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Altcoins, coins, and tokens: What’s the difference?

Posted on Sep 6, 2023
Altcoins, coins, and tokens: What’s the difference?

If you're just venturing into the world of cryptocurrency, the lingo can be quite overwhelming. This is primarily because the technology and its associated terms are in flux, with their meanings often shifting as the field evolves. Even seasoned crypto enthusiasts might mix up terms, given the lack of universal definitions.

Key Points:

  • The words altcoins, coins, and tokens have distinct technical meanings but are often used interchangeably.
  • Understanding the context is sometimes more crucial than the exact definition.
  • Generally speaking, a coin is a cryptocurrency with its own unique blockchain, while a token is a cryptocurrency or digital asset that operates on another cryptocurrency’s blockchain.

Let's look at some foundational cryptocurrency terms: coins, altcoins, and tokens. Do they mean the same thing? Most experts would say no. However, they are often used as if they do:

  • Tokens might be introduced during initial coin offerings (ICOs), despite not being actual "coins".
  • Some regard tokens as altcoins, despite there being a clear distinction.
  • A major crypto exchange labels all tokens as altcoins, but categorizes all digital assets as tokens, technically speaking.

Feeling a bit lost? It's alright; even the experts occasionally fumble.

Though distinguishing between various crypto terminologies might feel like splitting hairs, it's beneficial to get a grasp of the core terms. Even if their exact meanings shift or remain elusive, having a foundational understanding can be handy.

Navigating the world of crypto can feel like diving into a maze of terminologies. But here's a primer to guide you through the nuances of altcoins, coins, and tokens.

What Is Altcoin?

Altcoins, often termed as "alternative coins," encompass all cryptocurrencies excluding Bitcoin (BTC). Originating from the notion of being alternatives to Bitcoin and traditional fiat currencies, their name captures their essence well. Born in the aftermath of Bitcoin, which itself was introduced post the global financial crisis of 2008–09, altcoins first appeared in 2011. The term "altcoin" is a blend of "alternative" and "cryptocurrency," highlighting their difference from Bitcoin, the inaugural cryptocurrency that introduced blockchain technology to the world.

Bitcoin, with its pioneering status, became the “gold standard” of cryptocurrencies, transforming the financial landscape with its groundbreaking blockchain technology. It has secured its place as the cornerstone among blockchain-based cryptocurrencies, given its first-mover advantage. In contrast, the inception of altcoins was motivated by desires to refine and augment Bitcoin's foundation. While early altcoins primarily sought to enhance Bitcoin's transaction efficiency and energy utilization, subsequent generations of altcoins have embraced diverse objectives, each molded by its developer's vision.

Indeed, the crypto market has witnessed a surge in these altcoins, with thousands now in circulation. Ranging from cryptocurrencies like Litecoin (LTC) and Ether (ETH) to countless others, they've addressed both the technical and functional challenges posed by Bitcoin. In the realm of cryptocurrency valuations, it's common to see altcoins priced in Bitcoin, given BTC's dominant stature.

For investors diving into the crypto sphere, comprehending the essence, advantages, and potential pitfalls of altcoins is crucial. As the crypto domain grows, altcoins undoubtedly play an increasingly pivotal role in the broader ecosystem, making understanding their functionalities and distinctions essential.

Types of altcoins

Altcoins, the alternative cryptocurrencies to Bitcoin, offer a diverse range of options, each tailored to serve specific purposes and functions within the digital finance ecosystem. These variants can be broadly grouped based on their underlying mechanisms and goals.

One of the primary distinctions lies in their consensus mechanisms. Altcoins often adopt either the proof-of-work (PoW) or proof-of-stake (PoS) mechanisms. PoW requires participants to solve complex cryptographic puzzles to validate transactions, consuming significant energy in the process. On the other hand, PoS allows holders to "stake" their coins as collateral to validate transactions, emphasizing ownership and reducing energy consumption.

Additionally, the altcoin domain has seen the rise of stablecoins, which aim to peg their value to a stable asset, like the US dollar, ensuring lower volatility compared to other cryptocurrencies. This stability makes them an attractive option for transactions and as a bridge between the crypto and traditional financial world.

Another significant category is decentralized finance (DeFi) altcoins. These tokens power DeFi platforms and projects that aim to recreate traditional financial systems like loans, interest accounts, and insurance without intermediaries, all on blockchain technology.

In essence, the altcoin landscape is rich and varied, offering solutions ranging from energy-efficient consensus mechanisms to financial tools that challenge traditional systems. As the crypto world continues to evolve, these categories help investors and enthusiasts navigate the complex and ever-expanding world of digital currencies.

