If I had mentioned the words ICO, cryptocurrency, or token sale a few years ago, you would have probably not known what I was talking about.
In the last 18 months, the world of cryptocurrencies have been catapulted into the mainstream and everyone seems to be experts, or at the very least, getting involved in the buying, selling, and trading of virtual currency coins.
But what do all these new terms and words mean? When it comes to token vs coin, do you know the differences? Particularly in terms of taxation and regulation, you really need to know your apples from your oranges as not doing so could land you in some rather hot water.
In this article, we will give you the full lowdown in layman’s and slightly more technical terms so you can get to grips with the ins and outs before you take the plunge.
Table of contents:
- What is a token?
- What is a coin?
- Why it’s confusing?
- Is token a coin?
- What exactly is ICO?
- Where are the best places to buy tokens?
- Which is the right option for you?
What Is a Token?
A token, in the context of cryptocurrency, is a unit that represents a particular utility or asset that is related in one way or another to a particular blockchain. A token can represent pretty much any asset that is tradable or fungible and these can include but are not limited to loyalty points or even commodities as well as other cryptocurrencies.
The process of creating a token is pretty simple as you do not need to modify any codes from a particular protocol, nor do you need to create a blockchain from scratch. All you need to do is to follow a template that already exists on a blockchain such as Ethereum or Bitcoin.
Using this template will then allow you to quickly and easily create your own tokens. This method of being able to create your own tokens is made possible through the presence of a smart contract. A smart contract is a bit of programmable code that is self-executing in nature and does not require the involvement of any third-parties.
A token can then be created and distributed to members of the public through means of an Initial Coin Offering which is a way of raising funding via members of the public, through releasing a new cryptocurrency or token to fund the project’s development.
It is pretty similar in concept to an Initial Public Offering that is used for stocks, but of course, there are several major differences that are worth understanding before you get involved.
In other words, a token operates on top of a blockchain and it facilitates the creation of a decentralised application. It is also basically a stand-in for something else be in value, a service or utility, or a type of cryptocurrency coin, but it is not the same thing as a cryptocurrency coin.
What Is a Coin?
An altcoin, a digital coin, a cryptocurrency coin, or just a coin are all the same thing, but the terms used to describe them are interchangeable. A crypto coin is what is known as a digital asset and it is designed to work as a medium of exchange to transfer value.
It uses cryptography to secure all of its transactions, to manage the creation of additional units and to verify the transfer of one asset to another person. They are what is known as digital currencies and they are completely decentralised in nature as opposed to traditional money or electronic money that relies on centralised banking systems.
The decentralised nature of each coin is managed through the use of the blockchain which is a public database that records information about each transaction and functions like a distributed ledger.
A cryptocurrency coin is quite literally a type of money – it can be used as such and it’s the only representative of a value, not as a service, utility, or other cryptocurrency or fiat currency.
Why Is It Confusing?
For those amongst us that aren’t totally au fait with the world of cryptocurrency, the difference between coin and token can be a little confusing, furthermore, different individuals have different interpretations of each one.
Simply put, a cryptocurrency is a unit of value that is completely independent of any platform. Examples include Bitcoin, Litecoin or Dash.
A token is a unit of value that can represent a service, or utility, as well as a value but it always needs another platform to operate on. Examples include Ethereum, Golem, Tether, and Gas.
The Ethereum platform, for example, has many tokens that are built on top of it, but it is not the only platform out there. Platforms such as NEO, Waves, Tangle, and NXT all allow tokens to be built on them
For those that aren’t completely sure how the world of digital currencies work, it can be tough to differentiate, so just to recap – a coin is a standalone currency that doesn’t need any platform to run on, whereas a token is built on another platform and is not necessarily just a currency.
Is Token a Coin?
Just to confirm once again, no they are not the same thing. Whilst they do have many similarities, they are essentially very different.
When it comes to function and form, a coin is a means of payment whereas a token has a much wider functionality – in other words, you can buy things with a coin, whereas with a token you are more than likely to just be able to exchange it for a service, or a coin.
A token is also the unit that you purchase when you invest in an ICO, this token can then be exchanged for cryptocurrency coins, or a service once the ICO is complete and the product is launched.
What Exactly Is ICO?
So, an ICO is an abbreviation for Initial Coin Offering and it refers to a method of fundraising which allows a project to sell their idea through the means of cryptocurrency tokens, in exchange for Bitcoin or Ether.
