During your research journey into the burgeoning world of cryptocurrency, it is quite likely you will encounter the terms ‘coin’ and ‘token.’ You might think that a cryptocurrency coin and a cryptocurrency token are one and the same, but there are several nuances that make them very different to each other. In this article, we will delve deeper into those nuances and put an end to the crypto token vs coin debate, once and for all.
What is a cryptocurrency coin?
A cryptocurrency coin is one which is native to its very own blockchain. It is a virtual currency that can be utilised as a method of payment, with transactions in a cryptocurrency coin conducted exclusively via its own blockchain. Bitcoin, the original cryptocurrency, is the best possible example of a cryptocurrency coin. It exists as a unit of value — on its own independent ledger. Some cryptocurrency coins, such as Bitcoin, are limited in their supply. Their value is, therefore, influenced by the basic principle of supply and demand.
Several of the newer emerging cryptocurrency coins are also built and underpinned by Bitcoin’s protocol. A great example is Litecoin, which is the result of a hard fork from Bitcoin’s code that occurred in 2011 and is one of the most popular altcoins. Litecoin is now considered the “digital silver,” while Bitcoin is regarded as “digital gold.” This is because cryptocurrency coins are increasingly viewed as ‘safe havens,’ although these coins are much more volatile than traditional safe-haven assets.
At the other end of the spectrum, there are many alternative cryptocurrency coins built to operate via their own unique blockchain and protocol. Ripple (XRP) is one of the best examples of this, creating a more affordable way to process cross-border payments by acting as a segue between fiat currencies and a unique form of liquidity for B2B and B2C transactions.
What is a cryptocurrency token?
There are subtle differences between a cryptocurrency coin and a cryptocurrency token. We have already explained that a crypto coin acts largely as a form of value. Now, it is time to explain the distinction between the two.
Simply put, although a cryptocurrency token can act as a form of payment, its primary purpose is to be used within a blockchain platform’s wider ecosystem. In many cases, cryptocurrency tokens are created to foster user interaction and innovation within a network’s community. Blockchain tokens can be dished out as a form of reward for partaking in an activity within a blockchain platform.
The most common platform for cryptocurrency tokens is Ethereum. Typically, a cryptocurrency token created using the Ethereum platform is known as an ERC20 token. If you are wondering what ERC20 tokens are, they can be stored and distributed between Ethereum addresses.
Most cryptocurrency tokens are designed to power decentralised applications (Dapps) on the Ethereum blockchain. These crypto tokens act as gatekeepers for Dapps such as games or on-demand services powered by the Ethereum platform on their shared blockchain.
By its very nature, a crypto token is simpler to create than a cryptocurrency coin. To form a new crypto token, a developer can simply follow a template approach on their chosen blockchain, i.e., Ethereum or the burgeoning NEO platform. Creating new tokens does not mean you need a new exclusive blockchain to operate them. For instance, all ERC20 tokens are compatible with the Ethereum blockchain.
Both cryptocurrency coins and tokens can be stored together in the same compatible crypto wallet, with ‘hot’ online wallets and ‘cold’ offline wallets from which to choose. At eToro, we make it easy for cryptocurrency traders to store, receive and transfer crypto coins via our secure digital wallet. These wallets are compatible with multiple cryptocurrencies, with over 120 coins available.You can buy and sell cryptos on our platform, which, as an alternative to trading, also offers ownership of underlying assets and cryptocurrencies. You can also trade the value of these underlying cryptos without physically owning them via contracts for difference (CFDs) trading, which is open to eToro customers, though only in select territories.
How do the use cases of coins and tokens differ?
