What is Cryptocurrency and What is a Token?

by | Nov 15, 2018 | Crypto, Cryptocurrency, Token

What is cryptocurrency?

I can’t recall ever being asked specifically, what is cryptocurrency? I have been told that crypto is too confusing and hard to understand. Many times.

I have spent the last 16 months studying this subject from every angle imaginable. Admittedly, it can be confusing….and not just for beginners.

Much of the confusion is due to the fact that people have a tendency to generalize. Words like crypto, bitcoin, altcoins, tokens, blockchain, etc, are used interchangeably.Depending on the context, the same term often has a different meaning. My goal is to clear up the confusion.

Is Everything Crypto?

Crypto is short for you guessed it, cryptocurrency. Both are used interchangeably as a blanket term to cover everything and anything cryptocurrency related. It’s my observation that crypto is the more commonly used term within the industry.

Regardless, it is not likely you would be corrected for the technical misuse of  ‘crypto’ in this space. Ask 100 people from the crypto world ,what is cryptocurrency. Most don’t know the difference, and the rest don’t care.

Common practice is to use both as a reference to the industry as a whole, in the context of it’s most technical meaning, or anywhere on between. I don’t even think ‘industry’ is the proper word for this space…yeah, it’s confusing.

I have explained in previous posts that blockchain is distinctly different from crypto itself. I have written a couple of articles on the subject. They are designed to be a simplified overview for beginners on the history and purpose of blockchain.

If you are interested in the how and why of cryptocurrencies underlying technology, check out ’Blockchain Basics Pt.1

Crypto As A Currency

Crypto basically falls under two categories…cryptocurrencies and tokens. What is cryptocurrency in the technical sense? Any crypto that is ‘mined,’ and meant to be used as a form of digital currency, falls under the category of cryptocurrencies.

I’ll go into more detail on crypto mining in future articles, but I have covered it briefly in part 2 of blockchain basics.

Just as each country has its own currency, there are also a variety of different cryptocurrencies. Bitcoin is obviously the most well known, but there are others such as Monero, Dash, Bitcoin Cash, and Tether to name just a few.

There are also several different categories of cryptocurrency.

Depending on when you read this article, I will either soon be adding, or already have added, a glossary section. I will make sure to add the different crypto categories. They include terms you may have heard such as privacy coins, stable coins, alt coins, etc.

Think about them like car brands. They all look a little different, have different features, and some cost more than others, but at the end of the day they all have 4 wheels and an engine. They’re all cars, and they’re all designed to do the same thing.

Cryptocurrencies fluctuate in value and trade against each other not unlike the forex market for government backed fiat. They are designed to be a fungible asset.

As adoption grows, their purpose is to be used as any other currency to purchase everyday products just like using cash, credit card, or debit.

What Are Tokens?

Tokens on the other hand are not mined, and are not designed to be a currency. They also operate on different type(s) of blockchain than the ‘bitcoin style blockchain’ described in the bitcoin basics articles.

A token is a digital representation of value, or information. Terms like the ‘Internet of Things,’ (IoT) ‘smart contracts,’ and obviously ‘tokenization,’ are referring to token related crypto. They are designed to be the representation of value within a closed ecosystem.

Side note. I just read the previous paragraph and realized that I’m starting to write and sound exactly the opposite of what this site is supposed to be…written in Plain English!

I’ll leave it as an example of how I don’t want to communicate. If you are reading through any of my posts and come across a paragraph written in ‘cryptonese,’ please let me know. Back to english…

TOKEN METAPHOR

Think of tokens as casino chips. You can’t walk into a casino and use cash to place a bet. When you sit down at a blackjack table, the dealer will take your cash and give you back the same value in the form of chips.

These tokens can only be used for the purpose of placing bets, purchasing food and drink from the casino restaurant and bar, and (hopefully) tipping your server or dealer.

Another aspect of casino tokens, is they can only be used at that specific casino. If you want to play at a different casino, you must cash out your chips. When you arrive at the new casino, you purchase new chips.

Just as casino tokens have no value outside of a specific location, (you can’t buy your gas or groceries with casino chips), the same is true for tokens.

They are designed as a token of value specific to the project they are a part of. Generally they also have a specific use within that system.

You could also think of tokens as buying and/or trading baseball cards. You don’t actually own the player on the card, you own a representation of the player. The better a player is, the more his card is worth.

Tokens are in the most general sense, very similar. Instead of representing baseball players, they represent ideas and/or companies that based on their performance, will increase or decrease the value of the token.

HOW TO DETERMINE WHAT A TOKEN IS WORTH

More often than not, a tokens worth is actually based on the perceived value of an idea. For example, in most cases tokens are originally made available (sold) to the public as a form as of crowdfunding.

In other words, raising capital for a blockchain based idea that hasn’t actually been developed yet.

This process is known as an ‘ICO’ or “Initial Coin Offering’ which could more accurately be called a ‘ITO” or ‘Initial Token Offering’ as they aren’t actually coins at all. Welcome to crypto!

The subject of tokenization or tokenomics could easily provide enough material to fill an entire book. Given this article is meant to be an overview, I won’t delve any further at the moment. The thing to remember is this.

Cryptocurrencies are designed to be integrated as another option of payment in the ‘real world.’ Tokens are designed to be used within a specific project for a specific purpose.
One last note on tokens.

More than once I’ve come across information comparing tokens to owning stock in a company. This is an incorrect analogy. Purchasing stock in a company makes you a shareholder. You are now entitled to a percentage of the profit it generates.

Tokens entitle you to ownership of nothing but the token itself. The value of the token is based on the current market price, which is based on the overall sentiment of the project it’s associated with.

I’m not making any judgments as to whether that’s a good or bad thing, I just wanted to make clear the distinction between the two.

Summary Of What Cryptocurrency Is 

This is a very over simplified description of tokens, and crypto in general for that matter, but the big takeaway to the question of what is cryptocurrency is this…

In the broader sense it’s a commonly used blanket term that covers all things crypto related, tokens included. In the technical sense, it is a digital currency that has many benefits over traditional currency. A topic that I have covered in greater detail here.

I’m sure this makes the subject about as clear as mud, but I hope it helps at least a little. The only piece of advice I can offer is this. Understanding how all the pieces of the puzzle fit together is a matter of immersing yourself.

Read as much as you can on bitcoin, blockchain and crypto. Watch videos, listen to podcasts, starting with the areas that interest you most.

Given this space is so new, there truly is a lot of misinformation online…intentional or otherwise. I will be posting links shortly on the resources page to some of the best content and sites I’ve come across to get you started in the right direction.

Cheers!