This article discusses the distinctions between cryptocurrency, tokens, and altcoins in digital finance. Cryptocurrencies, such as Bitcoin and Ethereum, are digital units of value that are not widely used as payment yet. They are mostly viewed as investments.
On the other hand, Tokens are digital units of value that operate on top of existing protocols using smart contracts. They can have multiple functions and resemble stocks and shares more than cryptocurrencies.
Altcoins are alternative digital currencies to Bitcoin, including tokens and other cryptocurrencies. As an investor, it’s essential to understand the differences between these terms and choose projects you believe in, whether they involve independent blockchains (cryptocurrency coins) or smart contracts (tokens).
Understanding Blockchain Technology
Blockchain technology has brought about a whole new market for investing and trading, including decentralized finance, a growing trend within the cryptocurrency ecosystem as more people look for alternatives to traditional financial institutions.
Today, the world’s supply of cryptocurrency is worth several hundred billion dollars and has thus become an enormous financial sector. Investors worldwide are working to make money from investing in cryptocurrency, and the market is being filled with investment opportunities at a tremendous speed.
Given that the cryptocurrency market cap has grown so large, it is no surprise that one can invest in several sub-areas. The jargon is also increasing, and if you are new to cryptocurrency, it is easy to become confused.
This guide will thoroughly review the concepts of ‘cryptocurrency,’ ‘tokens,’ and ‘altcoins.’ These tend to be used interchangeably, which is incorrect. We will also examine why the term cryptocurrency itself is pretty inappropriate. Read on, and you will get a better overview of the investment options in the cryptocurrency and altcoin markets.
Briefly about the concept of currency
Cryptocurrency is a poorly formulated term for the units of value it encompasses. This is about the definition of ‘currency’ and what is meant when using this word. The word used is currency, which comes from the Latin word “currens” which means ‘in circulation.’ Both terms refer to a unit of value that is in use.
From these two meanings, one can thus summarize the currency’s three main characteristics as follows:
- Currency should have a (stable) price or value
- Currency should be in circulation
- Currency should be usable
Let’s look at cryptocurrency with these three properties, or criteria, in mind. It is easy to see why it is a pretty inappropriate term. People primarily use cryptocurrency as an investment rather than as a functional unit.
We can compare this to someone who uses their money against someone who has their standing on an account. How would society have gone if no one was willing to use their money?
Cryptocurrency revolves around utilizing it as a unit of value within a system. That is, it has a value that is in circulation. But this is not the case today. Few people use cryptocurrency; investors buy and sell the units in large chunks. Therefore, the word crypto shares or units would probably have been more appropriate.
Digital and unregulated units of value
Digital units of value define cryptocurrency. Generally, people don’t accept cryptocurrencies as a form of payment, and they can’t be used for trading goods in actual transactions. Moreover, cryptocurrencies exhibit high instability. This last feature can be explained by the fact that a central authority does not regulate cryptocurrency; the units are decentralized by nature. That is, no one ensures that the price remains stable.
This also makes it challenging to implement in the financial systems we are used to. Imagine that the salary you received today was worth half or twice as much just a few hours after you received it. This is today’s reality for cryptocurrency investors; it is quite normal for several tens of percent price fluctuations in a short time.
So, in that sense, cryptocurrency is not real money yet, at least not in the term’s true meaning. They are unstable units of value, investments that function within their specific financial ecosystems. As an investor, you can reasonably lose and make money on them. For a typical consumer, cryptocurrencies present investment risks and are too volatile for everyday use.
Also, there are no systems for trading cryptocurrency yet, at least not widespread. You may come across online stores that accept Bitcoin, yes. But it’s still long before grocery stores accept cryptocurrency as a payment or exchange method. For now, cryptocurrency is a relatively static unit that only works digitally and within its established protocols.
The Ideology behind cryptocurrency
Cryptocurrency has a future and the potential to do a lot of good. If someone stabilizes cryptocurrencies, they could become a crucial contributor to reducing economic disparities on a global scale. When any central authority does not control a unit of value, it can counteract inflation and financial corruption.
The challenge is that as long as everyone uses cryptocurrency to make themselves rich, they are not using cryptocurrency. Then, cryptocurrencies become investment objects instead of actual transaction units, which are static. In that case, cryptocurrency will also be impossible to replace traditional currencies as we know them in the real world today.
However, the ideology behind cryptocurrency is that it should be able to function as a decentralized unit store of value one day. There is a long way to go before this becomes a reality.
Still, the blockchain technology that supports cryptocurrency has the potential to revolutionize several market sectors. If we find solutions to stabilize cryptocurrency, nothing will prevent digital currency units from eventually replacing traditional currencies.
In summary, Crypto is digital and unregulated units of exchange of value that are unstable and generally used as investment objects instead of transaction units of exchange. The blockchain supports the cryptocurrencies and can be used within their specific platforms.
What are tokens?
Digital assets comprise several subcategories, including cryptocurrencies and tokens, making it an umbrella term. Tokens are a subcategory that people frequently use interchangeably with cryptocurrency, which is incorrect.
Blockchain: A layered structure.
To understand the difference between tokens and cryptocurrency, or at least why tokens can be cryptocurrency. On top of Level 1 are different protocols, but cryptocurrency can’t be a token. Let’s look at how it is structured in layers. The units of value are located in different places in this structure.
