There are two kinds of digital assets in cryptocurrency: coins and tokens. Coins operate on their blockchain network and are mainly intended as digital currencies. Tokens are built on an existing blockchain and are used to execute financial transactions within that blockchain ecosystem. It’s crucial to consider the purpose of owning or trading either asset before investing in them.
In this article, we will delve deeper into those nuances and put an end to the crypto token vs coin debate, once and for all. Read on and decide if investing in cryptocurrencies is for you.
The cryptocurrency market can be a complex space to navigate, with its own dictionary of terms. It’s important to understand two common terms — coins and tokens — before investing.
Coins and tokens serve distinct functions in the cryptocurrency ecosystem. While both can be bought and sold, they’re different in their purpose and functionality.
Coins operate on their own blockchain network and are used as a payment method. Cryptocurrency tokens can also be used as a method of payment, but operate on an existing blockchain.
In this guide, we’ll explore the difference between coins and tokens, how they work, and what the most popular ones are.
What is a cryptocurrency coin?
A cryptocurrency coin is one that is native to its very own blockchain. It is a virtual currency that operates on a blockchain network and can be utilized as a payment method of payment.
One essential feature of a cryptocurrency coin is that it has its own independent blockchain. This means that its value is specific to the network it operates in and the rules that govern it.
These coins use complex algorithms to secure and regulate the transfer of funds and record transactions on the blockchain. They’re validated by miners, who receive rewards in the form of coins.
Bitcoin, the original cryptocurrency, is a good example of a cryptocurrency coin. It exists as a unit of value on its own independent ledger. Because it’s limited in its supply, its value is influenced by supply and demand.
Tip: Cryptocurrencies are usually considered as high-risk investments. Each investor understand how much risk she can accept, taking into account her whole investment portfolio.
Several emerging cryptocurrency coins, like Litecoin, are built and supported by Bitcoin’s rules.
Litecoin is sometimes referred to as the “digital silver”, while Bitcoin is regarded as “digital gold”. This is because cryptocurrency coins are increasingly viewed as ‘safe havens’, through cryptocurrency coins are much more volatile than traditional safe haven assets.
Cryptocurrency coins, such as Bitcoin, aim to offer an alternative to conventional banking.
There are many altcoins built to operate via their own unique blockchain and protocol.
One example is XRP, which creates a more affordable way to process cross-border payments by acting as a segue between fiat currencies and a unique form of liquidity for B2B and B2C transactions.
What is a cryptocurrency token?
A crypto token is a virtual currency token or unit of value that’s created and managed on top of an existing blockchain. It can represent assets, services, or even voting rights within a specific ecosystem.
Despite their similarity to coins, tokens do not have their own blockchain and are instead built on top of an existing one. Although tokens can act as a form of payment similar to coins, their primary purpose is to be used within a blockchain platform’s wider ecosystem.
Tokens are usually issued through initial coin offerings (ICOs) or airdrops, and can be used to raise funds for a project, reward contributors, and foster user interaction and innovation within a network’s community. Blockchain tokens can be used as a reward for partaking in an activity within a blockchain platform.
One of the biggest benefits of tokens is their versatility. They can represent anything from assets like real estate or gold, to loyalty points and in-game currency. They also offer more functionality than just being a typical store of value.
The most common platform for cryptocurrency tokens is Ethereum. Typically, a cryptocurrency token created using the Ethereum platform is called an ERC20 token. Such tokens can be stored and distributed between Ethereum addresses. Most cryptocurrency tokens are designed to power decentralized applications (dApps) on the blockchain.
A crypto token is typically simpler to create than a cryptocurrency coin. A developer can simply follow a template approach on their chosen blockchain, like Ethereum or the growing NEO platform, to make a token.
You also don’t need a new blockchain to create a new token. For example, all ERC20 tokens, even new ones, are compatible with the Ethereum blockchain. Coins and tokens can be stored together in the same compatible crypto wallet.
Tip: Investors should avoid making decisions based on emotions and online hype. Take the time to do proper research and analysis of a new asset before investing.
How do the use cases of coins and tokens differ?
As we mentioned before, crypto coins and crypto tokens are both digital assets that are exchanged and traded using blockchain technology. However, the use cases of crypto coins and crypto tokens differ significantly.
Cryptocurrency coin use cases
| Purpose | Explanation |
|---|---|
| Store of value | Crypto coins such as Bitcoin aim to offer an alternative to conventional banking. By providing decentralized transactions, Bitcoin has circumvented the need for centralized ledgers, becoming a reliable store of value. Each crypto coin has their own blockchain, which means that each transaction is recorded and verified on their respective blockchains. |
| Digital cash | Crypto coins are designed to be used as a medium of exchange in transactions and are generally accepted by merchants and businesses as a mode of payment. |
| International remittances | Some crypto coins are designed to make processing real-time international transactions easier, as payments do not require clearance or centralized approval. |
Cryptocurrency token use cases
| Purpose | Explanation |
|---|---|
| Smart contracts | Crypto tokens are created using smart contracts on pre-existing blockchains such as Ethereum. A smart contract is a protocol that automates transactions when mutually-agreed conditions of contracts are met. Smart contracts could be transformational for industries such as the property sector, for example, by automating and decentralizing property sales. |
| dApps | Tokens represent a specific asset or utility and are not intended to be used as a currency. Ethereum-based crypto tokens have become integral to dApps, open-source apps ranging from games to social media platforms to lending platforms. |
| Supercomputer platforms | Golem is the world’s first decentralized supercomputer, powered exclusively by both data centers and individuals’ laptops and desktops around the world. Ethereum-based crypto tokens help contribute to this. |
| Digital user identities | Certain tokens can be used to verify access to digital services such as age-restricted websites and software. |
Utility token vs. security token
When cryptocurrency tokens are created, they are issued to users through an initial coin offering (ICO), similar to an initial public offering (IPO) on the stock markets. ICOs offer to investors crypto tokens in exchange for an initial investment in a blockchain project.