PoW and PoS altcoins

The Bitcoin network employs the proof-of-work (PoW) consensus model to authenticate and record transactions. This system, which requires significant computational power, is also the backbone for other cryptocurrencies, including Litecoin (LTC), Bitcoin Cash (BCH) and Zcash (ZEC).

Contrastingly, the proof-of-stake (PoS) model introduces a different approach. Here, validators, rather than miners, are responsible for transaction verification. This method emphasizes coin ownership and reduces the environmental impact, primarily because it doesn't rely on energy-consuming puzzles.

Recognizing the advantages of PoS, especially in terms of energy efficiency, Ethereum is in transition from PoW to PoS. Other cryptocurrencies have already adopted the PoS mechanism. For instance, Cosmos (ATOM) and Tron (TRX), both leverage the PoS model, showcasing the growing trend towards more sustainable consensus methods in the crypto space.

Stablecoins

Stablecoins have emerged as a solution to the pronounced volatility that has characterized the cryptocurrency market since its inception. Unlike typical cryptocurrencies, stablecoins are designed with stability in mind, and their value is pegged to tangible assets or widely accepted fiat currencies. For example, a stablecoin such as Tether (USDT) is pegged to the US Dollar, maintaining a value close to $1.00.

This pegging mechanism involves the issuer holding a reserve of assets equivalent to the circulating stablecoin supply. Such reserves could be in the form of fiat money, precious metals, or even other cryptocurrencies. By having these assets, the issuer ensures that even if the stablecoin faces challenges or collapses, its holders will have a safety net and can redeem their coins.

Several notable stablecoins have gained prominence in the market, with Tether's USDT, MakerDAO's DAI, and the USD Coin (USDC) being some of the most recognized. Their significance in the financial ecosystem has been underscored by major financial entities adopting them for transactions. Illustrating this, in March 2021, Visa Inc., a global payment processing titan, unveiled plans to settle select transactions using USDC over the Ethereum blockchain. This move not only validated the reliability of stablecoins but also indicated a growing trend towards their broader acceptance in conventional financial systems.

Security Tokens

Security tokens represent a groundbreaking innovation in the financial sector. Essentially, they involve the process of tokenization, wherein real-world assets – be it real estate, stocks, or any tangible asset – are converted into digital tokens that can be traded on cryptocurrency platforms or digital securities exchanges. The crux of their value hinges on the underlying asset they represent; if the asset isn't properly secured or held, the token's intrinsic value diminishes, since it doesn't stand for a tangible equivalent.

Owing to their nature and resemblance to traditional securities, security tokens fall under the purview of regulatory bodies like the Securities and Exchange Commission (SEC). Their main function is to provide investors with an asset-backed digital representation of their rights to the underlying asset.

A noteworthy moment in the evolution of security tokens occurred in 2021 when Exodus, a renowned Bitcoin wallet company, executed a Reg A+ token offering that complied with the SEC's standards. This innovative move paved the way for $75 million of the firm's common stock shares to be tokenized on the Algorand blockchain. What made this particularly significant in the annals of finance was its status as the first-ever offering of a digital asset security that granted equity in a U.S.-based entity.

Utility Tokens

Utility tokens serve as the linchpin for various blockchain-based platforms and ecosystems. Their primary role isn't as a simple medium of exchange but as a means to access certain functionalities within their respective networks. These tokens can be leveraged to procure services, offset network-associated fees, or even claim rewards.

One notable example of a utility token is Filecoin, a decentralized storage system. Users employ Filecoin tokens to secure storage space on its network, underlining the practical use cases for these digital assets.

Similarly, Ether (ETH) is a quintessential utility token, indispensable for the smooth functioning of the Ethereum platform. It facilitates operations on the Ethereum blockchain, acting as 'gas' for transactions and smart contract executions. Moreover, unique strategies have been devised using utility tokens, as exemplified by USTerra's approach to stabilize its value. In an attempt to peg its value to the U.S. dollar—a peg it momentarily lost on May 11, 2022—the platform ingeniously mints or burns two specific utility tokens. This mechanism applies either downward or upward price pressure to achieve stability.

Though utility tokens are available for acquisition on various exchanges, their true essence lies in their utility. They are designed to be consumed or used within their respective ecosystems, ensuring the smooth operation and enhancement of blockchain networks.

