A Guide to Cryptocurrency: Distinguishing Two Types of Tokens

Cryptocurrency has been around for a decade, but it’s only recently that it blew up in the digital world thanks to the recent popularity of Bitcoin. If you don’t have a clue what cryptocurrency is, chances are that you’re left scratching your head whenever your colleagues mention something like “tokens” when referring to “coins,” and vice versa. This article will help guide you through the complex world of cryptocurrency, starting with the basics.

Defining Cryptocurrency

Cryptocurrency can be described as a digital currency where encryption is used to secure and record transactions. The term refers to all tokens and coins. However, most people don’t know that tokens and coins are two different things. Many often use the terms interchangeably, which is incorrect. It is very important to understand the difference between the two if you want to be a crypto pro.

Coins Vs. Tokens

Coins usually have their own blockchain, in which they are treated as real money. To put it simply, coins are digital money. On the other hand, tokens – which can be referred to as digital tokens or crypto-tokens – represent an asset or utility. Early investors can use tokens as a form of payment, either through a platform, an app, or a system. They don’t have their own blockchain, and so they need a platform to operate on. Tokens are created when a project launches an Initial Coin Offering (ICO). There are two main types of tokens that you should know about: security and utility tokens. It is also important that the differences between these two are addressed.

Security Tokens vs. Utility Tokens

Security tokens can represent shares or assets in a company. In fact, they are comparable to equities or bonds. This also means that they have to follow a specific regulatory framework, and they are required to follow federal laws. That being said, regulations are different for every country, and so by launching ICO, you need to apply specific regulations in accordance with the jurisdiction that your token falls under. The key to distinguishing a security token from other types of tokens is to think about whether the value of the token will increase over time based on the company’s performance. If so, then the token is most likely a security token.

Utility tokens can be used as an early payment in order to gain access to a company’s products or services. This means that they are not regulated and are not made to be investments. For this reason, they are popular among startup companies all over the world. A utility token can be treated as a coupon for the company’s services, and because it is a utility, it is not subject to strict regulatory guidelines.

Conclusion

The takeaway here is that there are different types of tokens. The ability to discern between utility tokens and security tokens is imperative to understanding how cryptocurrency works. If you’re interested to get into the cryptocurrency world, you really need to know what you’re getting yourself into. Otherwise, you may make mistakes buying into something that you don’t want to, or you may break some regulations that you should have been complying to. The bottom line is to do your research carefully before you launch your ICO.