Understanding the fundamental difference between Token and Coin: A must-read before investing

Coin or Token? A Visual Guide to Their Fundamental Differences

Many novice investors often confuse Tokens and Coins, but in reality, they have fundamental differences.

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 networks. Early cryptocurrencies like Litecoin and Dogecoin also belong to the Coin category.

Tokens, on the other hand, do not have their own blockchain; instead, they are built on existing blockchain ecosystems. Tokens are often called “digital certificates” or “tokens” in Chinese, representing specific rights or asset certificates. After Ethereum introduced the ERC-20 token standard in 2015, anyone could issue their own Tokens on it, which is why the number of Tokens now far exceeds that of Coins.

The most straightforward comparison: BTC, ETH, SOL, DOT are all Coins (with their own Layer-1 main chains), while UNI, LINK, AAVE, MKR, MATIC are all Tokens (application tokens built on other public chains).

What exactly is a Token? Why is it so important?

Tokens are application-layer tokens within the blockchain ecosystem, representing certain rights, usage rights, or investment certificates. If Coins are considered “infrastructure,” then Tokens are “various applications” built on that infrastructure.

From a functional perspective, Tokens can be used for payments, staking and mining, voting governance, and more. This is why they are more flexible than simple payment currencies (Coins).

Tokens are divided into three main types, each with different purposes

The Swiss Financial Market Supervisory Authority (FINMA) classifies Tokens into three categories:

1. Payment Tokens
These Tokens aim to enable secure and efficient payment functions. The most typical examples are various stablecoins (USDT, USDC, etc.). They attempt to solve cross-border transfer issues in traditional payments.

2. Utility Tokens
This is the most common type of Token, mainly used to provide access to certain applications or services. Most ERC-20 tokens on Ethereum fall into this category, such as DEX tokens like UNI used for governance, and Compound’s COMP used for protocol governance.

3. Asset Tokens
These Tokens represent ownership or income rights to a project or asset, somewhat similar to stocks. Holding such tokens means you are a participant in the project, but it’s important to note that in the crypto space, they usually do not involve actual company ownership or dividend rights.

In practice, many Tokens possess multiple of these attributes simultaneously, which makes strict classification difficult.

Why are Token prices usually more volatile than Coins?

This is an important point for investors to understand: Token prices tend to fluctuate more significantly than Coins.

For example, tokens like UNI, SNX, MKR often experience daily volatility exceeding that of BTC and ETH. Especially during bull markets, the upward and downward movements of Tokens are more intense. This creates more investment opportunities but also higher risks.

In contrast, Coins are supported by independent blockchains and relatively stable ecosystems, making their volatility more controllable. Tokens, as application-layer assets, derive their value heavily from the development prospects of their respective projects, thus carrying greater risk.

There are two ways to invest in Tokens

Method 1: Spot Trading

Spot trading involves directly purchasing and holding actual Tokens. For example, if UNI is currently priced at $3, buying 1 UNI for $3 grants full ownership of that Token.

Be especially cautious of “fake tokens”. After a Token becomes popular, malicious teams may issue tokens with the same name but no value, attempting to confuse investors. The way to prevent this is to always verify the contract address via the official website or blockchain explorer to ensure you are buying the genuine Token.

Method 2: Margin Trading

Besides holding Tokens physically, you can also participate in Token investments through margin trading (contract trading). This method does not require actual possession of the Token, so there is no risk of fake tokens.

Margin trading’s biggest advantage is that it allows you to leverage a small amount of capital to control a larger position. For example, using 10x leverage to go long on UNI, you only need $0.3 to establish the same position that would cost $3. If you buy 1 UNI at $3 with no leverage, with 10x leverage, you only need $0.3, but your risk is amplified tenfold.

Important reminder: Due to the high volatility of Tokens, be very cautious when using leverage. It’s recommended not to exceed 10x leverage, and to set reasonable stop-loss and take-profit levels to avoid liquidation.

Summary of Token Investment in Chinese

Whether investing in Tokens or Coins, choosing a safe and regulated trading platform is the top priority. Before any transaction, fully understand the differences between Tokens and Coins, assess your own risk tolerance, and develop a clear investment strategy.

Remember: Tokens are innovative products at the application layer, offering greater potential but also carrying higher risks. Coins are fundamental assets, relatively stable but with limited room for innovation. Both have their characteristics; there is no absolute “good” or “bad.” The key is to make rational choices based on your investment goals.