent blockchain. Ripple (XRP) and Cardano (ADA) are examples of popular altcoins, for example.
Meme coins
Meme coins refer to the cryptocurrencies that are named after characters, trends or viral moments that gain popularity from social media memes. Despite usually having lesser utility than other cryptoassets, they typically gain value through notoriety.
Although the term is used lightheartedly, meme coins can be incredibly volatile. Dogecoin (DOGE) is an example of a meme coin that experienced high trading volumes and price fluctuations around the time of the COVID-19 pandemic.
Coloured coins
Coloured coins contain metadata to represent ownership of additional (real-world or digital) assets. For example, ownership of NFTs (non-fungible tokens) is usually asserted through coloured coins.
Final thoughts
It is important for crypto investors to understand the key differences between coins and tokens to make the best possible investment decisions. While coins serve as digital currencies and independent units of value, tokens have a diverse range of utility and are built on pre-existing blockchain networks.
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Quiz
FAQs
- Should I invest in coins or tokens?
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A well-balanced crypto portfolio will include investment in both crypto coins and tokens. It is important for long-term investors to diversify in this way, to manage their risk of loss.
- How can I invest in an ICO?
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To invest in an ICO, an individual will first require a compatible crypto wallet and a means to exchange. Some ICOs require pre-registration of interest, but specific details of each ICO will typically be issued in advance by the project’s development team.
- How can I gauge the popularity of coins and tokens?
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Investors can use various fundamental and technical analysis indicators to determine the popularity of a coin or token. This may include looking at trading volumes, tracking price movements on crypto charts, analysing market sentiment or considering potential utility.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.