At first glance, there seem to be no differences between cryptocurrency and tokens. Some even think they are the same, but this is a misconception. Cryptocurrency is digital money that can be used for purchases. Tokens, on the other hand, are virtual assets that can represent a security or a work of art.
- What is Cryptocurrency?
- What is a Token?
- How Cryptocurrency Differs from Tokens
- 3 Ways to Get Tokens and Cryptocurrency
What is Cryptocurrency?
Cryptocurrency is a means of payment used mainly as a unit of account. Its main advantage is decentralization, which excludes direct control by banks, financial institutions, and authorities.
Cryptocurrency is managed directly by its owners. Users determine the current value of the coin based on supply and demand.
One of the key features of cryptocurrency is the ability to obtain it as a reward (mining and staking), which contributes to the increase in the total number of coins in circulation.
All cryptocurrencies are divided into two major categories:
Category Description Bitcoin A special type of cryptocurrency considered separately from others. This coin effectively created the entire cryptocurrency market and serves as the foundation for the creation of other coins. Bitcoin continues to develop thanks to modern additions and its status. Altcoins All other coins except Bitcoin. The popularity of Bitcoin has stimulated the development of new types of cryptocurrency. Altcoins are developed to address the shortcomings of Bitcoin and include coins such as ETH, LTC, USDT, DOGE, and others.
What is a Token?
A token is a digital representation of a valuable asset on the blockchain, whether it be shares, real estate, or works of art. Tokens are usually created on an existing blockchain, such as Ethereum.
Tokens can be created for various purposes. They can be used to raise funds or provide access to different platforms. Like cryptocurrencies, tokens can be bought and sold, and their value is often determined by their utility and efficiency.
Typical uses for tokens:
- Raising funds through ICO
- Providing access to services
- Raising funds through crowdfunding
Tokens are also issued when new blockchain projects are launched, and investors can purchase them to interact with the platform created by the developers.
Main categories of tokens:
Governance tokens: allow holders to participate in decision-making for the network or platform. An example is MakerDAO (MKR), where users vote on important decisions and risk management strategies in the Maker protocol.
Stablecoins: tokens with a stable price, tied to fiat currencies such as the dollar or euro. An example is USDT.
Non-fungible tokens (NFTs): unique digital assets, such as works of art or collectibles (for example, CryptoPunks and Bored Ape Yacht Club). In-game items or domain names can also be NFTs.
This is a conditional classification of tokens, and one token can belong to several categories depending on its purpose. For example, a token can simultaneously be a governance token and an NFT.
How Cryptocurrency Differs from Tokens
The main difference is in the blockchain. Tokens are created on existing blockchains (e.g., Ethereum), while each cryptocurrency has its own blockchain. Bitcoin, Litecoin, and Ethereum have their own blockchains. Cryptocurrencies are intended exclusively for payments, while tokens can be used for various purposes.
Another important aspect is the structure of tokens. Tokens can be centralized or decentralized, depending on the project's structure. Centralized tokens are managed by a single entity, which can provide greater efficiency and faster updates. Decentralized tokens are managed by a network of distributed nodes, making them more secure due to the absence of a single point of failure.
How Cryptocurrency Differs from Tokens in a Simple Example
For simplicity, let's compare Bitcoin and a token. Imagine Bitcoin as regular dollars, and tokens as tickets for public transportation. Tickets will never become real currency, regardless of their value, and you can't buy anything in a store with them.
Similarly, a token, even if traded on an exchange, will not become fiat currency. Cryptocurrency always has a payment function built in by its developers. Tokens, however, are often bought for profit through resale at a higher price. Thus, the differences between cryptocurrencies and tokens are related to their nature and practical use.
3 Ways to Get Tokens and Cryptocurrency
There are several ways to acquire tokens and cryptocurrencies, including those that require initial investments and those that do not. Each method has its own features, and there is no definitive answer to which one is better. Below are three of the fastest and most effective ways to obtain these digital assets.
Buying on ICO or IEO
Assets can be purchased directly from the seller in an initial coin offering (ICO). In this case, the funds, whether cryptocurrency or fiat currency, are directed to the development of the project. The purchased tokens can then be resold either on external exchanges after their listing or within the platform. Participating in an ICO requires careful analysis of the project to avoid fraudulent schemes.
Participation is also possible in an initial exchange offering (IEO), where tokens are sold publicly through a cryptocurrency exchange that partners with the seller. The terms of the deal are agreed upon in advance, making IEO a more reliable method since the exchange selects worthy projects. However, this violates the blockchain principle of no third parties, as the exchange acts as an intermediary.
Buying on an Exchange
After the ICO is completed, token trading begins on cryptocurrency exchanges. The current asset price depends on supply and demand, so it is important to study the price dynamics to maximize profit. Almost every crypto exchange offers popular tokens. New coins initially appear on a limited number of exchanges.
It is essential to consider the availability of the exchange in your country and potential verification issues. It is also important to check how long the exchange has been operating, its legal framework, and its security measures against hacking and fraud. Additionally, the exchange should meet individual preferences regarding user interface, fees, and available trading pairs.
Mining
With sufficiently powerful equipment (ASIC miner), you can mine cryptocurrency. During mining, the equipment solves mathematical problems and generates new data blocks. Transaction verification is performed by blockchain participants, and the miner who solves the problem first receives a reward. This principle was first applied in Bitcoin and is used by other cryptocurrencies.
Thus, three ways to get tokens and cryptocurrencies have been considered: buying on ICO/IEO, buying on an exchange, and mining. These methods allow you to obtain digital assets in various ways, each with its own advantages and features.
