Thu. Sep 19th, 2019

Cryptocurrency for Beginners: difference between coins and tokens

This guide helps you understand the fundamental difference between cryptocurrency coins and tokens. We explain the key characteristics of coins and tokens, including the function of the mining process and also present to you the top 10 mineable coins on the market.

What is the difference between a coin and a token?

The terms ‘coin’ and ‘token’ are often used interchangeably, especially by beginners, although there are salient differences that you should know about.

What is a coin?

A coin is an encrypted digital currency that is used as money within its own blockchain infrastructure as well as outside of its own native platform. The sole purpose of a coin is to make and receive payments over the blockchain.

What is an altcoin?

As you may already know, Bitcoin was the first coin developed by Satoshi Nakamoto. And since Bitcoin was the first coin, all other coins are known as ‘alternative coins‘ or ‘altcoins’ for short.

So whenever someone refers to altcoins, they are simply referring to all the other coins that were launched after Bitcoin.

Bitcoin-derived blockchains

Many coins are a fork of Bitcoin. These Bitcoin-derived blockchains are developed using the same open-source protocol as the Bitcoin blockchain although contain changes to the underlying code. Notable examples of Bitcoin-derived blockchains include Bitcoin Cash, Namecoin, Dogecoin and Litecoin.

Native blockchains

However, there are other altcoins that do not make any use of Bitcoin’s open-source protocol whatsoever and have instead created their own blockchain protocol to support their own native currency. The most renown examples are Ethereum, Ripple and Omni.

The criteria for coins

As mentioned above, coins are intended to be used as digital money, and therefore must satisfy three main criteria:
1. they must have a unit of value;
2. they must be a store value (although significant volatility often raises questions over the ability for digital coins to be a true store of value);
3. they must be used as a medium of payment for goods and services in much the same way that you would use fiat money.

Another distinguishing factor of a coin is they are typically mineable whereas tokens are not. We say typically because not all coins can be mined.

What are the top 10 mineable coins?

  1. Bitcoin core (BTC)
  2. Ethereum (ETH)
  3. XRP (XRP)
  4. Litecoin (LTC)
  5. EOS (EOS)
  6. Bitcoin Cash (BCH)
  7. Binance Coin (BNB)
  8. Tether (USDT)
  9. Stellar (XLM)
  10. Cardano (ADA)

What is coin mining?

Explained briefly, in order for a cryptocurrency transaction to be added to the blockchain digital ledger, a miner must verify the authenticity of the information and update the blockchain with the transaction.

In order to be competitive, a cryptocurrency miner requires a fast computer with specialised hardware.

The process of mining involves competing with other cryptominers to solve complex mathematical problems with cryptographic hash functions. The miner that is able to crack the problem first is rewarded by being able to authorise the transaction, and in return for the service provided, earn a small amount of cryptocurrency known as a ‘block reward‘.

To learn more about how block rewards and their halving affect the price of a coin, read our post: Preparing for the Litecoin Halving 2019: Don’t be fooled.

What is a token?

Unlike coins, tokens cannot be used as a form of currency outside their native environment. A token either represents a utility or a digital asset that has a unit of value and that operates on top of an existing blockchain infrastructure such as Ethereum.

Although tokens share some similarities with coins, they serve a much broader purpose and are used to facilitate range of applications through smart contracts or decentralised applications (‘dApps‘ for short.)

Tokens that are built to run on the Ethereum platform must be ERC-20 compliant, and this type of token has in fact emerged as the technical standard used for all smart contracts, which is why Ethereum has become so popular.

These smart contracts or dApps are programmable and self-executing, written in an open-source code with inbuilt incentive mechanisms and algorithms to process as well as manage various commands occurring on the blockchain.

What are the different types of tokens?

There has been much discussion about different cryptocurrency classification. The following article Cryptocurrencies: currencies? commodities? derivatives? provides some further food for thought.

The U.S. Securities Exchange Commission and Switzerland’s FINMA have made an effort to classify the different types of tokens, especially attempting to distinguish between utility tokens and security tokens.

Utility tokens

Utility tokens give its holders the right to use services developed by a project at discount.

Utility tokens are not considered to be investment instruments. However, these tokens are very often traded (typically on an exchange) in much the same way you would trade a share or a currency in the hope that the price will rise in value due to growing demand for the goods and services the project is developing.

Anyone analysing utility tokens should really dig hard to understand what the underlying value of that utility really is. For example, if a token giving you access to 1GB of cloud storage is priced at $10 then you may want to think twice about buying it since the same 1GB of cloud storage from a traditional service is valued at $1.

Also, you will want to look at whether the tokens have any value generating mechanisms in their economy or external growth drivers.

If you want to learn more about utility tokens, what they resemble and how they could be valued, read our guide Five rules to master before trading crypto.

Utility tokens are issued and bought either through an Initial Coin Offering (ICO) or possibly through an exchange.

Security tokens

Security tokens represent legal ownership of an asset such as a share, a bond or real estate. There is nothing really unusual about security tokens except the transactions are recorded digitally on the blockchain and since they are considered to be investment contracts, securities laws and regulations are applicable.

In the United States, tokens are scrutinised using the Howey Test to determine whether they should be treated as a security. 

The regulator will assess whether the token represents (a) an investment of money, (b) an investment in common enterprise and (c) an expectation of profits from the efforts of others. If all three factors are met then a token or coin are deemed to be a security.

Security tokens are issued and bought either through a Security Token Offering (STO) or possibly through an exchange.

Is it possible for a token to become a coin?

Yes. It is interesting to note that Binance was initially a token run on the Ethereum blockchain. However, in 2019 Binance launched its own blockchan called Binance Chain and migrated its coins off the Ethereuem network and onto its own.

Concluding remarks

CoinMarketExpert hopes you found this guide to be valuable.

If you enjoyed reading this page or have any valuable feedback to share with us then please do let us know. You may contact us on: info@coinmarketexpert.com or alternatively please share your feedback with us on Twitter

Copyright © All rights reserved. | Newsphere by AF themes.