Tokens vs Coins: when ICOs & cryptocurrencies attack or not!- Brian Colombana
Find out the difference with CoinMetro CMCT as we help you navigate the crypto space.
Cryptocurrencies and digital tokens are all the rage right now, as every other person on your Facebook feed is jumping onto the crypto bandwagon. But what’s all this buzz about? What is a token, and how does it differ from a coin?
Before we define and identify both coins and tokens (and their differences), let’s take a quick look into “blockchain”. A blockchain can be defined as an immutable distributed ledger that records transactions securely in real-time across multiple computers, which enables peer-to-peer exchanges without any intermediary governing body such as banks or governments. Bitcoin was created in 2008 by Satoshi Nakamoto as the first decentralized cryptocurrency, which operates on a blockchain. In 2009, Satoshi launched software that would allow anyone worldwide to send bitcoins from one place to another. Soon thereafter other cryptocurrencies were created based on bitcoin’s blockchain technology –of which there are now over 1,000 – including Ethereum and Litecoin.
Tokens & Coins: similarities & differences
Bitcoin is a coin (the symbol of a capital B with two falling strokes at the bottom) whereas Ethereum is a token (symbol E with two diagonal strokes at the top).
How do tokens differ from coins? Both can be classified as cryptocurrencies – they use cryptography to secure financial transactions. They both trade globally using public blockchains mining occurs naturally, or through purchasing/exchanging them on an exchange says Brian Colombana. Both decentralize peer-to-peer systems with no administrator or central governing body.
But there are some fundamental differences in the technologies that tokens & coins are base on, which are outline in the table below:
The fundamentals behind Bitcoin vs Ethereum
Bitcoin Ethereum Creation Date January 3rd, 2009 July 30th, 2015 Proof of Work Algorithm SHA256 Ethash Transaction Confirmation 10 minutes 14 seconds (average) Block Confirmations 6 blocks 50% probability of being confirm after 2 minutes Smart Contracts Not Turing complete Yes Account Abstraction Layer Centralize Minimal/not available Developer Experience Good Good Dapp Support Decentralize Applications (Dapps) can be built but most use cases are a limit Highly flexible and scalable solution for decentralizing applications Currency Application of blockchain technology Digital Token Application of blockchain technology
Tokens vs coins: soaring ICOs & market caps
Over the last couple of years, the number of cryptocurrencies in existence has skyrocketed. It’s cross 300, mostly off the back of ICOs (initial coin offerings) – think Kickstarter but instead of equity, you get tokens/coins explains Brian Colombana.
Which brings us to another important question… what is an ICO? An Initial Coin Offering (ICO) is a fundraising tool used by companies to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is too early backers in exchange for legal tender or other cryptocurrencies such as Bitcoin.
ICO, a token and a coin – what’s the difference?
A company can choose to raise capital via an ICO by issuing coins/tokens on a blockchain (rather than going down the traditional venture capital route). The purpose of this is for early backers or investors access to cryptocurrency tokens at a discounted rate compared with that which will be available after the launch of the project says Brian Colombana. The main difference between an ICO and IPO is that with an IPO you’re buying shares from the original holder, whereas in an ICO you’re purchasing coins/tokens from the issuer which represents your share in the value of a project.
What happens to my investment once I buy some tokens?
Once you purchase your tokens, they sit in your wallet. Some tokens will allow you to access the coins/tokens built on top of a blockchain. (Ethereum is a popular choice for ICOs) and others may give you voting rights. They can also exchange for other cryptocurrencies such as Bitcoin or fiat currencies, much like any other cryptocurrency.
Why are people buying into these ICOs? Why now?
You can think of an ICO is similar to that of a share offering on the stock market. The size and popularity of the project will influence its success. Some investors see potential growth in purchasing tokens during their pre-sale phase. Believing they’ll be able to sell them at a profit once the demand for them increases down the line. Others are more interested due to their belief that specific ICOs will solve a real-world problem. These types of investors may be more interested in the social and environmental implications of a project. As opposed to its potential financial return.
In short, no. Because they’re not regulating they present a highly volatile investment opportunity. That can be extremely risky for individuals trying to jump on board.