What Is the Difference Between Cryptocurrencies, Tokens, Coins and Altcoins?
The release of Bitcoin in 2009 introduced a completely new vocabulary of words, phrases, and terminology within the investment community. Quite often, these words and phrases are taken out of context as people are unfamiliar with the appropriate meaning. So, what's the difference between cryptocurrencies, tokens, coins, and altcoins? And what is the difference between different cryptocurrencies, such as Bitcoin and Ethereum?
In order to gain a better understanding of these new words, let’s review a few of the more popular terms from the crypto universe.
The Difference Between Cryptocurrencies, Tokens, Coins, and Altcoins
A good place to begin is with “cryptocurrency”. Many people have a difficult time understanding the proper meaning of cryptocurrency because the underlying technology is based on computer language and other forms of technical jargon. Consequently, people tend to avoid topics that are technological in nature.
There are two types of cryptocurrencies: digital currencies, and virtual currencies. Both types of currencies are encrypted (i.e. secured) using cryptography. In its simplest format, cryptography refers to the use of encryption techniques to secure and verify the transfer of transactions.
Contrary to popular belief, Bitcoin was not the first cryptocurrency. However, it was the first decentralized cryptocurrency powered by a public ledger that records and validates all transactions chronologically. Of course, this is known as the Blockchain.
The creation of Bitcoin unleashed a wave of new cryptocurrencies, even though the majority of these tokens and coins don’t fit the proper definition of a currency. In order to be classified as a currency, the token or coin must act as a store of value or medium of exchange.
Therefore, the cryptocurrency “purists” will argue that these new financial instruments should not be labeled as cryptocurrencies. At least for now, the majority of the people in the crypto community are comfortable labeling all coins and tokens as cryptocurrencies.
Coins Versus Tokens
As we just discussed, all coins and tokens are labeled as cryptocurrencies, although most don’t function as a currency or medium of exchange. Therefore, the term “cryptocurrency” is somewhat of a misnomer because a currency is a store of value and unit of account.
When you ask what the difference is between different cryptocurrencies, you may find people drawing comparisons between Bitcoin and whatever other currency you’ve asked about. Certainly, Bitcoin fits the proper definition of a currency. As a result, Bitcoin deserves the title of a cryptocurrency. Given the fact that Bitcoin was the “original” cryptocurrency, the crypto industry simply fell into the habit of classifying all subsequent coins and tokens as cryptocurrencies (which in hindsight, was probably a mistake).
There are two categories of cryptocurrencies: alternative cryptocurrency coins (i.e. altcoins) and tokens. Let’s explore each term in more detail.
Quite often, altcoins are simply referred to as “coins”. Both terms are used interchangeably within the crypto universe. The simplest definition of an altcoin is any coin that is an alternative to Bitcoin. Therefore, Bitcoin should never be referred to as an altcoin. Bitcoin is the original cryptocurrency. In fact, Bitcoin has been so successful that the majority of altcoins are simply a variant (i.e. fork) of Bitcoin.
The altcoins are built using Bitcoin’s open-sourced, original protocol. A few changes are made to the underlying code which creates an entirely new coin with a different set of features. Without going into too much detail, there are two types of forks. This would include hard forks and soft forks. The ultimate objective of a fork is to create a better user experience with the coins. The difference between cryptocurrencies often comes down to what the creators of a fork felt would lead to a better user experience.
Crypto tokens are a special kind of virtual currency token that reside on their own blockchains. Each token represents an asset or utility. As long as the asset is fungible and tradeable, it can be represented by a token. Creating a token is a much easier process versus the creation of an altcoin because there are no codes to modify and the formation of a new blockchain is not required.
Instead, the only requirement is to follow a standard template on the blockchain such as the Ethereum platform. This functionality of creating your own token is made possible through the use of smart contracts. The beauty of smart contracts in regard to creating a token is the fact that the contracts are self-executing. They do not require any third party to operate.
These Are the Most Important Distinctions Between Coins and Tokens:
If you understand one thing about the difference between cryptocurrencies, let it be this: Cryptocurrencies and altcoins are virtual currencies that have their own dedicated blockchain and primarily serve the purpose of being used as a medium for digital payments. In comparison, tokens operate on top of a blockchain that acts as a medium for the creation and execution of decentralized apps (DApps) and smart contracts. The tokens are used to facilitate the transactions.
Tokens Are Introduced Through the ICO Process
Tokens are not simply created out of thin air. On the contrary, the creation and distribution of tokens are initiated through an Initial Coin Offering (ICO). Essentially, an ICO is a crowdfunding exercise. What is crowdfunding? In layman’s terms, a crowdfunding event involves the practice of funding a project by raising a small amount of capital from a large number of investors.
