Crypto Token vs Coin Explained: Differences and Use Cases
Even beginning traders know that there are two types of crypto — coins and tokens. But what’s the difference?
Coins and tokens are perhaps the most commonly interchanged terms in the crypto industry. But while all coins are tokens, not all tokens are coins. If this sounds confusing — well, it is. However, that’s also why we are here to explain the difference.
What Is a Crypto Coin?
To put it briefly, crypto coins are a type of digital currency developed with encryption algorithms. Coins function both as a medium of exchange and a form of virtual bookkeeping. Now, let’s break down that definition and explain coins in a bit more detail.
👉 The foundation of decentralized payment systems is a distributed ledger, a database that stores all of the transactions that have been made with a native cryptographic asset. This asset is commonly referred to as a “coin,” and it’s the only one supported by the blockchain.
For example, neither the Bitcoin nor the Ethereum blockchains support any other coin but bitcoin and ether, respectively. For anyone using these blockchains, their native assets are the only acceptable medium of exchange. Bitcoin and ether are, therefore, functional representations of their parent blockchains in terms of technology and economics.
Let’s go over a few coin-specific features:
- Coins issued by a particular blockchain are tailored to it and serve as a representation of its monetary and technical infrastructure. Thus, the blockchain’s taxes and rewards are all paid in its native currency. For example, bitcoin miners are rewarded in bitcoin.
- Some coins, like Bitcoin, are seen as a legitimate store of value and an alternative to traditional banking. Bitcoin's limited supply of only 21M bitcoins makes it an attractive and reliable store of value.
- Finally, some coins have chain-specific applications. For example, Ripple leverages blockchain technology for international transactions. Ripple’s native asset XRP serves as the fundamental medium of exchange between financial institutions, payment providers, and crypto exchanges. Compared to the standard remittance market, where international money transfers can take up to 48 hours, XRP transactions typically take four seconds and cost just 0.00001 XRP.
What Is a Crypto Token?
A token is a cryptocurrency that is issued as a sub-asset of another cryptocurrency like Ethereum, Neo, or Waves. While coins are primarily used as a medium of exchange, tokens can serve a number of purposes, such as asset management, tracking, and data storage, among others. But more on it later.
Let’s take a look at an example first. As mentioned earlier, tokens leverage existing blockchain infrastructure. For example, Uniswap's native digital token, UNI, is a token rather than a coin because it is built on Ethereum, a pre-existing blockchain.
👉 One way in which blockchains' digital asset feature facilitates the creation of specialized digital assets that leverage the blockchain's base technology is through Ethereum's ERC-20 token standard. While tokens can be freely exchanged between users, transaction costs are still paid in the blockchain's original currency.
How Do Cryptocurrency Tokens Work
Crypto tokens use a pre-existing blockchain infrastructure to function. They represent a tradeable value that gives their holders a right to something else, such as voting rights, loyalty points, or rewards. In some cases, tokens are created purely for crowdfunding purposes and are later swapped for assets on a new blockchain. However, some projects will stay with the original chain forever.
So, What’s the Difference between Coin and Token?
Crypto coins are designed to function as money. Crypto tokens, on the other hand, reflect ownership or interest in an asset and facilitate transactions on a blockchain.
👉 Creating a token is easy. Blockchain can have only one coin while simultaneously having hundreds of thousands of tokens.
How Do You Create Crypto Tokens
The most popular way to create a cryptocurrency token is to build it on the ERC20, the Ethereum standard for creating fungible tokens. You can find detailed instructions on how to create your own token with ERC20 on the Ethereum Foundation’s official website.
Token Types and Examples
There are seven main types of crypto tokens:
- Utility tokens grant their holders access to the token issuer's product or service. By purchasing utility tokens, users can redeem them for the product’s (or service’s) defined access value. For example, they can have special privileges, such as access to products (or services) for free or at a discounted price. One of the most important features of utility tokens is that, in certain jurisdictions, they are not considered investment products and, therefore, do not fall under any financial regulation. Examples include Golem, Funfair, and the Basic Attention Token.
- Governance tokens give holders voting rights over decisions in a blockchain project. Some governance token holders also benefit from a share of trading fees and other rewards. Such tokens represent a new approach to corporate leadership that provides a more fair, decentralized, and open way of governance. They are meant to foster cohesive communities around blockchain projects (particularly decentralized autonomous organizations (DAOs) and decentralized finance (DeFi)) and facilitate their organic growth. Examples: UNI, CAKE, and Aave.
- Security tokens are securitized digital assets, meaning their value is based on another asset that satisfies the criteria of financial security and can be exchanged legally. Security tokens, therefore, are used for the securitized tokenization of assets like bonds, equities, real estate, and fiat currencies. As such, they represent a share in stock, voting or dividend rights. Holders of security tokens are entitled to a share of profits made by the project’s management. Examples: Bcap (Blockchain Capital), Sia Funds, and Science Blockchain.
- Exchange tokens are assets issued and used on cryptocurrency exchange platforms. They can be issued by centralized exchanges with or without their own decentralized platforms or blockchains. Exchange tokens are primarily used for cheaper gas or fee payments, voting rights, access to discounts, and other exchange services. Examples: BNB, OKB, and KuCoin Token.
