Cryptocurrencies differ from traditional fiat currencies in a number of ways, and knowing exactly what is meant by a ‘coin’ is key to understanding the whole concept.It’s tempting to think of a cryptocurrency coin – a token with an attached monetary value held in a wallet, and spent on goods and services – as exactly equivalent to a physical coin in your local fiat currency. That too is also a token with an attached monetary value, held in a wallet and spent on goods and services, but the two are far from the same.
A key feature of a cryptocurrency coin, such as a Bitcoin, is that it is highly divisible. Just as a US Dollar or Pound Sterling can be divided into 100 cents or pennies, a Bitcoin can be divided into individual units called ‘satoshis’ – named for the pseudonymous creator of the Bitcoin cryptocurrency.
There are rather more than 100 satoshis to a Bitcoin, however, with 100,000,000 satoshis making up a single Bitcoin. This divisibility gives it immense flexibility, and means that anyone looking to transfer fiat funds into Bitcoin can do so with as little as a single penny regardless of how much a whole Bitcoin is worth.
The divisibility of a given coin is entirely up to its creators. Where Bitcoin is divisible to eight decimal places, Ethereum’s Ether coin is divisible to 18 decimal places.
Coins vs. Altcoins vs. Tokens
Some cryptocurrencies talk of ‘tokens’ rather than ‘coins’, and that’s not a case of semantics. A coin is typically used directly on its own blockchain, the distributed ledger which underpins a given cryptocurrency; a token, by contrast, is usually used on a different blockchain, lacking one of its own. This is not a hard-and-fast rule, however: some native blockchain cryptocurrencies, like Ripple, refer to their coins as tokens; some tokens made specifically for use as currencies are referred to as coins by their creators.
The most common token type is known as ERC20 (Ethereum Request for Comments), and uses the blockchain underpinning the Ethereum cryptocurrency. Creating a token running on someone else’s blockchain is significantly easier than creating your own coin with its own blockchain, so it’s no surprise to find that tokens considerably outnumber coins.
A final term you’ll see is ‘altcoin’, short for ‘alternative coin’. Technically speaking, any coin that isn’t the original Bitcoin – whether that’s Ethereum, Litecoin, Bitcoin Cash, Ripple, or another cryptocurrency – is an altcoin, meaning nothing more than the fact that it represents an alternative coin to Bitcoin. As the number of coins grows, though, the use of ‘altcoin’ is dying out owing to what some see as negative connotations surrounding the term.
The core functionality of a coin is obvious: a way of representing and transferring stored value, just as the physical coins in your wallet represent value and can be transferred to others. For some coins, this is their sole purpose; these are true cryptocurrencies.
For other coins, and especially for tokens, there are functions beyond being a currency. The flexibility of blockchain technology – which allows for a trustless, permissionless, distributed, and unchangeable ledger to be easily shared and used for a variety of purposes – mean that companies around the world are constantly finding new ways to use it, for everything from asset tracking to identity verification. In these ‘cryptocurrencies’, a token or coin may be tied to individual users, physical items, or contracts, or ‘burned’ – taken out of circulation – as time goes on.
“What is its purpose?” is the key question to ask of any coin or token before any money is invested, particularly during Initial Coin Offerings (ICOs) – often-misnamed funding runs which typically feature tokens, not coins, being sold to early investors as a means of raising capital to start a company. Some ICOs leave their users with tokens that have a function, and are thus likely to appreciate in value; others are simply unregulated and unsecured vehicles for speculative investments; still others are outright scams, with ne’er-do-wells taking advantage of the current cryptocurrency fever and the simplicity of launching an ERC20 token to rob investors of their hard-earned cash.