Even though cryptocurrencies have boomed recently, few people understand the technicalities behind them. There are tons of different factors behind each cryptocurrency and as a trader or investor, it is recommended that you understand the basics of each crypto you buy.
The terms tokens and coins are often, mistakenly, used interchangeably, while in reality, they mean two different things. In this article I will try to explain the different types of cryptocurrencies - coins and tokens, and further break them down for you.
Coin - A cryptocurrency (digital currency) that uses its own platform and operates independently, is a coin. Coins do not require any other platform to run, but rather, function on their own independent Blockchain, on which they are the native currency. Bitcoin is a coin, and so is Litecoin and Ethereum - Litecoin and Ethereum are also altcoins, which means they are Bitcoin alternatives in some ways. There are two common types of altcoins:
Alternative coins that are built using the original source code of the Bitcoin derived Blockchain with modifications and changes (Dogecoin, Litecoin).
Alternative coins that are built using independent and new Blockchains (e.g. Ethereum, Icon, AION)
Token – A cryptocurrency that is built on top of an existing Blockchain or protocol is known as a token. Tokens typically represent an asset or utility. Since tokens are created on top of an existing Blockchain, they are easier to create and most of the tokens we see today are based on the Ethereum blockchain:
Utility Token – These tokens are not designed as investments. They are to be used to transact, exchange, and access products or services, essentially providing a ‘utility’ of some sort. Since they are not considered an investment, these tokens are exempt from regulatory scrutiny under the law (e.g. Tokens used for Identification or for playing a Blockchain based game).
Security Token – These tokens are considered investable assets and are subject to securities regulations. For example, The SEC (Securities Exchange Commission in the U.S.) uses the Howey Test to verify if a token represents a security or not. If a token fails the Howey Test, it is considered a security. If a firm meets all the regulatory requirements, this token has the most potential for widespread application. The largest use case would be for companies to issue tokens that represent ownership in a company or asset, just like stocks.
Coins provide the foundation for tokens, but tokens have overall greater functionality than just being used as a native currency on a protocol. Tokens can be used to represent ownership in a company or real estate, provide voting rights, can issue buybacks and the list goes on, providing other uses cases beyond speculative returns and a medium of exchange.
If you want to know which cryptocurrencies are coins and which are tokens, you can head over to CMC and select ‘Coins’ or ‘Tokens’ from the available tabs to view the lists:
Top Coins on CMC:
Top Tokens on CMC:
Even though we have explained the differences in this post, it is likely that the terms token and coin will continue to be used interchangeably and will be redefined over time as hybrid coins and tokens are launched in the future.
If you have any questions or confusions, feel free to contact us and we will do our best to explain the various crypto concepts.