As a new cryptocurrency investor, there’s a lot of stuff to learn in this space. This includes learning about the many different types of cryptocurrencies that are out there and the technology behind each one.
One thing you may have noticed is that there are both coins and tokens, but you may still be confused as to what each one represents. In this article, we’re going to talk about the main differences between coins and tokens to help you decide exactly what you might want to invest in. Ready? Let’s get started!
A coin is its own asset. It has its very own chain and functionality. Some prime examples of a cryptocurrency coin include Bitcoin or Ethereum. These are their own solutions. Tokens, however, do not have their own chain. They are usually built on top of another blockchain, and while they have specific rules to govern themselves for the most part, they are still tied to the asset which they are built on top of.
This coin has launched the most popular platform with which other projects can tokenize themselves and launch their new platforms. These are called ERC20 tokens. This provides some advantages over creating your own coin too. For the most part, these tokens can take advantage of any services currently available to Etheruem, including wallets and even many decentralized exchanges.
This gives these assets a leg up that they would not have if they launched on their own. Ethereum is not the only blockchain that serves this purpose though, and there are other projects such as Waves and Neo which also have additional assets hosted on top of their main chain.
While sometimes these new assets are simply representative of their own projects. In others, they are actually improvements to their base chains. Some projects like this will allow for side chains, sharding or even new capabilities for smart contracts to improve their functionality. An example of a project like this is POA Network. Their solution creates an entirely new public sidechain for Ethereum apps to run on.
Another key difference between a coin and a token is that coins are typically mineable, and tokens are not. This is not really by design, as 0xbitcoin has actually created a mineable token, but more to preference.
Most companies tend to host an ICO for their project, effectively using the Ethereum blockchain as a placeholder for their development. This allows them to collect money for their startup, while still offering their investors a tangible asset which they can trade with one another.
Sometimes these startups choose to simply stay an ERC20 token, such as Dragonchain. If there’s no reason for them to host their own blockchain, then this is honestly a good move. It gives their investors a lot of advantages that they might not otherwise have.
In some cases though, such as with EOS, the ERC20 asset is simply a placeholder. Once the mainnet for the project is launched, investors will swap these placeholders for the real token on the project’s new blockchain. If you plan to invest in tokens, then you’ll need to look out for this. If you make a large token investment and stow it away, you could come back to find that your investment is now worthless if you missed the swap!
When investing in a token, you should always try your best to verify whether that project will be staying on its host chain or migrating to its own chain after the fact for this reason. It’s also a good idea to keep up with your favorite cryptocurrencies on their various social media channels. This way you’ll be the first to know in the case of a swap.
Tokens are also typically not meant to be used as a currency. Though they do still have value obviously. In many cases, these assets are for utility. Unlike Bitcoin, which was meant for purchases and exchanging value between parties.
Usually, the idea of a token is to hold it for some purpose within the network. Though the reasons for this will vary for every single cryptocurrency. Investors should also be sure to watch out for assets with empty use cases, as these are normally money grabs for the project, but hold no real value for you.
In closing, when choosing what type of asset you want to invest in, you should take a moment to appreciate the differences between coins and tokens. When investing in a token, you are more likely investing in a portion of a startup or a company.
Many times ICOs are big budget affairs with large development teams full of professionals and advisors. They also tend to have large development budgets and venture capital partners to help streamline the process.
When investing in a coin, it is typically a community-owned venture. While the budgets for marketing or development may be slim to none, they do offer a more personal experience for investors. Bitcoin is an open source platform for transferring value, it can’t “go out of business” or be shut down.
Even if every developer left the team tomorrow, new ones would simply take their place, and in many cases, that’s just not something you’d get from a token. That’s not to say that tokens are not good investments, there are many great companies who issue them. The point is, that it’s up to you, the investor to evaluate exactly what type of investment you want to make.
Before putting money into any project, it’s important to research it thoroughly. There are plenty of projects out there that are blatant scams, no matter if they are a coin or a token. If you’re not sure about a particular project, then you can use Cointobuy’s many features to evaluate the many cryptocurrencies out there and their teams.
Using aggregated information can help you to vet your investment decisions more quickly than if you had to do all of the research on your own. It’s a good idea to take a look at these tools to help you make an informed decision.