The popularity of cryptocurrency has been skyrocketing lately. Since the invention of bitcoin in 2009, cryptocurrency has evolved from an idea to a sizeable investing market. People from all around the world are beginning to take an interest in this new and exciting market.
However, the one topic that every new crypto investor will eventually tackle is the difference between coins and tokens. Many mistake coins and tokens to be the same. Both of these are indeed crypto investments, but each has particular qualities that make them significantly different.
The truth is that while coins and tokens are related, there are some significant differences between the two that you have to know before you decide to invest in either one. This article covers the four major differences between coins and tokens.
Coins Are Digital Currencies
The concept of cryptocurrency was first introduced in 2008 by an anonymous person or group that goes by the name Satoshi Nakamoto. This was the original bitcoin white paper, which is considered the invention of cryptocurrency. In 2009, bitcoin was officially created and became the world’s first digital currency. Numerous digital currencies have been created since.
Coins are cryptocurrencies, and cryptocurrencies are digital currencies. All of these names refer to the same thing. Much as the name implies, coins are digital pieces of data that are given monetary value and act as a medium of exchange. They’re usually used as a payment method.
Investors should know that the monetary value of different coins fluctuates with the market. But essentially, you can exchange real money for coins, and you can exchange coins for real money. Coin investors tend to buy coins and sell them after the value of their coin rises, earning themselves a profit.
Each Coin Has Its Own Blockchain Network
Every cryptocurrency has its own independent blockchain. The team behind each project creates the coin by coding the blockchain themselves from scratch. Bitcoin and Ethereum’s Ether are good examples of such coins.
Tokens don’t exist on their own blockchain. Consider Ethereum’s ERC-20 Tokens. These Tokens aren’t Ether but rather are created using Ethereum’s blockchain. You’ll get more information on this below or on other articles that solely focus on ERC-20 tokens.
Transactions Happen On The Blockchain
In simple terms, a blockchain is a digital ledger with advanced security features and exists across a network. Cryptocurrency coin transactions happen directly on this blockchain. Another way of saying this is that the ledger will record all cryptocurrency transactions as they occur.
Creating Coins Is Complicated
The technology behind each cryptocurrency is quite complex. To create one, the team behind it has to build their unique coin from scratch. This means first having a working knowledge of advanced programming and software development before building the blockchain from the group up.
Furthermore, cryptocurrencies are usually ongoing projects; they aren’t a one-and-done deal. Maintaining a cryptocurrency requires consistent work and maintenance. Teams usually have to constantly improve their project by adding new features and addressing concerns of the community.
Tokens Are Digital Assets
While coins are currencies, tokens are assets. Just like any other asset, tokens are bought and traded. The difference is that you can use coins to purchase tokens.
Imagine having a stack of cash in one hand and a physical item in the other. Here, the cash represents a coin and the item represents a token. You can use the cash to buy the item, or you can sell the item to get the corresponding amount of cash.
They Use A Cryptocurrency Blockchain As A Foundation
To make it easier to understand, you can think of this concept as renting a house instead of buying a house. If you buy a house, you own it and are responsible for maintenance, renovations, and any other expenses and work that the house requires. When renting a house, you don’t own it and aren’t responsible for any maintenance or other costs. You’re just paying money to use someone else’s home.
The relationship between coins and tokens can be compared to the above example. As mentioned earlier, tokens are built on an existing blockchain. Therefore, the value of tokens is usually measured in the cryptocurrency they’re built on.
Tokens, such as Non-fungible Tokens (NFTs), are usually bought and paid for in cryptocurrency. With that said, tokens are often used as a means of providing access to digital assets and for representing physical items.
Transactions Are Handled By Smart Contracts
Unlike with coins, transactions concerning tokens can’t be handled directly by the blockchain. While they use a crypto blockchain to exist, they aren’t part of the blockchain in the same way a coin is. Instead, these transactions are handled via smart contracts. Fundamentally, these contracts are automated programs that are managed on the blockchain and handle token transactions.
Creating A Token Is Easier Than Creating A Coin
Perhaps one of the most beneficial aspects of creating a token is that it’s a much easier task than creating a coin. As you might already have gathered, it’s a much simpler task to adapt something to an existing blockchain than to create your own blockchain.
Coins and tokens are related, but they’re not the same. As an investor, the differences will affect how you trade.
Coins exist on their own infrastructure and are used as digital currency. Tokens, on the other hand, are built using a coin’s infrastructure and are treated as assets. If you’re investing in crypto, ensuring a good understanding of the basic differences is essential. You won’t only make informed decisions, but you’ll also have a better chance of choosing the right investments for you.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.