It is similar in its concept to an IPO where investors purchase shares within a company.
ICOs are pretty new on the scene and over the last few years they have not only raised billions of dollars in funds, but they have stirred a lot of controversies.
Some jurisdictions and many individuals view ICOs as unregulated securities that allow an investor to raise an unjustified amount of money, whilst there are those that believe they are truly innovative and could change the way we raise capital.
In simple terms, when someone or a group of people have an idea for a new project or cryptocurrency, there are a few steps they need to go through before they can launch the ICO.
First of all, they need to create a whitepaper – this document is the main point of reference for any potential investor and it provides all of the information that a potential investor would need to know. It serves as a sort of business and marketing plan for the digital currency world.
Then comes setting up a website, marketing it well, and attracting the right kind of investors. Once the money is raised, the product can be launched and the investors can cash in their tokens for the actual units of cryptocurrency.
The amount of money that can be raised via means of an ICO can be truly astounding and billions and billions of dollars have been raised since ICOs became a thing a few years ago.
The great thing about ICOs is the fact that it gives normal, members of the public the chance to become investors and to have the opportunity to be involved in start-ups and projects that would have previously only been accessible to venture capital firms and professional investors.
The drawback with ICOs is that they are largely unregulated. A lot of debate is ongoing at the moment as to whether they qualify as securities or not and as such, many jurisdictions do not know how to regulate effectively to protect investors as well as companies that are trying to find their feet.
Luckily, jurisdictions such as Malta are making considerable headway in putting forward legislation and laws to protect investors as well as to nurture the sector to avoid stifling its growth. It is hoped that the Malta model will act as a template for other countries that are looking to officially classify, and regulate the ICO market.
It is clear that ICOs are a breakthrough way of doing things and it is expected that they will continue to completely change the investment market, as well as raise more money than they did in 2017.
Where Are The Best Places To Buy Tokens?
When it comes to buying or acquiring coins, you can choose to mine your own, or alternatively, you can buy them from a cryptocurrency broker or exchange.
You can use fiat currency or a token or coin to exchange for the crypto-coin of your choice and then you can store it in your personal cryptocurrency wallet. If you are looking to acquire tokens, however, there are a few different options available to you.
Bitfinex is one of the worlds leading cryptocurrency exchange sites and you can purchase and sell a huge range of digital tokens.
It offers financed and unfinanced purchasing of tokens as well as the option to borrow tokens to facilitate short sales through the platform’s peer-to-peer financing functionality.
It has also been the largest Bitcoin exchange platform for the last consecutive four years and it holds 10% of the worlds exchange trading volume.
The platform offers clients a huge range of tokens and coins for purchase and some of the coins it offers include Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Ripple, OmiseGO, Monero, NEO, EOS, and IOTA. As of 2017, it has stopped customers withdrawing their funds in USD after a fall out with Wells Fargo.
Find more information about Bitfinex in our review.
Binance is another world leading, international, multi-language, cryptocurrency exchange. They took part in their own ICO back in 2017 where they raised $15m for their ERC20 BNB token.
Users of the BNB token can receive a 50% discount on trading fees when they use the token.
Since Binance launched their own ICO, many other exchanges have followed suit and adopted the ICO model for themselves.
As of January 2018, Binance was the largest crypto exchange in the world with a market capitalisation of $1.3B and in March 2018, they announced they would be moving some operations to Malta after a tightening in restrictions in Japan and China.
Find more information about Binance in our review.
Which Is The Right Option For You?
The answer to this question really depends on what you are after. If you want to trade or you want to buy items or services directly via an e-commerce platform for example, then a crypto coin is probably the best thing for you. If however, you want to invest in a new project or idea, then a token is the way forward.
The thing with tokens and ICOs is that you can never really be assured of their success, or even the legitimacy of the people behind it, so you need to be completely sure that you do your research and that you know what you are doing before you invest any sum of money.
IF you are unsure, you can always look for ICOs that are developed by well-known names or brands such as the one that was created by Binance. If you know the brand name or the team behind the ICO or token, you can have a little more security in the knowledge that it is coming from a reputable source.
ICOs and token sales will keep on growing and developing in the next few years. If you want to learn more about investing in cryptocurrency, download our free eBook.