Cryptocurrency coins and tokens are digital assets that operate using blockchain technology. This means transactions in the two are recorded in an electronic and distributed ledger and verified by computers across the world. You can buy and sell both cryptocurrency coins and tokens online using a cryptocurrency exchange and store them in cryptocurrency wallets. Despite the similarities, coins and tokens are fundamentally different.
Coins are cryptocurrencies native to a blockchain and crucial to its working. Cryptocurrency tokens are enabled by smart contracts that operate on an existing blockchain platform and can be traded like cryptocurrency coins.
In most ways, coins and tokens work the same way, and some cryptocurrency users may not know they are using one or another. However, this fundamental difference influences transaction costs and the currency's technical processes. Keep reading for a more in-depth look at cryptocurrency tokens and coins, so you know the key differences.
What’s the Difference Between Cryptocurrency Tokens and Coins?
Cryptocurrency tokens and cryptocurrency coins sound like similar terms, but in theory are not the same thing. One relies on the existing blockchain to function and the other is part of each blockchain.
Here is more about their differences:
|Cryptocurrency Coin||Cryptocurrency Token|
|How They Work||Created as part of a blockchain’s software. Coins are required to operate the blockchain network||Created with a smart contract, a type of software that uses an existing blockchain|
|Paying for Transactions||An amount of the coin is used to pay for transactions||The blockchain’s native coin is required to pay for transactions|
|Uses||Primarily as exchange and investment||Smart contracts have multiple applications across gaming, NFTs etc.|
|Popular Examples||Bitcoin, Ethereum, Binance Coin||Tether, Shiba Inu, Decentraland, Axie Infinity|
How Cryptocurrency Coins and Tokens Work
Cryptocurrency coins operate on their own, independent network. To launch a new cryptocurrency network, the developers must create a new blockchain and enlist the infrastructure to make it work.
As long as that blockchain remains online, the related cryptocurrency coin will also remain in existence. While the coin values remain highly speculative, the coin itself should continue to exist indefinitely, as long as the blockchain has users and miners or validators keeping the system up and running.
Tokens are created and managed using smart contracts, a type of software that works using blockchain technology. ERC-20 is a popular smart contracts standard powering tokens on the Ethereum network.
Cryptocurrency tokens rely on another network to operate as a platform. That means cryptocurrency tokens could not exist without the underlying infrastructure provided by the blockchain and its native cryptocurrency coin.
Think of it like this. You pay for a new home with money or mortgage, but the deed is what gives you the ownership of the house. The deed is a contract that wouldn’t exist without the underlying monetary system. So in this instance, money would be the coin and the deed, a token.
Traditionally, cryptocurrency coins such as Bitcoin and Ether have been used for the purposes of exchange or investment as assets. The Ethereum blockchain enabled smart contracts and that cleared the way for tokenization.
Tokens are useful for many purposes, including stablecoins, gaming, initial coin offerings (ICOs), and creating new tradable assets. Stablecoins are cryptocurrency tokens that always follow the value of a specific fiat (government) currency like the U.S. dollar.
One of the most popular forms of tokens are non-fungible tokens (NFTs) that are unique digital assets comprising anything from a piece of art, sports memorabilia, or even a tweet.
Paying for Cryptocurrency Coin and Token Transactions
Cryptocurrency coins are required to pay for coin, token, and non-fungible token (NFT) transactions.
If you want to send someone cryptocurrency from your wallet or make a transfer between two wallets or exchange accounts of your own, you will most likely have to pay network fees, sometimes referred to as gas.
Network fees are paid using the blockchain’s primary coin. For example, if you want to send ether (the name of the ethereum coin) to a friend, you’ll have to set aside some ether to pay for the transaction. Gas fees are usually calculated as a small fraction of ether called gwei.
When using cryptocurrency tokens, you need to hold both the token and the blockchain’s native coin to transact outside of a centralized exchange. For example, if you want to send the Shiba Inu token to a hardware wallet, you would need to use Ether, a coin, to pay for the fees.
Examples of Popular Cryptocurrency Coins and Tokens
In April 2022 there were more than 1,050 cryptocurrency coins and 9,000 cryptocurrency tokens listed on CoinMarketCap. That makes tokens much more plentiful than coins. However, some of the smallest coins and tokens carry little value, if any.
Cryptocurrencies are highly volatile and risky investments. Spend the time to learn what you’re investing in, so you fully understand the risk of losses.
Bitcoin, Ether, Binance Coin (BNB), XRP, Cardano, Solana, and Terra (LUNA), were among the top coins by market capitalization as of April 2022.
Stablecoins were the top tokens by market capitalization in April 2022. Tether (USDT), USD Coin (USDC), Binance USD, Shiba Inu, were among the most significant.
A Best-of-Both Worlds Option
If you are interested in cryptocurrencies, you may be wondering if cryptocurrency tokens or coins make more sense for your investments or trading strategy. There is no rule that you have to use or own cryptocurrencies at all. If you decide to invest, you can easily buy a combination of coins and tokens.
Just like with the stock market, it may be a good idea to diversify your crypto investments beyond just a single currency or two.
When you hold a portfolio of different cryptocurrencies, your risk is spread around rather than concentrated in one currency.
The Bottom Line
Cryptocurrency coins and cryptocurrency tokens play a vital role in the digital currency ecosystem. Coins and blockchains provide the underlying architecture that allows cryptocurrency tokens and other smart contracts to exist and operate.
In some ways, coins may be considered a safer and more stable investment option, as they are required for the blockchain to work. Tokens can come and go without as large of an effect on other digital currencies. However, depending on the coin and token, either could be a good choice for your trading and investing goals.
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!