First and foremost, technology is the foundation for all units of value in the crypto world, whether cryptocurrency or tokens (or altcoins, which we will come to shortly). So, all other programs (for all this is just programs and protocols running on each other) begin with theoretical blockchain technology. We can, therefore, call this Level 1.
On top of Level 1 are different protocols. For example, this can be the Ethereum or the Bitcoin protocol. A protocol is another word for how users within a specific digital network communicate. It is also another word for the individual blockchain. We can, therefore, say that the Bitcoin protocol is the same as the Bitcoin chain and is Level 2 in the structure.
As a part of the protocol in Level 2, we find cryptocurrencies. The code of each blockchain protocol contains programmed value units. For Bitcoin, it’s bitcoins (BTC/XBT); for Ethereum, it’s ether (ETH), and so on. A cryptocurrency is associated with a specific protocol – a specific blockchain – and is the unit of value of that protocol.
But there is also a Level 3 in the blockchain structure, where tokens are located. These are digital units of value, just like cryptocurrencies (and we can say that a token is a cryptocurrency, but a cryptocurrency is not a token), but that operates on top of an existing protocol.
Where do tokens fit into the blockchain structure?
The way to create tokens is through so-called smart contracts. These are digital contracts that follow sequential programming. Creating such programming makes it possible to develop decentralized applications (dApps), and we find tokens within these applications.
A decentralized application can be incredibly different; think of it as any software. This only means that you’re dealing with a decentralized program instead of a centralized one, which, in principle, can do anything.
It is common for projects that wish to launch a new cryptocurrency with an underlying service offering to build this in a decentralized application. So, they don’t create a native token on their own blockchain network or protocol but do a new service (in principle, a new software) with its corresponding unit of value on top of an existing network protocol.
This transaction and the corresponding unit of value are then a token. It operates within a decentralized application using smart contracts on top of an existing protocol, a blockchain platform such as the Ethereum blockchain.
What does the word token mean, and what is the function of the value units?
Tokens are comparable to “value certificates” or “securities.” They are generally issued to investors who invest in the project through an ICO (initial coin offering) in the first instance. When the value of cryptocurrencies is high enough for trading, investors sell them on cryptocurrency exchanges. This often confuses because people use cryptocurrencies (coins) and tokens interchangeably when selling assets.
It is common for tokens to have multiple functions in a decentralized application beyond just being a value unit. Yes, they serve as a means to store and transfer assets and pay for transactions within the application. But generally, a token owner can also decide how the project’s future moves forward.
In that way, tokens resemble stocks and shares more than cryptocurrency coins do. You own a value, but as a stockholder, you will also have some influence on how the company (project; the decentralized application) makes decisions and develops. Users who hold tokens can participate in determining things such as further development, implementing changes, and selecting users to operate and secure the network.
Summary: Tokens are value units belonging to a specific decentralized application. Smart contract programming, rather than blockchain protocol, defines tokens as assets. This way, tokens are higher in the blockchain structure than cryptocurrency. The similarity is that tokens and cryptocurrency coins are digital, decentralized, and unregulated value units.
What are altcoins?
So, cryptocurrency typically refers to coins established by a protocol. In contrast, altcoins or tokens refer to value units established by a smart contract that runs a decentralized application. So, where does the term ‘altcoins’ come in?
Bitcoin is the world’s first cryptocurrency.
If you know a little about cryptocurrency, you probably know that Bitcoin was the first. Satoshi Nakamoto launched this payment system in 2009 after the global financial crisis that had ripple effects worldwide.
The idea was simple: Nakamoto wanted to create a system for online payments without relying on trust in a third party to make transactions. The financial crisis showed that banks did not responsibly manage customers’ funds. The creators made Bitcoin, a decentralized payment solution.
Nakamoto designed the blockchain protocol solely to support bitcoins, which have the potential to replace traditional currencies. And it didn’t take long before others discovered the revolutionary protocol and began creating their own cryptocurrencies.
Altcoins: Alternatives to Bitcoin
Altcoin is an abbreviation for alternative coins or currencies, such as cryptocurrency. The only word ‘altcoin’ means one deal with an alternative coin to Bitcoin.
Because tokens can be cryptocurrencies, one can say that altcoins are all digital currencies, decentralized value units that are not bitcoins. Bitcoin was the very first currency on the market and has thus acquired a monopoly on the top crypto market.
Some examples of the most popular cryptocurrency altcoins are Ether (ETH), Cardano (ADA), Litecoin (LTC), Bitcoin Cash (BCH), and many other coins. In practice, people consider any cryptocurrency other than Bitcoin as an altcoin.
Cryptocurrency is a kind of digital money. It uses special technology called blockchain to keep it safe and private. People can use it to buy things online but usually use it as an investment. Some popular cryptocurrencies are Bitcoin and Ethereum.
Tokens are digital things that have value, like cryptocurrencies. But they work on top of another system called a smart contract. These contracts help build new services and applications. Tokens can be used in many ways, like voting in decisions or having value.
Altcoins are other digital currencies that aren't Bitcoin. Bitcoin was the first cryptocurrency, so any other kind is called an altcoin. Some examples of altcoins are Ethereum, Litecoin, and Cardano. They can be tokens or other types of cryptocurrencies.
To invest in cryptocurrency and tokens, you must learn about different projects and decide which ones you believe in. You can buy and sell them using special online platforms called exchanges. Remember that investing can be risky, so it's important to be careful and do your research.