Coins, Tokens & Altcoins: What’s the Difference?
in Crypto Tutorials
We use lots of terms in the cryptocurrency community that might not make sense to someone who isn’t familiar with the space. For example, if you’re not already deep into crypto you might not know the difference between coins, tokens and altcoins.
This article will explain all of these phrases, and hopefully clear up any questions you have about the categorizations of different cryptocurrencies.
Apart from one very notable exception, which we’ll explain in a moment, coins are cryptocurrencies with their own networks, nodes and consensus mechanisms. To draw a comparison to the internet, a coin is similar to a self-hosted website. For example, Exodus.com is its own website, whereas Exodus.WordPress.com (which doesn’t exist) is not. It’s a “subsidiary” website of WordPress.
Although these two websites can look very similar in your web browser, Exodus.com has a hosting package and is fully controlled by Exodus, whereas Exodus.WordPress.com is dependent on WordPress. A cryptocurrency “coin” is a currency with its own network, whereas a “token” is dependent on another network (more on this in a later section).
Some of the most popular cryptocurrency coins include:
Although these coins have different features and use cases, they all have a few things in common:
- Their own consensus mechanisms
- Network nodes that store a copy of the blockchain
- A lack of interoperability. For example, it’s impossible to send XLM to a BTC address
The Exception that Proves the Rule
The one exception to the coin rule is that we refer to cryptocurrencies like USDT and USDC as stablecoins, even though it would be more accurate to call them stabletokens.
A vast majority of stablecoins run on the Ethereum network using the ERC20 token standard. Technically speaking, stablecoins shouldn’t be considered coins since they don’t have their own consensus mechanisms and unique networks. However, we refer to them as coins nonetheless.
Categories of Coins
Broadly speaking, we can break down the different cryptocurrency coins into several categories.
Smart Contract Coins (Smart Contract Platforms):
Store of Value Coins:
These are just a few examples of the various types of coins. Messari.io has an excellent resource on their homepage that lets you sort cryptocurrencies by their use case.
What is an Altcoin?
Altcoin is a phrase that you’ll hear a lot in the cryptocurrency community. Thankfully, defining altcoin is very simple. An Altcoin is any coin that’s not Bitcoin. There’s just one Bitcoin (BTC), followed by thousands of altcoins.
In the last year or two some people have begun to question whether Ethereum still qualifies as an altcoin. Ethereans say it doesn’t, Bitcoin maximalists say it does, and many other people have no opinion because the label doesn’t matter that much. Suffice to say; we can state with 100% certainty that every coin that’s not BTC or ETH is an altcoin.
One interesting way to track the altcoin market is to use the TradingView Total2 chart, which is the entire cryptocurrency market minus Bitcoin.
Unlike coins, tokens do not have a unique network and consensus mechanism.
Ethereum based ERC20 tokens are by far the most popular kind of token. The ERC20 standard allows anyone to create a token on top of Ethereum. When you create an Ethereum ERC20 token it has several properties:
- It uses Ethereum’s consensus mechanism for security (the same goes for creating a token on Tezos, Cardano, etc. The token uses the consensus mechanism of the blockchain it’s built on top of)
- Ethereum nodes store the transaction history for all ERC20 token transfers
- The token is interoperable within the Ethereum ecosystem. In fact, one thing that often confuses new token users is how to send an Ethereum ERC20 token to someone. There is no special address for token transfers, you send ERC20 tokens like DAI, LINK, UNI, etc. to a user’s Ethereum address. An Ethereum wallet can store ETH, ERC20 tokens and ERC721 NFTs.
Tokens can also exist on top of other blockchains like Tezos and Cardano, to name a few. That being said, as of 2021 Ethereum tokens account for a majority of all tokens in existence.
Categories of Tokens
As with coins, there are several categories of tokens.
Base layer scaling tokens:
Tokens use the same infrastructure as the protocol they’re built on top of, which makes interoperability easy. ERC20 tokens are fully interoperable within Ethereum’s huge ecosystem of applications and wallets.
The downside of a token is that it’s reliant on the base protocol. For example, if the Ethereum network is at full capacity, sending an ERC20 token can be quite expensive. Furthermore, if there’s ever a critical bug in Ethereum (very unlikely, but not impossible) it would affect all ERC20 tokens.
The Crypto Markets 101
The following are a few of the most common questions about the crypto markets, including questions about tokens and altcoins.
The relationship between Bitcoin and altcoins
Altcoins are often referred to as a higher beta version of Bitcoin. This is a term the cryptocurrency community borrowed from the precious metals market, where silver is a higher beta version of gold. Put simply, Bitcoin leads the market and the altcoins typically follow. However, when the altcoins “move” they typically have bigger price swings than Bitcoin.
If Bitcoin goes up 20% in a month, the altcoins might go up 40%. If Bitcoin goes down 20% in a month, the altcoins could go down 50%. There’s no exact science to these moves, but we can say with some certainty that the following rules often apply:
- Bitcoin moves first
- Higher-cap, ‘established’ altcoins tend to move next
- Altcoins that are more speculative (risky) and have lower market capitalizations tend to move after that.
Beware of utility tokens that have no utility!
If there is one thing that we learned in 2017 it’s that a vast majority of “utility tokens” don’t actually have any utility! In fact, a majority of the “utility token” ICOs that launched in 2017 ended up being misguided at best, and scams at the worst.
There are only a very small number of instances where a utility token is essential to the functioning of a protocol. Furthermore, many utility tokens have been deemed securities by the SEC. Be very careful buying utility tokens as the entire market is fraught with economic landmines.
Security tokens vs currencies
While some countries like Switzerland and Portugal have crafted very friendly crypto regulations, other regulators, like the American SEC, have yet to clearly define the difference between a security token and a currency.
The Ripple XRP story is the best example of how unclear regulation is hurting the American cryptocurrency industry. Many people don’t realize that XRP is actually one of the oldest cryptocurrencies, having been around since 2012. For years Ripple (the company behind XRP) claimed that XRP was a currency and should not be subject to certain regulations.
As a California-based company, Ripple went out of their way to please regulators and attain regulatory approval wherever they could. Despite Ripple’s efforts to work with regulators, in December of 2020 the SEC announced that they would be suing Ripple for selling XRP as an unregistered security.
As you can see, ultimately it’s up to regulators to decide what is a security token and what’s a currency. If you are worried about regulatory action you can always invest in Bitcoin and Ethereum, which American regulators have clearly defined as commodities.
Coins & Tokens: there’s space for both
Tokens are a simple, fast and inexpensive way for developers to launch a cryptocurrency. It’s much easier to launch a token on Ethereum or Tezos than it is to create your own (secure) blockchain.
Even though tokens depend on the underlying smart contract platform, this can be an intermediate stage for a project. For example, Binance’s BNB token started out as an ERC20 token until Binance eventually launched their own blockchain and moved the token off of Ethereum.
Tokens and coins each have advantages and disadvantages, and they both have a place within the cryptocurrency ecosystem.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.