What is the fundamental difference between tokens and coins in cryptocurrencies?

In the world of cryptocurrencies, the concepts of Token and Coin are often confused. Early cryptocurrencies like Bitcoin and Litecoin are collectively referred to as Coins, but with the rise of Ethereum, the concept of Token as a virtual currency became popular, leading many investors to be confused. This article will delve into the fundamental differences, investment characteristics, and trading methods of these two concepts.

What is the fundamental difference between Coin and Token?

To understand the characteristics of token cryptocurrencies, first understand what a Coin is. Coins have their own independent blockchain, for example, Bitcoin (BTC) runs on the Bitcoin blockchain, and Ether (ETH) runs on the Ethereum blockchain. They are the native assets of these blockchain networks.

In contrast, Tokens do not have their own blockchain; they are built on existing blockchain ecosystems. Tokens, often translated as tokens or passes, represent specific rights, certificates, or digital assets, and can be traded, transferred, and exchanged on their respective blockchains.

Ethereum’s ERC-20 standard, launched in 2015, revolutionized the crypto ecosystem, allowing anyone to issue Tokens on Ethereum. To date, Ethereum remains the blockchain with the largest issuance of Tokens.

What types of Tokens are there?

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

Payment Tokens: Mainly aimed at enabling secure, efficient, and low-cost payment functions; stablecoins are typical representatives.

Utility Tokens: Provide access to various applications, such as ERC-20 tokens on Ethereum, including UNI, LINK, COMP, etc.

Asset-backed Tokens: Represent ownership or revenue rights of a project, allowing holders to benefit from token value appreciation, similar to stocks. Note that holding such Tokens in the crypto space usually does not mean ownership of the project company or dividend rights.

In practical applications, many Tokens often possess two or even three of these attributes simultaneously, making strict classification difficult.

Investment characteristics comparison between Token and Coin

Why do investors prefer Token cryptocurrencies?

Compared to Coins, Tokens have different advantages. If Coins are viewed as the infrastructure layer, Tokens are the application service layer. Coins mainly solve the fundamental infrastructure issues of blockchain, while Tokens provide various applications or services based on this foundation.

Tokens are more scalable. The value of a public chain is often limited to its infrastructure itself; once it fails, it is difficult to recover. Tokens, however, can continuously introduce new applications based on market demand. For example, MakerDAO’s RWA (Real-World Asset Tokenization) business demonstrates the flexibility of Tokens.

Tokens tend to be more volatile than Coins. Tokens like UNI, SNX, MKR often experience price swings exceeding those of BTC and ETH, especially during bull markets. This provides more profit opportunities for short-term traders but also entails higher risks.

How to trade Token cryptocurrencies?

There are two main ways to invest in Tokens:

Spot Trading

Spot trading involves full payment for actual assets. For example, if the current price of UNI is $3, the buyer pays $3 to obtain full ownership of 1 UNI token.

Important reminder: When trading spot, beware of the risk of fake tokens with the same name. If two teams issue tokens with the same name, buying a fake token not listed on exchanges may result in being unable to sell it. The solution is to verify the token’s contract address via the official website or blockchain explorer.

Margin Trading

Margin trading allows investors to trade with a portion of funds as collateral, without paying the full amount. For example, using 10x leverage to go long on UNI, requiring only $0.3 to control a $3 UNI position.

Contracts for Difference (CFD) and U-based contracts are common forms of margin trading, where traders do not actually hold the native tokens.

Risk control reminder: Due to the high volatility of Tokens, leverage should preferably not exceed 10x. Emerging tokens are especially prone to sharp fluctuations, so be vigilant about liquidation risks.

Choosing a secure trading platform is crucial

Whether for spot trading or margin trading, selecting a safe, regulated trading platform is the first step. Ensure the platform has robust risk control mechanisms, transparent fee structures, and excellent user protection policies to confidently invest in token cryptocurrencies.

Overall, Tokens and Coins each have their advantages. Investors should choose trading varieties and methods flexibly based on their risk tolerance and investment goals to achieve better returns in the cryptocurrency market.