There are two different types of crypto tokens that exist in the ICO sphere — utility tokens and security tokens.
A utility token is designed to provide access to a specific product or service. For example, a utility token might be used to pay for access to a new blockchain-based video game, or to buy and sell tickets on a resale platform.
Typically, a cryptocurrency token created using the Ethereum platform is known as an ERC20 token.
On the flip side, a security token is considered a digital asset in its own right, and itsvalue is influenced by the value of it linked external asset.
Security tokens can, therefore, be considered the crypto version of shares in a digital company. Buying a security token means you’re investing in a project or company, and you expect to receive a return on that investment.
To sum it up:
- Utility tokens are designed to encourage interaction between users and a company’s crypto services.
- Security tokens are designed to offer users ownership of a digital company, acting as a form of investment.
But what are the key differences between the two?
For one, utility tokens are typically not considered securities and are therefore subject to less stringent regulations. They’re often seen as a speculative investment, with the potential for high returns if the underlying project is successful.
Security tokens, on the other hand, are subject to securities laws and must comply with strict regulatory requirements. They’re typically viewed as a more stable investment with more predictable returns.
Defining a security token with the Howey Test
The Howey Test is a legal framework used to determine whether an investment is a security or not, and includes the following criteria:
- It must be derived from an investment of fiat currency
- The investment must support a ‘common enterprise’
- The investment is made with an expectation of future profit
If a token satisfies these criteria, it’s considered a security token, and its sale would be subject to the regulations of the Securities and Exchange Commission (SEC).
Tip: When analyzing a new investment asset, use reliable sources and take the time to understand its underlying value. Consider how the specific asset may impact your whole portfolio.
Popular cryptocurrency coins and tokens
Now that we have successfully differentiated cryptocurrency coins and cryptocurrency tokens, you may wish to study the most popular coins and crypto tokens more carefully to pinpoint any potential investment opportunities of your own.
There are some major players in both sectors of the market.
When it comes to coins, the big hitters are Bitcoin and Ethereum. These have been the two most famous ones for the past 10 years, and they have probably been responsible for most of the adoption in the cryptocurrency industry. In addition to those, there are also Tether, BNB, and the stablecoin USD Coin, which have been gaining traction and are now fundamental to a large majority of the investment strategies on cryptocurrencies.
With the tokens, you will probably have found Cardano and Polygon in your research. These two platforms have a considerable amount of projects already built under their ecosystem and keep growing their following every day. The other key assets are Solana and Chainlink.
Conclusion
Understanding the distinctions between coins and tokens is essential for cryptocurrency investors. By recognizing the different use cases and functionalities of these two types of digital assets, individuals can make smarter investing decisions.
To learn more about blockchain technology and start investing in cryptocurrency coins and tokens, join the eToro Academy.
FAQs
- Are cryptocurrency coins legal in the US?
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Yes, cryptocurrency coins are legal in the United States of America. However, they are not considered legal tender. This means that you can own and transact cryptocurrencies, but there is no law requiring them to be accepted by enterprises operating in the country. Moreover, they are not accepted as means of payment for governmental and federal taxes.
- Can I use cryptocurrency tokens in other blockchains?
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It’s not possible to use one cryptocurrency tokens in different blockchains, but there are ways to get around this. Common practices include “bridging” the tokens to the new blockchain or “swapping” the tokens using an exchange. When you bridge, you are transacting the two different tokens at the same time, directly to each wallet. When you swap, you are sending the tokens to an AMM pool, which in turn will send the correct tokens to the new wallets.
- What is the difference between crypto coins and crypto tokens?
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Crypto coins are standalone currencies with their own blockchain networks and are used as a medium of exchange. Examples of crypto coins include Bitcoin, Litecoin, and Ethereum. Crypto tokens are built on top of an existing blockchain network, such as Ethereum, and represent a utility or asset. They are used in decentralized applications, or dApps, as a means of payment or for accessing certain functions within an ecosystem.
- Can I convert crypto coins to crypto tokens?
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Yes, you can convert some crypto coins to tokens, and vice versa, on certain exchanges that support these transactions. For example, if you have Ethereum, you can exchange it for a token that is built on the Ethereum platform. Different tokens have different rules for conversion, so you’ll need to check with the specific exchange.
- Can I buy goods and services with cryptocurrency tokens?
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It may be harder to buy goods and services with cryptocurrency tokens, but it all depends if the person who is selling to you accepts and it does not violate any regulations of the countries you are in. Moreover, you can buy digital assets from the projects that were created within the native blockchain of your tokens.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments.
This material has been prepared without taking into account any particular recipient’s 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 or future 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.
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