Every digital currency on the market can be classified as one of five types. The distinctions between them are important because they tell you what exactly you’re investing in and who can invest in them.
Coins vs Tokens: This is the biggest distinction between cryptocurrencies. Each digital currency must be one or the other, and here’s the difference—coins have their own blockchain and tokens don’t.
A blockchain is a decentralized, peer-to-peer network that records transactions on a digital ledger.
Most of the big-name currencies are coins.
On the other hand, tokens must be created from a blockchain already in existence like Ethereum. Their protocol exists on top of that blockchain.
Coins function as currency; tokens represent access to “stock” or a product. The value of a token is a little complicated, too.
Tokens are usually released in Initial Coin Offerings (ICOs), which give the investor access to tokenized services or products, or represent a stake in a cryptocurrency company.
Tokens also fall under different SEC regulations depending on whether they represent a utility or a security.
Utility Tokens vs Security Tokens: It’s almost essential that an entrepreneur understand the difference between these two types of cryptocurrency.
The SEC has much stricter regulations for security tokens than it does for utility.
This is because the former, as the name says, act as digital securities.
If you can buy or trade a token on a cryptocurrency exchange without being an accredited investor, then it’s a utility token.
In the most basic terms, a utility token gives an investor access to a product or service. It can represent a discounted rate or early/exclusive access.
If you’re looking at Smart Contracts or DApps, you’re looking at utility tokens.
Security tokens are different. They’re securities that exist on a blockchain and represent part-ownership in a real-world, tradeable asset that is external to that blockchain.
Because they’re regulated by the SEC like securities, you must be an accredited investor to trade them. The SEC decides which tokens are security tokens by determining whether or not an investor will make money based on a third party’s labor.
Stablecoins: Distinctions between the different types of cryptocurrency can be a little obscure. Some companies will try to pass off their security tokens as utility tokens.
And then there’s the debate over whether or not tokens can represent currency (like coins) rather than just access to a service.
To make things even more confusing, stablecoins are often technically “stabletokens.” Stablecoins are a type of cryptocurrency that is “pegged” to traditional assets like government-backed currency or gold.
The advantage with this is that during a “bear” market, investors can move their money from volatile cryptocurrencies to stablecoins (which are theoretically more stable) instead of converting back and forth to USD, which will involve transaction fees.
Then, during a “bull” market, the investor can convert the stablecoins back into more volatile cryptocurrency without much of a cost.
Despite being called coins, however, most stablecoins are actually tokens because they don’t have their own blockchains.
Why should you care whether something is a coin, a token, a security or a utility?
As a potential investor, you need to know the value of the cryptocurrency you’re considering and how current and future SEC regulations will affect it.
And the distinction between coins and tokens marks the two forks in cryptocurrency’s evolution: cryptocurrency as a payment method and as a tokenized security.
The question is: can cryptocurrency replace the US dollar or the stock market—or both?