As you read more about digital currencies, it feels like the words “coin” and “token” are synonymous. This, however, is incorrect. Although coin and token are often used interchangeably in the crypto universe, it is important to understand the distinction of the different roles they play when it comes to blockchain projects. This knowledge can be invaluable when making investment decisions.
WHAT ARE COINS?
The term coin generally refers to any cryptocurrency that exists on its own separate, standalone blockchain. A few of the most popular are Bitcoin, Monero, and Litecoin. The crucial properties of a coin are — uniformity, portability, fungibility, acceptability, durability, divisibility and limited supply.
WHAT ARE TOKENS?
The term token or digital tokens can refer to any cryptocurrency that is built on top of an existing blockchain (think of a Dave & Busters arcade token that you can’t touch or hold in your hands).
Generally, coins represent a cryptocurrency that is similar to the foundation or framework of a building. In contrast, tokens represent a cryptocurrency that is added to an existing infrastructure, like a new roof on a house. The process of building an entirely new blockchain and launching a coin is typically considered to be more complex and time-consuming.
COMPARING TOKENS AND COINS
There are several fundamental differences between tokens and coins that you should know:
- Coins can exist independently (Ethereum), but tokens can’t do that without ‘parent’ infrastructure
- Token price depends from project-oriented factors, coins – from its value to the market
- Coins tend to have a much larger user base than tokens.
- A coin functions like money, while a token is more similar in functionality to a gift card.
Countries like Japan, Canada, and the US are working on formulating regulations around different types of cryptocurrencies which should make the picture clearer for everyone to differentiate between various crypto projects.
The language used in cryptocurrency is important to understand to better guide your investment decisions. We encourage you to explore learning resources, like our GetSmart Hub, to fully understand this language, especially with regards to words that seem so similar on the surface like token or coin. With a deeper understanding of what makes these terms distinct, you can feel confident and make more informed investment decisions.