Cryptocurrency Coins vs Tokens: What is the Difference?

Cryptocurrency Coins vs Tokens: What is the Difference?

There are two types of cryptocurrencies developed, introduced, and used in the digital world: coins and tokens. Some individuals would not mind interchanging these two by collectively calling them cryptocurrencies. However, some prefer highlighting the difference between cryptocurrency coins and crypto tokens. What exactly is the difference between the two? How are they different? And which one is better?

Understanding the Difference Between Coins and Tokens in Cryptocurrency

A Background on Cryptocurrency

Of course, before discussing and understanding the difference between coins and tokens, it is first important to note that a cryptocurrency is a digital asset that is created using cryptography and the more specific processes in blockchain technology. These assets exist in the digital world but they can have a real-world monetary value.

The asset was designed and introduced as a medium of exchange in which the ownership records of its individual unit are stored in a type of database and distributed ledger called a blockchain. Each block in a chain contains data about a specific transaction, and it is linked or chained together in a previous lack and the rest of the blacks of all related transactions.

Because of the advantages of blockchain technology as distributed ledger technology maintained by a decentralized and open-source peer-to-peer network, cryptocurrencies have been considered as an alternative to fiat money and other valuable assets such as gold, especially when used to store value and as a medium of exchange.

Cryptocurrency Coins and Tokens

As mentioned in the introduction, crypto coins and crypto tokens, or more concisely, coins and tokens are fundamentally two types of cryptocurrency. To differentiate the two, note that a coin is the native asset of a particular blockchain platform or network, while tokens are created using an existing blockchain platform to serve more specific purposes.

Coins can be traded with other crypto coins or related tokens within the same blockchain platform, as well as with fiat money such as the United States dollars or the Chinese yuan through currency exchange markets. They are also used as a medium of exchange to purchase goods and services, and a store of value for foreign currency exchange trading.

Tokens serve more specific functions. Built on top of an existing blockchain platform, some of their notable applications include using them as an internal asset of blockchain-based apps, such as in the case of in-game assets of NFT-based or blockchain video games, and for representing physical assets and traditional digital assets, among others.

Exploring Notable Examples

To understand further the difference between the two, take note of some of the notable examples of each. For starters, two of the most popular cryptocurrency coins in the world are Bitcoin and Ether. Bitcoin is the native currency of the Bitcoin blockchain, while Ether is the native currency of the Ethereum blockchain platform and Ada is the native currency of the Cardano blockchain platform.

The Bitcoin platform only exists for hosting the Bitcoin cryptocurrency. However, numerous blockchain-based organizations and projects have built tokens on top of existing blockchains. Ethereum is one of the most popular, and it has several standards to include the ERC-20 standard for Ethereum tokens and the ERC-721 standard for so-called non-fungible tokens.

Estimates show that there are hundreds of ERC-20 tokens and thousands of ERC-721 tokens. Examples include the AXS and SLP tokens used in the NFT-based game Axie Infinity, the stablecoin DAI, the LINK tokens used in the decentralized oracle network Chainlink, and the COMP token of the decentralized finance project Compound.

It is also important to note that tokens are categorized into four according to their general functions: security tokens, equity tokens, utility tokens, and payment tokens. A security token is issued during Initial Coin Offering as a form of asset security, while an equity token represents the stock or equity of an issuing company.

Utility tokens are created as part of the features of a blockchain application. They are also called application tokens, and their specific function is to provide people with access to either a product or service coursed through an application. Meanwhile, payment tokens are the internal currency of a particular blockchain application.

Note that each token can fall into more than one category. A utility token can also be a payment token. Furthermore, tokens built on the same blockchain platform are interoperable. Hence, they can be traded with one another or exchanged with the native cryptocurrency coin.  These tokens can be acquired using the native crypto coin.

Pointers in Choosing and Investing Between Coins and Tokens

Remember that both cryptocurrency coins and tokens are digital assets. People can make money from them. They fundamentally have an equivalent monetary value, especially when traded with other assets. Individuals and organizations can earn from cryptocurrencies by acquiring these assets either through mining or minting, participation in other cryptocurrency-earning activities, or asset investing and trading.

However, because these two have different characteristics and use cases, it is important to define and evaluate the investment goal and risk appetite of a particular investor. Of course, crypto coins such as Bitcoin and Ether are similar to real-world physical money. They are recognized in foreign currency exchange markets, as well as by producers and retailers.

Tokens cannot be readily used as real-world money for purchasing goods or services. However, they have a notable advantage: they are backed by applications designed to perform a specific purpose. But acquiring tokens can only be considered a good investment if the involved application has an established utility and digital ecosystem.

It is also worth mentioning that introducing a coin requires a considerable amount of expertise and resources. Doing so fundamentally involves developing and operating a specific blockchain platform. In contrast, it is easier to create and introduce a token because it only requires using the standards of an existing blockchain platform.

Of course, it is also important to reiterate that investing in cryptocurrencies can be risky. Although the gains can be substantial, as evident from the present value of coins and the excitement over tokens and non-fungible-tokens, individuals should have a high risk appetite. Cryptocurrencies are extremely volatile due to the extreme historical price movements