What is the difference between Crypto Coins, Altcoins, Tokens, Utility Tokens, Tokenized Securities?in Cryptocurrency, Altcoins, Newbie
Cryptocurrencies are digital or virtual currencies that use cryptography. Cryptography, on the other hand, is the use of encryption techniques to secure and verify the transfer of transactions. Bitcoin represents the first decentralized cryptocurrency, which is powered by a public ledger that records and validates all transactions chronologically, called the Blockchain. Although many cryptocurrencies have existed prior to Bitcoin, it’s creation marks an important milestone in the realm of digital currencies, due to its distributed and decentralized nature. The creation of Bitcoin precipitated the expansion of a lush and more diverse ecosystem of other coins and tokens, that are often regarded as cryptocurrencies in general, even when most of them do not fall under the definition of a “currency”.
It is important to note that all coins or tokens are regarded as cryptocurrencies, even if most of the coins do not function as a currency or medium of exchange. The term cryptocurrency is a misnomer since a currency technically represents a unit of account, a store of value and a medium of exchange. All these characteristics are inherent within Bitcoin, and since the cryptocurrency space was kickstarted by Bitcoin’s creation, any other coins conceived after Bitcoin is generally considered as a cryptocurrency. The categorization of cryptocurrencies are:
- Alternative Cryptocurrency Coins (Altcoins)
- Utility tokens
- Tokenized securities
Alternative cryptocurrency coins are also called altcoins or simply “coins”. They’re often used interchangeably. Altcoins simply refers to coins that are an alternative to Bitcoin. The majority of altcoins are a variant (fork) of Bitcoin, built using Bitcoin’s open-sourced, original protocol with changes to its underlying codes, therefore conceiving an entirely new coin with a different set of features. Examples of altcoins that are variants of Bitcoins codes are
There are other altcoins that aren’t derived from Bitcoin’s open-source protocol. Rather, they have created their own Blockchain and protocol that supports their native currency. Examples of these coins include
A commonality of all altcoins is that they each possess their own independent blockchain, where transactions relating to their native coins occur in.
Tokens are a representation of a particular asset or utility, that usually resides on top of another blockchain. Tokens can represent basically any assets that are fungible and tradeable, from commodities to loyalty points to even other cryptocurrencies! Creating tokens is a much easier process as you do not have to modify the codes from a particular protocol or create a blockchain from scratch. All you have to do is follow a standard template on the blockchain – such as on the Ethereum or Waves platform – that allows you to create your own tokens. This functionality of creating your own tokens is made possible through the use of smart contracts; programmable computer codes that are self-executing and do not need any third-parties to operate. Tokens are created and distributed to the public through an Initial Coin Offering (ICO), which is a means of crowdfunding, through the release of a new cryptocurrency or token to fund project development. It is similar to an Initial Public Offering (IPO) for stocks. Many are crazy over ICOs as they represent a great way of identifying interesting projects.
The utility tokens are services or units of services that can be purchased. These tokens can be compared to API keys, used to access the service. They are a way to fund projects of shared infrastructure that couldn’t be funded before. To enable such ecosystems to be built some tokens can be “pre-mined” in addition to being sold in “crowd-sales” during tokens launches.
Tokens are representing shares of a business. In addition, considering the SEC announcement any token that can’t pass the Howey test should be considered as a security and fall under the 1934 Security Exchange Act. The Howey test consists of the following:
- Is it an investment of money or assets?
- Is the investment of money or assets in a common enterprise?
- Is there an expectation of profits from the investment?
- Does any profit come from the efforts of a promoter or third party?
Securities and the Howey test
Securities are tradeable and regulated financial assets. It’s important to understand whether each individual crypto coin, Altcoin or token is a security. However, it is irrelevant whether the cryptocurrency is an Altcoin or a token. Instead, the cryptocurrency needs to fulfill particular criteria. In the United States, the Securities and Exchange Commission (SEC) takes each cryptocurrency on a case by case basis. The SEC uses the Howey test to determine whether a security is present in the altcoin and therefore if it should be regulated. The criteria within the Howey test includes:
- An investment of money
- Investors expect to earn profits from their investment
- Investment of money is in a common enterprise
- Any profit come from the efforts of the promoter of the investment of from another third party
Follow us on Twitter