ICOs are a perfect way to raise funds for a new token. They're cheap, clean, and involve less regulatory paperwork than other forms of capital raises.
Digitex ICO and 2019 Outlook for the ICO Market
While we’re on the subject of ICOs, let’s briefly discuss the Digitex ICO and the general outlook for the ICO market as we transition into 2019. The Digitex Futures Exchange enjoyed a very successful ICO on 15 January 2018. In less than 17 minutes, Digitex raised $5.4 million. The ICO was so successful because Digitex has created a unique and innovative cryptocurrency futures exchange.
The exchange will use its own native cryptocurrency (the DGTX) for conducting all transactions. This will create a constant demand for DGTX.
In regard to the overall ICO market, there have been 1,706 ICOs through the first eight months of 2018 (at time of writing). In 2017, there was a total of 370 ICOs. The demand for Initial Coin Offerings continues to expand at a rapid pace.
Most likely, ICO activity will begin to level off in 2019. In the long run, it would actually be healthy to see a reduction in coin offerings over the course of the next 12 months. It’s never a good idea for a market to become overheated with excessive speculation. This type of activity always creates a speculative bubble, which eventually leads to a major decline.
Digitex Now and into the Future
In terms of Digitex, 2019 looks set to be incredibly exciting as the Digitex Futures exchange is released to the cryptocurrency trading community within the next few months. Digitex crypto futures and the DGTX token have an opportunity to be one of the most successful ICOs from 2018. Why?
Because Digitex has developed a product that could completely change the futures industry. The company’s commission-free exchange could become the “gold standard” for the entire futures industry.
Many ICOs are based on unproven products with an unreliable business plan. These ICOs have very little chance of generating any type of sustainable customer base or revenue stream. Digitex does not fit into this category. On the contrary, Digitex has created an extremely detailed business model which outlines all aspects of the company’s futures exchange and how the exchange interacts with the DGTX token.
Most ICO investors are quite sophisticated in regard to analyzing each ICO business plan and accurately determining which company has a realistic chance of being financially successful. This explains why the DGTX token volume has exploded during the past few weeks.
ICO investors are beginning to realize that the Digitex Futures exchange could become a major disruptive force in the futures industry. DGTX could be one of the “big winners” within the ICO universe in 2019.
The rise of the cryptocurrency movement (along with blockchain technology) reminds me of the internet boom and dotcom mania in the late 1990s. However, in terms of pure speculative fever, the dotcom mania was definitely worse than today’s cryptocurrency bull market.
Personally, I think it’s a good thing that the enthusiasm for tokens and altcoins hasn’t ascended to the level of pure insanity like we experienced during the days of the internet bubble. Why? Because all bubbles end in disaster. Quite frankly, I don’t want to see the cryptocurrency universe unravel because of excessive speculation.
Of course, an argument could be made that Bitcoin was in a speculative bubble in 2017. To a certain extent, this is correct. Bitcoin entered a speculative mania in late-2017. However, the price never collapsed to zero when the sell-off began in early-2018.
A true bubble occurs when the underlying security drops to zero after it reaches its peak. This never occurred with Bitcoin. Not even close. Therefore, Bitcoin, in my opinion, never entered a true bubble phase. Instead, the price has stabilized during the past several months and Bitcoin remains in good shape.
Will tokens and altcoins enter a mania phase and eventually collapse? It’s impossible to know for sure. However, the most likely answer is “No”. Instead, many of today’s tokens will probably disappear in a few years because they offer no utilitarian value. In other words, there is no viable business plan to support the tokens in the first place.
So what is the difference between different cryptocurrencies, tokens, and altcoins?
A brief summary of what we’ve just learned about the difference between cryptocurrencies:
- There are two types of cryptocurrencies: digital currencies, and virtual currencies
- Contrary to popular belief, Bitcoin was not the first cryptocurrency
- However, Bitcoin was the first cryptocurrency powered by a public ledger
- All new coins and tokens are inaccurately labeled as cryptocurrencies
- A “true” cryptocurrency serves as a medium of exchange and store of value
- An altcoin is any coin that is an alternative to Bitcoin
- Altcoins are built using Bitcoin’s open-sourced, original protocol
- Changes are made to the underlying code which creates an entirely new coin
- Altcoins have their own dedicated blockchain
- Tokens operate on top of an existing blockchain
- Most tokens are created through an initial coin offering (ICO)
- Digitex had a very successful ICO on 15 January 2018
- ICO activity has increased sharply during the past two years
- It would be beneficial for the marketplace if ICO activity leveled off in 2019
- Many ICOs will fail because they are based on unproven products with no business plan
- Digitex has created a detailed business model which positions the company well for 2019