If you just started to think about investing in the cryptocurrency market, there are some basic terms to know to understand your options. Everyone has heard of Bitcoin as it was the first cryptocurrency created in 2008.
Since then, the concept of Bitcoin has expanded and divided into thousands of altcoins—moderations to Bitcoin’s algorithm—new coins using their own blockchain technology, and tokens serving a whole other function within a coin’s structure. Knowing the difference between coins and tokens and how they function in the crypto world can help you make informed decisions when investing your time and money.
What is a Coin?
Every coin has a different purpose or goal in mind when it is created. For example, Ethereum—the second-largest cryptocurrency—uses its blockchain as an application-builder rather than a monetary system. So, not every coin is solely a currency, rather a technology with value.
Despite how a coin is developed—i.e. from Bitcoin’s original algorithm or an entirely new code—every cryptocurrency coin contains several basic principles:
- Interchangeable: it can be bought, traded and sold for another cryptocurrency or fiat
- Dispersible: it can be partially dispersed in segments among many parties
- Usable: It can be used to make purchases using a virtual wallet and payment gateways
- Circulated Supply: each coin only allows a certain about of coins to be released to the public
- Storable: coins can be saved like any other currency in a wallet for future use at your disposal
- Valuable: there is a value associated with each coin that fluctuates based on the coin’s market—this value is the same for each coin holder.
- Accessible: anyone can buy or mine coins through cryptocurrency exchanges or mining pools
What is a Token?
There are many cryptocurrency coins that use in-house tokens to manage their own ecosystem. Large coins like Ethereum, with their token ether, use smart contracts for dApps—decentralized applications—to create relationships and complete projects.
Other coins like Power Ledger, with their sparkz token, use tokens as an exchange system to send power supply internationally. So, just like coins, tokens have a very specific purpose. The difference is that tokens remain inside the initial blockchain network. Additionally, tokens usually include these characteristics:
- Representable: not really a spendable currency rather a symbol to make transactions easier— aka a digital asset
- Non-transferable: unlike coins, tokens cannot be exchanged for other tokens or cryptocurrencies outside of the original coin’s structure—so there do not exist on cryptocurrency exchanges
- Off Blockchain: instead of being stored on a blockchain like coins, tokens are kept on private equipment run by a company’s ledger
- Reward-based value: issued based on completed tasks and spent like reward points on various perks—like voting rights or as a credibility factor—inside the coin’s environment
- Reliant on a parent coin: in order to own tokens, you must own the coin that controls the token—e.g. you must own Ethereum to own any ether
Investing in the Future of Coins and Tokens
As cryptocurrencies become more practical and mainstream so will the potential of blockchain technology. This means that more coins and tokens will be created for purposes never seen before.
The applications are endless when secure, fast, and anonymous transactions can be done online.
Coins will always be the real value of a blockchain, but tokens will represent their core operations. It is important to not only know how much a coin is worth but also how their infrastructure functions.
Choosing an investment should not just include the monetary value of a coin. Your decision should be based on how well the community behind the coin runs itself. The true value of any cryptocurrency exists in how it will serve society.