Cryptocurrencies Coins and Tokens are different things even when the terms are used interchangeably.
Although cryptocurrencies have exploded over the past ten years, very few people understand the technicalities behind them. There are many different factors behind cryptocurrencies and as an investor, you should understand the basics of each cryptocurrency you buy.
Tokens and Coins are often confused and used interchangeably, when in fact, they are different. In this article, I will try to explain the difference between coins and tokens.
Coin
Use their own platform and operate independently. Coins do not require any other platform to operate, but rather, operate on their own independent Blockchain, on which they are their own coins. Bitcoin is a coin, and so are Litecoin and Ethereum – Litecoin and Ethereum are altcoins, meaning they are Bitcoin alternatives in some ways. There are two common types of altcoins.
Alternative coins are built on the original Bitcoin Blockchain with modifications and changes. Dogecoin and Litecoin are typical examples.
Alternative coins are built on new and independent Blockchains. Examples include Ethereum, Icon and AION.
Token
Built on an existing Blockchain or protocol. Tokens usually represent an asset or utility. Since Tokens are created on an existing Blockchain, they are easy to create and most of the Tokens we see today are based on the Ethereum blockchain. There are two main types of tokens: Utility Tokens and Security Tokens.
Utility Token
These Tokens are not designed as investments. They are intended to be used to trade, exchange and access products or services, essentially providing a “utility”. Since they are not considered investments, these Tokens are exempt from regulatory scrutiny (for example, Tokens used for identification or playing a Blockchain-based game).
Security Token
These tokens are considered investable assets and must comply with securities laws. For example, the SEC (Securities and Exchange Commission) uses the Howey Test to determine whether a token is a security. If a token fails the Howey Test, it is considered a security. If a company meets all regulatory requirements, the token has the most potential for widespread adoption. The biggest use case is for companies to issue tokens that represent ownership in a company or asset, much like stocks.
Coins provide the platform for tokens, but tokens have a much larger function than just being used as a native currency on a protocol. Tokens can be used to represent ownership in a company or asset, provide voting rights, issue buybacks, etc., used for many purposes other than speculative returns and a medium of exchange.
