Crypto for Dummies. Part 4: What are coins and tokens and how do they differ
Kyiv • UNN
Crypto for Dummies. Part 4: What are coins and tokens and what are their differences.
Cryptocurrencies are entering the modern world of finance more and more deeply. Today, cryptocurrencies can be used to pay for goods and services, used for payments and money transfers, and can also be used to invest. And this is not the whole list of possibilities of digital money. The co-founder of the first fintech ecosystem in Ukraine, Concord Fintech Solutions Elena Sosiedka told UNN about the two main types of cryptoassets: coins and tokens.
"The world of cryptocurrencies is a place full of new technologies and opportunities. However, it is important to understand the basics: what coins and tokens are and how they work in order to make informed investments and use these assets wisely," said Elena Sosiedka.
According to her, the cryptocurrency market is diverse and complex, especially when it comes to the differences between coins and tokens. These two forms of cryptoassets play an important role in the blockchain ecosystem but have different characteristics and functions.
Coins are cryptocurrencies that operate on their own blockchain networks. Examples of such coins are Bitcoin, Ethereum, and Ripple, each of which supports and interacts with its own network.
These coins are often used to pay transaction fees within their networks, and also serve as a means of ensuring network security and operation.
Tokens, as told by Elena Neighbor, unlike coins, do not have their own blockchain network and are created based on existing blockchains such as Ethereum or Binance Smart Chain.
They can represent shares in a project, rights to use certain services, or be tied to physical assets. Examples of well-known tokens include USDT, LINK and UNI.
Stablecoins, such as USDC, DAI, and Tether, are a type of token whose price is tied to stable assets, such as the U.S. dollar. They are created to ensure price stability in the volatile world of cryptocurrencies.
NFT (Non-Futurable Tokens) are unique tokens that cannot be replaced by another token with similar characteristics. They are used to represent digital art, collectibles, and other unique assets on the blockchain.
Elena Neighbor also noted that tokens are also classified by their functionality:
- Investment tokens (Security tokens) are investment instruments similar to stocks.
- Utility tokens are intended for use within a specific platform or project.
- Asset-backed tokens are linked to real assets and provide liquidity.
"Understanding the differences between coins and tokens helps investors and users better navigate the world of cryptocurrencies and choose appropriate investment uses for them in terms of their needs and market conditions. With each passing year, the cryptocurrency market is becoming more diverse and complex, requiring participants to have a deeper knowledge and understanding of the underlying principles and innovations it offers," the expert added.
According to Elena Sosiedka, one should not forget that investing in cryptocurrencies and tokens carries both high potential for returns and significant risks. For example, altcoins can offer high short-term returns due to their volatility, but can also lose value quickly. Whereas bitcoin and other large coins such as ether are considered more stable and reliable for long-term investment.
"Investors should consider market cycles and timing when investing in crypto assets. During bull markets, when cryptocurrency prices are rising, many altcoins can show a percentage of growth that exceeds that of bitcoin. However, in bear markets, when prices are falling, altcoins can lose value faster than more stable coins," the expert explained.
Many altcoins attract investors with unique innovations or features that may not be available in more traditional coins, she said. This creates opportunities for growth, especially if the projects successfully implement their technological and economic models.
As with any asset, speculation plays an important role in the cryptocurrency market, Elena Neighbor noted. Investors are looking for the next "big hit" by investing in new or little-known projects, which can lead to significant short-term profits but also comes with high risks.
"The cryptocurrency market is constantly evolving, offering new opportunities for those who are willing to dive deep into learning about it and understanding the complexities of how it works. Investors should be knowledgeable, research each project thoroughly, and make informed decisions based on their investment goals and risk appetite. Ultimately, safe and stable assets such as bitcoin and ether remain preferred for long-term investment, despite the appeal of high returns from lesser-known altcoins," summarized Elena Sosiedka.
Recall
UNN started a series of publications in which it will talk about digital currencies and their possibilities. Our first material was devoted to the technology underlying cryptocurrencies - blockchain: Crypto for Dummies. Part 1: What is blockchain and its "tricks" that few people know about.
The second material is halving bitcoin: Crypto for Dummies. Part 2: what halving is, and why it is causing a stir in the cryptocurrency market.
Third material: "Crypto for Dummies". Part 3: step-by-step instructions on how to buy crypto coin.
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