- Stablecoins are digital tokens whose worth is pegged to that of a fiat currency or other similarly stable commodity. This way, there are dollar and euro-pegged stablecoins, as well as coins backed by gold, silver, and oil, among others. Stablecoins’ primary purpose is to eliminate extreme volatility associated with the crypto market. To maintain the stable peg, the management of those tokens needs to keep those backed-up assets in reserves as per the defined ratio. Examples include USDT, USDC, XAUT, and FRAX.
- DeFi (or Decentralized finance) tokens are digital assets that power DeFi apps. Developers can add custom algorithms to tokens’ payment and transaction processes, making them a type of programmable money. With DeFi tokens, users can participate in a wide variety of financial transactions, including but not limited to: sending and receiving payments; buying and selling assets; lending and borrowing; earning interest; saving; growing and managing the portfolio; and more. Blockchains that support DeFi include Ethereum, Cardano, Stellar, Polygon, and Tron. Examples of DeFi tokens are Uniswap, Aave, Solana, Polkadot.
- Non-fungible tokens are digital certificates of ownership for unique, non-replaceable items, such as a work of art, pictures, videos, memes, GIFs, or any other type of digital content. As such, NFTs facilitate the sale of works by artists, producers, and fans. These tokens can be traded on NFT marketplaces such as Decentraland, OpenSea, and Rarible, among others. Examples: Beeple or The First 5000 Days drawings by Mike Winklemann, CryptoKitties, and CyberPunks.
How Do You Store Crypto Tokens
If you’re buying tokens from crypto exchanges, they will typically put them in a custodial wallet that they control. If you want to have full control over your tokens, then you’ll have to transfer them to your hot or cold wallet. Different tokens might require different wallets. The best way to find that out is to check the list of compatible wallets on the project’s website.
How Do You Trade Cryptocurrency Tokens
Tokens are traded pretty much the same way that coins are. To start, find an exchange with an active listing for your desired asset, create an account, and top it up with other coins or tokens.
👉 If you can’t find an exchange, visit a project’s website to see where it’s being traded.
By signing up for Bitsgap, you can trade on up to 15 connected exchanges from a single interface. You can also use Bitsgap's other, more advanced trading tools (otherwise unavailable at most exchanges) to make money from trading tokens.
One such tool is a crypto automated trading bot, a software app that automatically trades crypto on your behalf following a predetermined set of rules. For example, Bitsgap has a few crypto trading bots that can work in any market, be it bull or bear:
- The GRID bot follows the GRID strategy, one of the most popular investment strategies, that works with postponed limit buy and sell orders. The bot works best in the swing market, where the price bounces within a horizontal range.
- The DCA bot follows the Dollar Cost Averaging (DCA) strategy, whereby the bot divides your investment into periodic purchases or sales of tokens in small amounts. Such regular miniature investments allow the bot to get a better average price and reduce the market impact.
- The BTD bot follows the Buy The Dip trading strategy that works best in a downtrend market where the token’s price steadily falls. By buying up tokens at a discounted price, the bot can help you build a token portfolio.
- The COMBO bot combines the DCA and GRID trading strategies and works in the futures market. Thanks to its ingenious setup and leverage, the bot can generate returns 1,000% faster than in the spot market.
Ready to test those bots? Sign up for Bitsgap’s seven-day free trial now!
Bottom Line: Crypto Tokens Versus Coins
The fact that both coins and tokens function on the blockchain and can be freely exchanged between peers is the most obvious similarity between the two. A token is typically created as an offshoot of another cryptocurrency, like Ethereum, while coins run on their own chains. Both have individual use cases, but their success ultimately depends on the project's wider adoption.
Before putting your money into either, it's important to do one's own due diligence and examine the project's tokenomics to see if it makes sense and can be maintained over time.
FAQs: Coin vs Token
What Is a Token in Cryptocurrency?
A cryptocurrency token is a digital representation of an asset’s value or its utility. Unlike coins, tokens function on preexisting blockchains and do not have chains of their own. They are also not mined but minted, and their supply depends on different factors set by the issuing project. Tokens can have multiple purposes, like fundraising, voting, staking, utilities, access to certain services, and so on.
What Are Some Cryptocurrency Token Use Cases?
Tokenization can be applied to almost anything — trading and lending, crowdfunding, payments, collectibles, logistics, and so on. Tokens can be made out of anything of value, whether it be something tangible or just an idea.
Tokenization also allows individuals to swiftly and easily sell their assets without regulatory hurdles. For example, real estate tokenization involves using blockchain technology to create digital tokens that represent a partial interest in real estate. This method eliminates the need for a lengthy procedure and makes property acquisition possible for anyone, anywhere in the world.
What Are Crypto Token Swaps?
A token swap is the exchange of one token for another without the need to convert either into fiat currency. There are at least three main kinds of token swaps. First, regular token swaps simply refer to the exchange of tokens via centralized or decentralized exchanges. Second, cross-chain swaps happen when you move your tokens to another blockchain. And finally, a token migration refers to the transfer of a project from one blockchain network to another for crowdfunding, improving functionality, or something else.
What Are Token Burns?
A token burn is a scheduled process by which a crypto project burns (or liquidates) a certain amount of crypto tokens. Burning, which is typically done to control the token’s supply, has been a standard practice for most projects and is known well in advance. In other cases, however, burning can happen spontaneously due to problems or concerns raised by the project’s dev team. Since a token burn reduces the number of tokens in circulation, the price of the token goes up.