In-Depth Analysis: How to Differentiate Between Tokens and Coins? Token Investment Guide

The Evolution of Coin and Token

In the early stages of cryptocurrency development, projects like Bitcoin, Litecoin, and Dogecoin used the term “Coin” for naming, and there was no confusion in the market regarding the terminology. After the advent of Ethereum, the concepts of Coin and Token began to be used interchangeably, and in Chinese contexts, both are translated as “代币” or “cryptocurrency,” leading many investors to struggle to distinguish their fundamental differences.

What Exactly Is a Token?

In Chinese, Token is usually translated as “pass,” “token,” or “digital token,” representing an entity that signifies specific rights, certificates, or digital assets. Tokens can be traded, transferred, and exchanged on their respective blockchain networks.

Unlike Coins, Tokens do not have their own independent blockchain infrastructure; instead, they are issued on existing public blockchains. In 2015, Ethereum introduced the ERC-20 token standard, enabling anyone to create their own Token on its network. To date, Ethereum remains the blockchain with the largest issuance of Tokens.

The Core Differences Between Token and Coin

The most fundamental difference lies in ownership of infrastructure:

Features of Coins:

• Have their own native blockchain (Layer-1)
• Cover basic functions like payments and staking
• Common types: BTC, LTC, SOL, DOT, ADA, FIL
• Mainly issued through mining

Features of Tokens:

• Do not have independent blockchains; operate on other public chains (Layer-2, Layer-3)
• Offer more diverse functions, including payments, staking, voting, etc.
• Common types: MATIC, COMP, LINK, UNI, MKR, AAVE
• Issuance methods include ICO, IDO, IEO, etc.

From an ecosystem perspective, Coins, with their own blockchain, can build more complete ecosystems; whereas Tokens are relatively limited and often serve as internal tokens for specific applications or services.

The Three Major Classifications of Tokens

According to the Swiss Financial Market Supervisory Authority (FINMA), Tokens can be divided into three types:

Payment Tokens

Primarily used for secure, efficient, low-cost payments. Stablecoins are typical representatives of this category. These Tokens are pegged to fiat currencies, with relatively stable prices, suitable as a medium of exchange.

Utility Tokens

Provide access rights to various applications, acting as “passports.” ERC-20 tokens on Ethereum belong to this category, including DeFi protocols, NFT projects, etc., which all issue utility Tokens.

Asset Tokens

Represent ownership of a specific project or asset. Holding such a Token means becoming a participant in the project and enjoying the potential appreciation of the Token. It is important to note that in the crypto space, Token holders usually do not have legal ownership or dividend rights in the project.

In practical applications, a Token often possesses two or even three of these attributes simultaneously, making strict classification difficult.

Security Considerations for Tokens

The security of a Token is closely related to the security level of its underlying public chain. Ethereum, as a recognized secure and stable public chain, offers relative assurance for Tokens issued on it. Conversely, emerging public chains lack long-term validation and carry more uncertainties.

Compared to native Coins, Tokens face more diverse risks: malicious issuance, team exit scams, technical deficiencies, smart contract vulnerabilities, and more. Therefore, when investing in Tokens, it is crucial to scrutinize the project’s background and the security audits of its contracts.

Why Invest in Tokens? Future Outlook

Coins and Tokens each have their advantages; they are complementary rather than competitive.

If Coins are viewed as blockchain-based cryptocurrencies, Tokens are application-based cryptocurrencies. The former addresses infrastructure issues, indirectly meeting user needs; the latter provides specific applications and services on top of that infrastructure, directly solving practical problems. Both are indispensable and jointly promote ecosystem development.

Compared to Coins, Tokens have greater scalability and implementation flexibility. The value of Coins is limited to infrastructure development; if they fail, there is often no way to turn around. Tokens, however, can continuously iterate applications. Even if one application is not well received, developers can launch new products. For example, MakerDAO expanded from stablecoins into the RWA (Real-World Asset Tokenization) field.

In terms of volatility, Tokens usually outperform Coins significantly. The price swings of UNI, SNX, MKR are often higher than BTC and ETH, especially in bull markets. This provides more opportunities for short-term investors but also entails higher risks.

Notable Token Examples to Watch

UNI (Uniswap’s native token)

In June 2022, UNI dropped from a high of $45 to $3.1, a decline of 93%. Although it rebounded somewhat, it has been oscillating between $3 and $9, with the market generally expecting this range to be the bottom.

MATIC (Polygon Layer-2 network token)

In 2021, it experienced a rapid decline from $2.6 to $0.6, followed by a strong rebound. By early 2023, it rebounded to $1.5, demonstrating strong resilience and upward momentum, making it relatively suitable for short-term trading.

APE (Bored Ape NFT governance token)

Fell from a high of $32 in March 2022 to $1, a drop of 97%. Long-term, it has lacked significant rebounds, but the market expects a potential oversold rebound towards the end of the year.

Two Ways to Invest in Tokens

Method 1: Spot Trading

Spot trading involves full payment based on actual assets. For example, if UNI is priced at $3, a buyer pays $3 to acquire 1 UNI, gaining full ownership.

Risk Reminder: Beware of fake tokens with the same name. Some malicious teams copy well-known token names to issue tokens with the same name but no value. The way to prevent this is to verify the token’s contract address via official websites or blockchain explorers to ensure you are purchasing the genuine, official Token.

Method 2: Margin Trading

Unlike full payment in spot trading, margin trading uses leverage. For example, using 10x leverage to go long on UNI at $3, you only need to invest $0.3 to control a position of 1 UNI.

Key Point: These trades usually do not involve actual token delivery, so there is no risk of fake tokens. However, high leverage entails high risk. Considering the higher volatility of Tokens compared to Coins, it is recommended not to exceed 10x leverage and to carefully control position sizes.

Practical Steps for Token Trading

Step 1: Choose a secure trading platform regulated by reputable authorities to ensure fund safety.

Step 2: Enter the target Token code (e.g., UNI) in the platform’s search box to find the corresponding trading pair.

Step 3: Fill in trading parameters according to your strategy, including direction (buy/sell), trading type, quantity, leverage, stop-loss and take-profit prices, etc.

Step 4: Confirm the parameters are correct and click the order button to execute the trade.

Summary of Investment Recommendations

Tokens represent the innovative direction of the application layer in the crypto ecosystem, characterized by high volatility and diverse application scenarios. When participating in Token investments, adhere to principles such as: understanding the fundamental differences between Token and Coin; assessing the security of the issuing blockchain; choosing trading methods cautiously; controlling risk exposure; and avoiding large investments in unfamiliar assets. Through learning and practice, you can better seize opportunities and avoid risks in Token investing.