If you google ‘cryptos’, you’ll see the terms alt(ernative) coins and tokens a lot. Most of the time they are incorrectly blurred into the same thing. As we’ve established, cryptos are simply digital currencies that are governed and secured by cryptography. Bitcoin was the first horse out of the gates with this new asset class, and, as it was a digital currency that incorporated cryptography, the term ‘cryptocurrency’ was born.
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Bitcoin’s wild success set off a chain of events that sparked an explosion of development in this industry. As such, it wasn’t long before other cryptos appeared, and there’s now a vast array of different types of crypto, each with its associated ecosystem. Unfortunately, because nearly every new crypto that emerged for the first few years was a copycat cryptocurrency, the term has stuck and now people obliviously use it when referring to all sorts of crypto. It’s a bit like calling all vehicles a ‘car’, which is incorrect. The first internal combustion engine vehicle was a car, and after the car industry took off there were all sorts of variants being created – vans, lorries, trucks and motorbikes, among them. So, using the term ‘cryptocurrency’ when referring to the general crypto market is an incorrect blanket term. This is why I use the term ‘cryptos’, as it covers all crypto-based assets whether it’s a currency or not.
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But getting back to the topic of the difference between ‘altcoins’ and ‘tokens’, we should first look at the word ‘coin’. In simple terms, a coin is historically a metal circular disc that has been used to transfer value from one party to another. But a coin hasn’t always been a metal disc as there have been civilizations that have used stones, wood, gems, emeralds and diamonds for the material and squares, triangles and rectangles for the shape. The key defining trait of a ‘coin’ is the fact that it transfers value from one to another. So, the basic definition of an altcoin is any cryptocurrency (other than Bitcoin) that transfers value. But there’s slightly more to it than that because we also have to see whether it’s a free-standing crypto or a crypto based on another platform.
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Since 2017 there has been an explosion of crypto platforms that help people build their own cryptos (just like WordPress is a website-building platform). These are referred to as DApp platforms – decentralized app platforms, and prominent examples are Cardano, NEO and Ethereum. So when someone creates a crypto based on one of these DApp platforms, these are referred to as tokens. These tokens are used to transfer information and/or value. So one could argue that there are cryptos out there based on a DApp platform which are also transfers of value, but the easy way to look at them is like air miles. If a new airline wanted to have an air miles system, they could simply sign up to an air miles system like Avios and then their customers could accrue Avios air miles points.
Perhaps an easier way to get your head around it is by looking at web page builders like wix.com. Wix is a simple platform where you can use their templates to very quickly create a simple, nice-looking website or landing page. But we all know that you don’t really have a proper website if it’s created by Wix because your site is not a free-standing website as it relies on Wix. What would happen if Wix went bankrupt, or its servers got broken or hacked? Your Wix website wouldn’t load. So, continuing with this analogy, an altcoin is like a proper free-standing website not based on a third-party platform, and a token is like a website that is based upon a third-party platform like Wix.
Typically, a token is a crypto that is built upon another platform and an altcoin is historically a crypto that transfers value.
There are also companies now trying to ‘tokenize’ their business in order to raise capital – in other words, do a crypto cash-grab. So people then ‘invest’ into these projects and are issued tokens which represent a share or stake in that company or project. Even though you can sell those tokens later, as you could with any normal share, it’s not a currency. The token in this instance is a digital representation of the underlying asset. So, in this case, projects/cryptos like this would be classed as a token, not an altcoin.
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You now know the two main points that determine the difference between tokens and altcoins. Let’s add something else into the mix. There are also many cryptos out there which are free-standing cryptos but are not designed to be cryptocurrencies. So what would you call these? An altcoin or token? Which determining factor takes priority, the transfer of value or whether it’s free-standing or not? Personally, I feel that the industry has progressed to the point that we just can’t have two pigeonholes for cryptos anymore. In this example, I would call a free-standing crypto which isn’t a transfer of value a tokenized asset/security.