Meme Coins

Meme coins, often characterized by their playful or whimsical nature, stem from jokes or parodies of established cryptocurrencies. Despite their seemingly lighthearted inception, they have the potential to garner significant attention and popularity in a fleeting period, frequently fueled by well-known internet personalities or investors seeking to capitalize on brief market surges.

This phenomenon came prominently into the limelight during what many referred to as the "meme coin season" spanning April and May 2021. During this period, a proliferation of these types of altcoins experienced meteoric rises, with several securing staggering percentage gains. It is important to note that the valuation of these coins is often propelled by speculative trading rather than inherent value or utility. This can sometimes foster volatile market environments, where prices can experience extreme fluctuations based on social media trends and influencer endorsements, rather than fundamental factors.

Furthermore, the meme coin trend highlights a shift in the cryptocurrency landscape, where community engagement and viral marketing have become potent drivers of a coin's success. Potential investors should tread cautiously, as the hype surrounding meme coins can sometimes overshadow the actual substance or utility they offer, possibly leading to inflated market bubbles and subsequent crashes.

DeFi altcoins

Blockchain-driven DeFi (Decentralized Finance) stablecoins are revolutionizing the financial landscape by offering a decentralized alternative to traditional banking mechanisms. These digital assets enable holders to lend and borrow cryptocurrencies, granting them opportunities to earn passive income without the intervention of traditional intermediaries like banks.

For instance, Compound (COMP) is a prominent DeFi platform that offers a decentralized lending protocol. It allows users to earn interest or borrow assets against collateral directly on the blockchain.

Synthetix (SNX) stands out as a synthetic asset platform. Users can mint and trade a variety of synthetic assets, which mirror the price of real-world assets, be it fiat currencies, commodities, or other cryptocurrencies.

Uniswap (UNI) takes a unique approach by offering an automated liquidity protocol. It allows for decentralized token swaps, and users can earn fees by providing liquidity to its pools.

The rise of these DeFi platforms exemplifies a larger trend: the democratization of finance. They're not just tools for trading but represent a more accessible and open financial system. However, as with all investments, it's crucial for potential investors to conduct thorough research and understand the intricacies and risks associated with DeFi before diving in.

Governance Tokens

Governance tokens serve as an innovative means to empower their holders with participatory rights within a specific blockchain ecosystem. They essentially act as a "voice" for users, granting them the authority to vote on protocol changes, upgrades, or even the strategic direction of a Decentralized Autonomous Organization (DAO).

While fundamentally, these tokens can be categorized as utility tokens due to their function on a private blockchain, their distinct purpose sets them apart. Unlike typical utility tokens that might be used to access services or functions within a blockchain, governance tokens embed their holders into the decision-making process of the network. This participatory role is especially vital in DAOs, decentralized entities that run through pre-set rules and without centralized control, ensuring decisions are made collectively.

The advent of governance tokens underscores a broader shift in the blockchain space towards more decentralized and democratized platforms. The holders of these tokens aren't just passive users; they actively shape the direction and future of the platform. This fosters a sense of community ownership and responsibility, further solidifying the promise of decentralized networks.

However, potential investors and participants should understand that with this power also comes the responsibility to be informed. Active participation in governance requires understanding the complexities and potential repercussions of decisions made on the platform.

Future of Altcoins

Historical parallels can be drawn between the mosaic of local currencies that once proliferated in the U.S. during the 19th century and today's vast sea of altcoins. Before the advent of the federally issued dollar, a myriad of unique local currencies, backed by varied instruments, was in circulation throughout the United States. A striking resemblance exists between these now-extinct local currencies and the multitude of altcoins in today's digital realm.

Just as local banks of yesteryears issued their own currencies, sometimes underpinned by dubious or non-existent reserves, we see a staggering array of altcoins today. Each purports to address distinct challenges or capture niche market segments. Much like the 19th-century landscape, the sheer number and variety present both opportunity and risk for modern investors and users.

While predicting the future of the cryptocurrency domain is challenging, it's improbable that the vast array of altcoins will coalesce into a singular dominating cryptocurrency. However, it's equally plausible that many of the currently listed altcoins might vanish into obscurity. The future likely holds space for a select cadre of altcoins, those bolstered by tangible utility, compelling use cases, and robust blockchain foundations.

Diversification within the realm of cryptocurrencies might tempt many, given the often more approachable price points of altcoins compared to industry giants like Bitcoin. But it's crucial to tread with caution. The cryptocurrency market, irrespective of coin pedigree, remains nascent, dynamic, and unpredictable. As the crypto sector continues its dance with global finance, a judicious and well-researched approach is advised for all potential participants.

