01 Feb 2022 Anthony Lehrman
What’s The Difference Between Tokens And Coins In The World Of Crypto?
The topic of cryptocurrency can be a bit intimidating for would-be investors who aren’t exactly too quick to adopt new technologies, and that’s for a good reason. While cryptocurrencies have become more accessible in the past few years, the technology behind decentralized financial systems is still fairly new. Because of this, many regular consumers have trouble wrapping their heads around these cryptocurrencies’ characteristics and features.
Beginners also need to familiarize themselves with lots of cryptocurrency terms, such as ‘Bitcoin’, ‘altcoins’, ‘coins’, and ‘tokens’, to name a few. While plenty of people might think these terms all mean the same thing, the truth is that they have subtle differences that you need to know about when immersing yourself in crypto.
It’s also important not to mix up the names of different cryptocurrencies such as Bitcoin, Ethereum, and Monero. One reason is that, while some wallets can store a variety of cryptocurrencies, other types can only be used to store the coin they were specifically designed for. There are also many different wallet types available for each cryptocurrency. With an XMR wallet, for example, one can choose to use a full wallet, a light wallet, a custodial wallet, or a paper wallet.
Indeed, there’s a learning curve that would-be cryptocurrency investors, traders, miners, and users need to know before they can start gaining confidence in their financial decisions using the medium. If you’re a newbie trader looking to take your first step into the world of digital currencies and assets, you’re in the right place. To give you a head start on understanding the language of crypto, let’s talk about two commonly confused terms: coins and tokens.
What Are the Differences Between Coins and Tokens?
Cryptocurrency coins and tokens share similar qualities, which makes it easy to think that one is an interchangeable term for another. To be clear, all coins can be considered tokens. However, the reverse isn’t true, in that not all tokens can be considered coins. To put it simply, a coin represents the value that a trader or investor can own, while a token stands for what the person possesses.
Specifically, the term “coin” refers to the native coin of the blockchain. In a way, coins are a digital representation of underlying value, and they operate within their own blockchains. Because of this, you can’t directly exchange one type of coin for another. This is because the coins need to stay in their own lanes, which are the blockchains that they are native to.
On the other hand, “tokens” can be considered representations of assets that are payable using coins. Tokens serve as a proposed medium of exchange by carrying deeds or assets, and they can be traded, staked on, and used independently of the structure they were built on. While crypto coins are exchanged using their respective blockchains, tokens are traded using smart contracts. They work with decentralized applications (Dapps) and operate on more than one blockchain to speed up the transactions that they facilitate.
Tokens are not a new concept; they’ve been around even before decentralized finances started to gain traction. Some examples of physical tokens include discount vouchers, land titles, and car titles. Even today, only a small portion of tokens have something to do with digital coinage, and most are still issued to be actively used in selling or trading tangible assets.
That said, there are many kinds of digital tokens in use today. Some have existing value on their own and can be used as currency, while others are used on exclusive platforms. Certain tokens serve as proof that you are who you claim to be. There are even transactional tokens that are primarily used to transfer currency from one form or platform to another.
Investing in Coins or Tokens: Which Is the Better Option?
Investing in one over the other has its pros and cons. Coins, for example, are more liquid than tokens. You can also use them to directly trade or buy products as long as the entity you’re transacting with is using the same blockchain. Their long-term value, however, hinges on whether they will be used for real-world applications or not.
Tokens, on the other hand, offer a bit more flexibility in that what they represent depends on the type of token you want to acquire. A token can, for example, represent a form of currency. It can also represent a tool used to enhance the security, privacy, and other qualities of your transactions. Whatever the token represents is the asset you’ve acquired by owning said token. In a way, the value of a token can be considered more flexible compared to that of a coin.
That said, the value of both coins and tokens is still subject to the volatility of the crypto market. In general, most trading experts recommend diversifying your portfolio across various types of assets. Doing so can help spread out your risk across different investments which, in turn, can minimize potential losses.
The function of crypto coins and tokens overlap at many points, and it can be difficult to tell one from the other if you’re a total beginner. Still, overlooking these differences can be a headache, especially if you mistakenly acquire a coin when you’re looking for a token or vice versa. As a rule of thumb, if you want to buy a product using cryptocurrencies, then you most likely have to use a coin. If it’s a service that you want to access, then it’s likely that you need a token.
If you’re ever in doubt about what you need or what you have while purchasing, trading, or investing using cryptocurrencies, don’t hesitate to do your research or to ask someone more experienced in the field. Learning more about how coins and tokens work will help you get a better understanding of your digital assets and how you can use them to grow your wealth.
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