What is the difference between coin investment and crypto tokens? Is there a difference between "cryptocurrencies" and "tokens"? Are they the same thing? If not, how are they different?
This article aims to answer just that: the difference between a "coin" and "token" in the crypto world in simple terms from a user's point of view. Yes, coin investment and tokens are different, though both assets have many similarities and both terms tend to be used interchangeably.
In this article, we'll discuss:
- What are coin investments and tokens?
- The difference between coins and tokens
- How do coins and tokens derive their value?
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Now let's begin.
What are coins and tokens?
Source: pexels.com
There are many differences between a coin investment and token, with the main one being its utility or what it is used for. The general rule is that coins are created to serve as a form of money, while tokens are created as a digital representation of other assets.
For example, Bitcoin (BTC) is a form of currency which you can use to pay for goods and services. On the other hand, Ripple (XRP) is a token created to execute transactions between financial institutions. It cannot be used to pay for goods and services outside that realm.
Let's use a non-digital example to illustrate this difference.
- Scenario A: Your mother gives you $10 to buy something at the store. In the crypto world, that $10 would be considered a coin because it is in itself money to buy things.
- Scenario B: Your mother tells you that if you finish your homework, she'll reward you with 10 chocolate chip cookies. These cookies would be considered tokens because they're being used to represent a reward for you within your home. But unlike the $10 she gave you earlier, you cannot use them to buy something at the store. The cookies have value, but they're not money.
The scenarios above also illustrate a few other differences between coins and tokens aside from their utility. Learn how:.
The difference between coin investment and tokens
Source: pexels.com
1. Ownership: who owns and controls the coin investment?
- The $10 is printed and controlled by a central bank or public entity, while the chocolate chip cookies are created and regulated by a private entity (your mother).
- Similarly, crypto coins are issued and regulated by a central authority or decentralized network; those issued by the latter are increasingly being regulated by the former to a certain extent. On the other hand, tokens are owned by private entities --- like in Ripple's case, it is owned by Ripple Labs Inc.
- While coins such as Bitcoin, Bitcoin Cash (BCH), Monero (XMR), and more are not owned or controlled by a central bank or government, they are nevertheless governed by their respective users through a global, decentralized network.
- Naturally, this means that coins are more heavily regulated than tokens because they represent a form of currency.
2. Ecosystem: can it be used only within a particular ecosystem or as a medium of exchange anywhere?
- The $10 is a universally accepted form of money which you can use to buy things outside your home, while the chocolate chip cookies will likely only ever be a bargaining chip within your household.
- Similarly, crypto coin investments are independent of any blockchain or platform and are used as a currency, while crypto tokens are units in a blockchain and are typically used for a specific function within that blockchain's ecosystem only.
- For example, coins such as Bitcoin and Ethereum (ETH) are increasingly being accepted by businesses and charities alike, which goes to show that these coins are accepted in lieu of conventional currencies even among traditional establishments.
3. Monetary value: how is the asset valued?
- The value of $10 is $10 whether you're at the grocery store or the pharmacy or on a yacht. One cannot hand someone a $10 bill and say that it actually represents $50. Meanwhile, the value of those chocolate chip cookies is up for debate.
- Similarly, the price of crypto coin investing is valued by the market. You can see these prices listed on exchanges and influenced by market factors.
- While tokens are also listed on exchanges, their prices are typically influenced by factors such as:
- The asset or fiat currency they represent: For example, Tether (USDT) represents the US dollar, so its price mirrors the dollar.
- Its usefulness: For example, Ripple helps major financial institutions such as American Express, MoneyGram and other regional and local banks move money within their respective ecosystems. Thus, its value lies in its utility.
- Transaction volume: For example, the Binance Coin (BNB) was created for transactions within the Binance cryptocurrency exchange. That may sound uninspiring until you take into account the fact that the platform saw trade volumes of over US$5 billion in the last 24 hours alone (at the time of writing). Now think about how many transactions that trade volume involved and how many BNB tokens were used in those transactions.
Think you can now tell the difference between a coin and a token? Let's try a little mental exercise.
Facebook Libra - coin or token?
Source: Libra Association
Facebook first announced Libra in mid-2019, calling it a "simple global currency". That is "backed by a reserve of assets to give it an intrinsic value". Suggesting that Libra was a currency that carries some form of intrinsic monetary value. And would thus be considered a coin.
The idea that a private entity like Facebook was going to issue a currency of its own that can be used anywhere and not just within the Facebook ecosystem. It caused a huge uproar, sparking fears that Libra would eventually compete with the US dollar.
After receiving intense pressure from regulators, Facebook announced in 2020 that it was scaling back its ambitious plans to create a new digital currency and said that it would instead work with governments to create "digital versions of government-backed currencies" such as the US dollar and Euro. This is to say that Libra itself would not have monetary value and would merely be a digital representation of a currency such as the USD, thus making it a token.
Verdict: Libra was meant to be a coin, but is now a token.
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