Should you consider investing in altcoins?

Altcoins present a unique opportunity for those considering diversifying their cryptocurrency investments. Delving into the world of altcoins requires a proactive approach, as they offer varied utilities and functions. While Bitcoin has primarily solidified its reputation as a store of value, many altcoins venture beyond this, spearheading innovative solutions and functionalities in the crypto landscape.

However, the vast expanse of available altcoins makes discernment vital. With the proliferation of these coins, pinpointing those with genuine potential amidst a sea of ephemeral and potentially dubious projects can be daunting. The allure of significant returns is often counterbalanced by the inherent risk, as a considerable portion of emerging altcoins might falter or, in worst-case scenarios, be outright scams.

For discerning investors ready to delve deep into research, altcoins can be a fascinating addition to a cryptocurrency portfolio. But for those seeking a more straightforward or lower-risk gateway into the crypto world, considering cryptocurrency-associated stocks might be a more prudent avenue.

In essence, while altcoins harbor potential for seasoned crypto enthusiasts ready to undertake thorough research, caution remains paramount. If you opt for altcoin investments, they should ideally represent only a fraction of a diversified portfolio, ensuring that risk is managed and spread effectively.

What is altcoin season?

"Altcoin season" is a phenomenon in the crypto world, denoting a time frame when numerous altcoins witness substantial price increases, often overshadowing the price trajectory of both Bitcoin and traditional fiat currencies such as the US dollar. This season gained prominence around 2017, parallel to Bitcoin's meteoric rise, spurred significantly by Ethereum introducing innovative smart contract capabilities, which catalyzed the inception of various new cryptocurrency projects.

While Bitcoin's impressive price escalations have rendered lucrative outcomes for many an investor, there's an equally enthusiastic cohort that delves into altcoin markets in the pursuit of outsized returns. This fervor, in part, instigates the altcoin season, making it a cyclical trend to watch.

Predicting the onset of an altcoin season remains elusive, with no definitive indicators guaranteeing its arrival. However, tools like the Altcoin Season Index by the Blockchain Center have emerged, offering insights into market dynamics by evaluating if Bitcoin or altcoins are currently in the ascendancy. The emergence of nonfungible tokens (NFTs) and the soaring popularity of meme coins, such as Dogecoin and Shiba Inu, further add complexity, often acting as catalysts for new altcoin cycles.

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Any questions?

Altcoins can be purchased on cryptocurrency exchanges such as Binance, Coinbase, Kraken, and Bitfinex. Always use reputable exchanges and do your research before buying.

To buy altcoins: Register on a reputable cryptocurrency exchange. Verify your identity if required. Deposit fiat currency (e.g., USD, EUR) or Bitcoin. Search for the desired altcoin. Choose the amount to buy and confirm the transaction. Securely store your altcoins in a wallet.

Altcoin season refers to a period when altcoins outperform Bitcoin in terms of price gains. It's hard to predict exact dates, but it's typically characterized by a surge in altcoin prices and market sentiment. Monitoring market trends and indices like the Altcoin Season Index can offer insights.

It's impossible to predict with certainty which altcoin will surge next. However, researching market trends, technological advancements, and community support can help identify potential high-performing altcoins. Always conduct thorough research before investing.

The "best" altcoin can vary based on investment goals, utility, and market trends. Popular choices include Ethereum (ETH), Ripple (XRP), and Litecoin (LTC), among others. It's essential to research and consider your investment strategy before determining the best altcoin for you.

The potential of an altcoin depends on its utility, technological innovation, and market adoption. Ethereum (ETH), due to its smart contract capabilities, and newer projects like Cardano (ADA) and Polkadot (DOT) often get attention. However, potential can change over time, and it's crucial to do thorough research and stay updated on market trends.

Creating an altcoin involves: Forking an existing cryptocurrency or building from scratch. Defining the coin's purpose, supply limit, and consensus mechanism. Developing the code and setting up a blockchain. Ensuring security measures. Launching through an Initial Coin Offering (ICO) or other methods. Getting it listed on exchanges. Always consult with blockchain developers and conduct thorough research before starting.

The best altcoin to invest in varies based on market conditions, investor goals, and technology behind the coin. Popular choices have historically included Ethereum, Litecoin, Ripple, and more. However, always conduct your research, consult financial advisors, and review market trends before investing.

The choice of altcoin to buy depends on individual investment goals, risk tolerance, and market analysis. Ethereum, Litecoin, Ripple, and Cardano have been popular choices, but it's crucial to do thorough research or consult a financial expert before making a decision.