Crypto-currencies have been generating a lot of enthusiasm among investors in recent months. More and more traders are entering into the cryptocurrency market. It is therefore increasingly important to understand and differentiate the terminology associated with these assets. There is, indeed, a lot of confusion when it comes to discussions about blockchain. There is not just one type of blockchain, there are several. Each one has its own specificities and technical characteristics. This is why a Bitcoin doesn’t work in exactly the same way as an Altcoin or a Token. If we take the example of Ethereum, its blockchain is able to execute smart contracts, whereas the Bitcoin blockchain can’t do this. Further confusion arises when referring to crypto-currencies, Tokens, or Altcoins. What exactly do we mean when we use these terms? In this article, we explain the differences between these three main crypto-currencies.
Is there a difference between a cryptocurrency, a token and an altcoin?
The answer is yes, absolutely. Crypto-currency based tokens are usually issued on DLT (Blockchain) or distributed platforms (Ledger Technology). They generally represent fungible and tradable digital assets. Unlike crypto-coins, which were developed for the sole purpose of being used as a medium of exchange and/or store of value. Tokens are therefore created with another purpose in mind, in addition to simply serving as a form of monetary exchange.
Commonly used terms in the crypto industry, such as crypto-currency, tokens and altcoins, have fundamentally different definitions or meanings. They are, however, often used incorrectly or in an inappropriate context. Even experts in the industry misuse these terms at times. Traders who are familiar with, and fully understand the technology and concepts related to cryptography are not generally confused by the incorrect use of the basic terminology. However, traders starting out in digital assets often find these new concepts difficult to grasp.
There are indeed both major and minor differences between all these terms. For example, when JPMorgan released their JPM coin, they introduced it as a ‘digital coin’. While Facebook’s Libra was presented as a solid “crypto-currency”. Although JPM Coin and Libra are different in design, in both cases, decentralisation experts were quick to dismiss them as “crypto-currencies”. They have in fact been labelled as “virtual currencies” or “digital currencies”. This is mainly due to the fact that they are managed by centralised companies. However, it is a little more complex than that. While decentralisation is the fundamental ideology behind crypto-currencies, some can still be centralised, at least to some extent.
The subtleties of language
A crypto currency, for example, is a digital or virtual currency designed with a strong cryptography. This makes it highly secure and immutable. Most cryptocurrencies are based on blockchain technology. However, blockchain-free crypto-currencies are also technically possible. For example, Digicash, one of the first examples of a cryptographic electronic payment system, released in the early 1990s, did not have a blockchain.
To make things even more complicated, there are also sub-categories within classic and modern crypto-currencies. For example, a NEO is a coin, while a Binance Coin is actually a token. As you are probably already aware, there is a lot of confusion in the cryptographic community surrounding these terms and through this article our aim is to provide some clarity.
What is a cryptocurrency?
Cryptocurrencies are native to their own blockchain. Bitcoin, Monero, and Ether are all examples of “cryptocurrencies”. What do they have in common? They all exist on their own independent registries. Bitcoin runs on the original Bitcoin blockchain. Ether is used in the Ethereum blockchain. Monero exists on the Monero blockchain, etc.
All of them can also be sent, received or used. As the name suggests, crypto-currencies generally have the same characteristics as money. That is, they are fungible, divisible, portable and their supply is limited. Cryptocurrency coins are therefore generally intended to be used in the same way as cash. To pay for goods, for example. However, there are exceptions. Although Ether has all the attributes of a coin, it does not function solely as a ‘currency’. It is also used in the Ethereum blockchain to facilitate transactions.
There are also “Altcoins”, which have earned this title because they are an alternative to Bitcoin, the original crypto-currency. Many Altcoins are a fork of Bitcoin and have been developed using Bitcoin’s open source protocol. Examples would include Litecoin and Dogecoin. Ether and Monero are also called Altcoins, however, even though they were created on new blockchains.
To confirm an Altcoin, you need to ask yourself the following question: is it a crypto-currency with its own blockchain that is not based on Bitcoin’s blockchain? If so, then it’s an Altcoin.
What is a Token?
A Token is a digital asset that can be used in the ecosystem of a given project. The main distinction between tokens and coins is that the former require another platform to function. Ethereum is the most common platform for creating tokens, mainly because of its “smart contracts” functionality. Tokens created on the Ethereum blockchain are commonly known as ERC-20 tokens. There are of course other platforms for tokens, such as NEO or Waves .
The purpose of tokens is also different from that of coins, although they can also be used as a means of payment (“coin tokens”). Many tokens are created for use in decentralised applications (DApps) and their networks. These are called “utility tokens”, however. Their main purpose is to grant the holder access to the project’s function, like with the “Basic Attention Token”. This is an ERC-20 token (which means that its blockchain platform is Ethereum) designed to enhance digital advertising. Advertisers buy ads with BAT tokens, which are then distributed among publishers and browser users as compensation for hosting the ads and displaying them.
In addition, there are “security tokens”, which essentially represent an investment in a project. Although they benefit from the start-up behind the project, they do not give the holder actual ownership of the start-up. People buy these tokens purely with the idea that their value will increase in the future.
What is the difference between virtual and digital currencies?
The term ‘virtual’ is much more abstract, while ‘digital’ is rather more tangible. In fact the difference is much simpler than the difference between a coin and a token. “Digital currency” is a generic term used to describe all forms of electronic money, whether virtual currency or crypto-currency. The concept of digital currency itself was first introduced in 1983 in a research paper by David Chaum, who later implemented it in the form of Digicash.
The particularity of digital currencies is that they exist only in digital or electronic format and, unlike a banknote or coin, they are intangible. They can only be stored and spent online via electronic wallets or designated connected networks. Normally there is no intermediary (no bank), which is why transactions are instantaneous and there are minimal or no fees charged. There is some good news here! Digital currencies and digital money are the same thing. So coins, tokens, virtual currencies, all are digital currencies.
It is clear that the world of crypto-currencies is constantly evolving. Crypto-currencies, as we know them, have only been around for 10 years, and most government agencies have only been paying attention to them for three to five years. That is, since Bitcoin’s popularity began to rise dramatically with its value. Facebook’s Libra has also recently caused a major stir among the financial experts. Some countries are currently forming working groups to discuss what Libra is and how it can be regulated. Definitions of crypto-currencies, therefore, tend to vary between and even within jurisdictions.
In the US, five different regulatory bodies define crypto-currencies in five different ways, depending on their domain. For example, the IRS considers crypto-currencies and most other virtual currencies as property. The Securities and Exchange Commission considers them to be securities. The Financial Crimes Enforcement Network, on the other hand, considers crypto-currencies to be money. The Japanese regulatory framework governing crypto-currencies defines “crypto-currencies” as a property value. And finally, the head of Russia’s central bank once referred to Bitcoin as a “substitute for money”.
Furthermore, given that this market is evolving at an incredible speed and that the regulators are generally left lagging behind, it is fair to assume that new conditions for digital currencies may well emerge in the future. This makes it particularly important to be at the cutting edge of technology and to have an in-depth understanding of the world of crypto-currencies.