Tokens: Definition and How They Differ from Cryptocurrencies

Written by: smm

on: 01/05/2023

There are over 8,675 cryptocurrencies and tokens in the crypto industry, which can be extremely confusing for beginners who don’t understand the differences between them.

In simple terms, a token is a type of digital asset or a unique digital coin that you buy, receive as a bonus, and can exchange for a cryptocurrency, a specific service, or a product in the future.

Tokens circulate within the project they were created for. Their initial value is negligible, but it can grow several hundred times once listed in the crypto exchange.

What’s one token equal to:

The cost of tokens, like cryptocurrencies, is calculated based on supply and demand in the crypto market and isn’t pegged to anything. The exceptions are stablecoins and non-fungible tokens (NFTs). The exchange rate of the former is pegged to the price of some national currency, while the latter is determined by the value of the real assets they represent.

Key features of tokens:

— Tokens act as a currency in a closed system; you can buy project’s subscriptions and services with them

— Tokens show a share in a particular project

— Tokens can act as a reward (bonus)

Key types of tokens:

— Application tokens, aka utility tokens or Appcoins

— Equity Tokens

— Security Tokens

— Beneficiary Tokens

— Credit Tokens

— Non-Refundable Tokens

Differences between tokens and cryptocurrencies:

Tokens and cryptocurrencies aren’t the same thing, although it may seem so at first glance. One of the key differences is that tokens—unlike cryptocurrencies—can be issued and managed completely centrally.

Tokens can be issued in a centralized and decentralized manner, while cryptocurrencies are decentralized only, without a single control center. Token transactions can also be verified centrally and decentrally, while cryptocurrencies are decentralized only.

The price of tokens can be affected by various factors, besides supply and demand (issue of additional tokens or pegging them to other assets), while the price of cryptocurrencies is fully dependent on the market.

Last but not least, tokens don’t have to use their own blockchain. On the other hand, cryptocurrencies always have their own blockchain.

Where you can buy or get tokens:

You can buy tokens through exchanges, second-hand, or during the ICO. When a company decides to attract investments for development, it issues tokens. This process is called the Initial Coin Offering or simply the ICO.

Issuing their “money” and exchanging it for cryptocurrencies enables startups to get the funding they need to launch and grow. It’s similar to the crowdfunding approach, where participants finance projects to receive benefits from them in the future.

Before buying tokens, you want to get the idea, find out whether a startup is reliable, assess the risks and reputation, and check out the project’s presentation with a development strategy and further prospects. Otherwise, you may invest in a loss-making project or fall for a scam.

To buy tokens you have to find a project, visit the company’s official page, read the project documentation, opt for the optimal crypto for buying tokens, enter your crypto wallet details and address for your tokens, transfer the required amount, and check whether the tokens got credited.

You can buy the most popular tokens in any crypto exchange, but new ones may not be available on all such platforms. Poloniex and Bittrex exchanges offer the largest selection of tokens, while Cryptopia, YObit, and LiveCoin are the largest and at the same time loyal to new products in the market.

How to get tokens for free:

Interestingly, there are instances where you can get tokens for free.

Here are the most popular ways to do that:

1. Airdrops: Companies can distribute tokens for free to create buzz around their projects. E.g. Ethereum (ETH) issued free EOS (EOS) tokens to all ETH holders between 2017 and 2018.

2. Participation bonuses: Projects can issue bonus tokens for active participation in the network, e.g., Stellar (XLM) rewards those who participate as validators or for adding your assets to the stablecoin pool.

3. Contests and competitions: Some projects may hold contests or competitions, issuing tokens as a reward. For example, Binance (BNB) holds monthly trading competitions, issuing many Binance tokens as a reward.

4. Referral programs: (MCO) payment platform is a good example of that. It offers a referral program and provides bonus MCO tokens for attracting new members to the network.

How to make money with tokens and how to store them:

Many people are looking for ways to earn from tokens. They encounter promising projects, pick the best startups, and become owners of assets using the above methods.

The approach typically consists of the following steps: buying selected coins at an acceptable price at the start of the project or following the ICO, expecting an increase in the market value of the token, selling the asset on the exchange, and making a profit.

You can do so with various tokens. In some cases, it’s possible to receive dividends or other profitable offers, depending on the type of token.

In the early stages, when the project prototype is still underway, you can’t evaluate the potential of the project and thus take risks of investing in a startup that may not live up to expectations. If you want to avoid that, you must keep an eye on the information on various portals, visit rating websites, and check whether the ICO is worthy.