The growing number of real-world use cases for cryptocurrency coins and crypto tokens is helping to legitimise the cryptocurrency industry further. Once again, the use cases of crypto coins and the tokenomics of tokens differ across a host of industries, as you can see in the tables below:
Cryptocurrency coin use cases
|Store of value||Crypto coins such as Bitcoin aim to offer an alternative to conventional banking. By providing decentralised transactions, Bitcoin has circumvented the need for centralised ledgers, becoming a reliable store of value.|
|Digital cash||The focus of Dash, formerly Darkcoin, is on digital transactions. Unlike other cryptocurrencies, Dash seeks to improve anonymity via its PrivateSend feature.|
|International remittances||Ripple’s XRP is the third-largest cryptocurrency coin in terms of market capitalisation. This coin is designed to make processing real-time international transactions easier as payments do not require clearance or centralised counterparty approval.|
Cryptocurrency token use cases
|Smart contracts||A smart contract is a protocol that automates transactions when mutually agreed conditions of contracts are met. It could be transformational for industries such as the property sector, by automating and decentralising property sales.|
|Dapps||Ethereum-based crypto tokens have become integral to Dapps, open-source apps ranging from games or social media platforms such as Karma to lending platforms such as MakerDao that are pegged to the US dollar.|
|Supercomputer platforms||Golem is the world’s first decentralised supercomputer, powered exclusively by data centres and individuals’ laptops and desktops situated around the world. Ethereum-based crypto tokens contribute to this.|
|Digital user identities||Different governments have varying legislation on digital services. The Civic token, a decentralised digital identity, is used to verify access to digital services such as age-restricted websites and software.|
Utility token vs security token
Typically, when cryptocurrency tokens are created, they are issued to users through an initial coin offering (ICO). Think of an ICO like an initial public offering (IPO) on a new public limited company in the stock markets. ICOs give you crypto tokens in exchange for an initial investment in a blockchain project.
Now that you are familiar with the differences between cryptocurrency coins and tokens, you will need to understand the two different types of crypto tokens that exist in the ICO sphere — utility tokens and security tokens.
Think of a utility token as a user token. It is a token that will grant you access to services provided by the creator of the utility token. They are not created with the sole purpose of becoming an investment or store of value. Utility tokens are becoming particularly popular among crypto start-ups which are in the early stages of developing new products or services and want to create interest and demand through an ICO of utility tokens.
On the flip side, a security token is considered a digital asset in its own right. The value of a security token is influenced by the value of the external asset to which it is linked. Security tokens can, therefore, be considered the crypto version of shares in a digital company.
We can summarise this section using the following bullets:
- Utility tokens are designed to encourage interaction between users and a company’s crypto services.
- Security tokens are designed to offer users part ownership of a digital company, acting as a form of investment.
But how do you tell the difference?
Using the Howey Test to define a security token
The landmark case in the US Supreme Court involving the Securities and Exchange Commission (SEC) and W. J. Howey Co. in 1946 has since provided the benchmark for ascertaining whether certain transactions can be qualified as ‘investment contracts’ or securities. This covers cryptocurrency security tokens too.
For a cryptocurrency token to be correctly deemed a security, it must meet the three following criteria:
- It must be derived from an investment of fiat currency
- The investment must support a ‘common enterprise’
- The investment is made with an expectation of future profit
Understanding the difference and idiosyncrasies of investment contracts and securities is important for wider implications for that cryptocurrency, including how it is perceived by regulatory bodies such as the US SEC.
Well-known cryptocurrency coins and tokens
Now that we have successfully differentiated cryptocurrency coins and cryptocurrency tokens, you may wish to study the most popular coins and crypto tokens more carefully to pinpoint any potential investment opportunities of your own. Alternatively, you could make full use of our social trading community and pinpoint profitable cryptocurrency investors to follow and copy.
With that in mind, we have compiled a list of the top ten cryptocurrency coins and tokens for you, based on market capitalisation:
Popular cryptocurrency coins
|Coin||Market capitalisation||Circulating supply|
|Ripple XRP||$22,592,523,597||45,404,028,640 XRP|
|Bitcoin Cash||$5,151,131,855||18,599,694 BCH|
|Bitcoin SV||$3,113,881,294||18,597,827 BSV|
|Binance Coin||$4,316,171,654||144,406,561 BNB|
From CoinMarketCap 15 December, 2020.
Popular cryptocurrency tokens
|Token||Market capitalisation||Circulating supply|
|Crypto.com Coin||$1,384,510,775||22,176,255,706 CRO|
|UNUS SED LEO||$1,353,480,651||999,498,893 LEO|
|USD Coin||$3,269,878,246||3,269,812,945 USDC|
|Huobi Token||$804,233,126||204,811,752 HT|
|Basic Attention||$325,172,769||1,492,067,763 BAT|
From CoinMarketCap 15 December, 2020.
Many of the cryptocurrency coins listed above can be bought and traded at the touch of a button on the eToro platform. At the time of writing, we offer 94 cryptocurrency markets to trade on, including cryptocurrency pairs with fiat currencies.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.