The fundamental difference between tokens and cryptocurrencies: from definitions to trading strategies

Evolution and Definition of the Tokens Concept

In the early development of cryptocurrencies, projects like Bitcoin, Litecoin, and Dogecoin were all named with “Coin,” and the two concepts were not confused. It wasn’t until the rise of the Ethereum ecosystem that Coins and Tokens began to be used concurrently, collectively referred to in Chinese as “tokens” or “cryptocurrencies,” which led many market participants to find it difficult to distinguish between them.

Tokens are essentially access passes representing specific rights, certificates, or digital assets that can be traded, transferred, and exchanged on their underlying blockchain. The key feature is that Tokens do not have their own independent public chain but are issued based on existing blockchain ecosystems. After Ethereum launched the ERC-20 standard in 2015, any developer could issue Tokens, making Ethereum the platform with the largest global Token issuance.

Broadly speaking, Tokens are a collective term that includes all non-Layer-1 native assets, such as DeFi protocol tokens, Layer-2 solution tokens, NFT-related tokens (like APE, SAND), and others.

The Three-Tier Classification System of Tokens

According to the standards of the Swiss Financial Market Supervisory Authority (FINMA), Tokens can be divided into three main types:

Payment Tokens aim to achieve secure, efficient, and low-cost value transfer, with stablecoins as a typical example. These Tokens focus on payment functions, reducing transaction costs and settlement times.

Functional Tokens provide access credentials for application ecosystems, primarily in the form of ERC-20 tokens on Ethereum. Holders participate in ecosystem governance, access services, or pay fees, serving as the foundation for DeFi, DEX, and other applications.

Asset Tokens represent rights to project assets or cash flows, similar to traditional stocks. It is important to note that holders in the crypto space usually do not own underlying company ownership or dividend rights but enjoy the potential appreciation of the token itself.

In practice, individual Tokens often possess multiple of these attributes simultaneously, and the boundaries are not absolute.

Fundamental Differences Between Tokens and Coins

The most core difference lies in ownership structure: Coins have their own independent blockchain infrastructure, such as Bitcoin operating on the Bitcoin network, and Ethereum (ETH) running on the Ethereum blockchain, making these networks’ native assets. Tokens, on the other hand, are built on existing blockchains and lack independent technical infrastructure.

The ecosystem applications of Coins are generally superior to Tokens, but Tokens are more flexible in application diversity—developers can rapidly iterate multiple scenarios on the same infrastructure.

Investment Perspective: Advantages and Disadvantages

Advantages of Tokens over Coins: Greater scalability in application scenarios. For example, MakerDAO can advance multiple business lines such as stablecoins and RWA simultaneously; if a Coin fails, there is often no room for recovery, as evidenced by the decline of public chains like QTUM and BTM.

Risk Characteristics: Tokens tend to be more volatile than Coins. Tokens like UNI, SNX, MKR often experience price swings far exceeding BTC and ETH during bull markets, providing more opportunities for short-term traders but also higher risks. Emerging Tokens are especially prone to rapid rises and falls, with liquidation risks not to be overlooked.

Importance of Infrastructure: If Coins represent the foundational layer, Tokens are the application layer. The former addresses network-level technical issues, while the latter implements various services on top of it. Both are complementary and indispensable.

Token Trading Methods and Risk Management

Spot Trading

Spot trading involves actual assets, where buyers pay the corresponding amount to obtain full ownership. For example, if the current price of UNI is $3, paying $3 will give the buyer one full UNI token.

Key Risk: The proliferation of fake tokens with the same name. Some teams copy the names of well-known Tokens to issue counterfeit coins, and investors who purchase them may face difficulties selling. The way to prevent this is to verify the token contract address via official websites or blockchain explorers to ensure you are buying the official version.

Margin Trading

Margin trading allows investors to leverage larger positions with part of their funds, without transferring actual tokens, thus avoiding the fake token risk mentioned above. For example, with 10x leverage trading UNI, a token priced at $3 requires only $0.3 margin to open a position; contracts like CFD and U-based contracts do not involve the underlying assets at all.

Risk Control Points:

• Tokens tend to have daily volatility far exceeding Coins, with 10% or more daily price swings being common.
• Leverage should generally not exceed 10x, especially for emerging Tokens with higher risks.
• Strictly set stop-loss and take-profit levels to prevent aggressive operations from leading to liquidation.

Practical Recommendations

Whether using spot or margin trading, choosing a secure and transparent regulatory trading platform is the top priority. Investors should select their trading method based on risk tolerance: long-term holders should prefer spot trading, while those seeking short-term opportunities may consider leverage tools but must have proper risk management skills.

The core attraction of the Tokens market lies in its combination of high growth and high volatility, but this also means higher trial-and-error costs. Deep understanding of the fundamental differences between Tokens and Coins is the basis for formulating scientific investment strategies.