What is a Token? Essential Basic Knowledge of Tokens Before Investing and the Core Differences Between Tokens and Coins

In the world of cryptocurrencies, the concepts of Token and Coin are often confused. In the early days when projects like Bitcoin and Litecoin appeared, the industry only used the term Coin. It wasn’t until Ethereum was born and introduced the ERC-20 token standard that the term Token gradually became popular. As the blockchain ecosystem expanded, both terms were translated into “tokens” or “cryptocurrencies” in Chinese, leading many investors to fail to distinguish their fundamental differences.

What exactly is a Token? A one-sentence definition

A Token is a digital asset issued on an existing blockchain, representing specific rights, usage, or investment certificates, which can be traded and transferred on the blockchain network. In simple terms, it is a token issued using someone else’s blockchain infrastructure.

Since Ethereum launched the ERC-20 standard in 2015, any developer can create their own Token on Ethereum. To date, Ethereum remains the blockchain platform with the largest issuance of Tokens worldwide. Because of this feature, Token is essentially a broad concept, not the name of a specific token. DeFi tokens, Layer-2 ecosystem tokens, NFT project tokens (such as APE, SAND) all fall under the category of Tokens.

Token can be divided into three main types

According to the classification standards of the Swiss Financial Market Supervisory Authority (FINMA), Tokens are mainly divided into three types:

Payment Tokens aim to achieve fast, secure, and low-cost payment functions. Stablecoins are a typical example; they are pegged to fiat currencies, making transaction risks relatively controllable.

Utility Tokens provide access rights or usage passes for blockchain applications. Most ERC-20 tokens on Ethereum belong to this category; users must hold these tokens to use the corresponding applications or services.

Asset-backed Tokens represent investment rights in a project. Holding an asset-backed Token means you are a participant in the project and can share the value growth brought by the project’s development. However, note that asset-backed Tokens in the crypto space usually do not confer company ownership or dividend rights.

In practical applications, a Token often possesses two or even three of these characteristics simultaneously, and classification is not as clear-cut as in theory.

What is the fundamental difference between a Token and a Coin?

The core difference: Coins have their own independent blockchain, while Tokens do not.

Bitcoin runs on the Bitcoin blockchain, and Ether runs on the Ethereum blockchain; they are native assets of their respective networks. But Tokens are different—they are built on existing blockchain ecosystems, such as MATIC built on Ethereum, LINK also on Ethereum.

This fundamental difference leads to differences in application capabilities. Coins are usually used to build infrastructure and support the operation of the entire network, while Tokens develop various applications and services on top of existing infrastructure.

From a functional perspective, Coins are mainly used for payments and staking, whereas Tokens have more diverse uses, including payments, staking, governance voting, etc. In terms of issuance, Coins are typically obtained through mining, while Tokens are often issued via ICO, IDO, IEO, and other fundraising methods.

Common Coins include BTC, ETH, SOL, DOT, ADA, which are native tokens of top-tier public chains, while MATIC, SAND, COMP, LINK, UNI, MKR, AAVE are typical examples of Tokens.

Invest in Tokens or Coins? Both have their advantages

There is no absolute answer to this question, as both are closely related and each has its own strengths.

Think of Coins as the foundational infrastructure builders of the public chain layer, while Tokens are application developers on this foundation. Coins solve underlying network issues, while Tokens address specific user application needs. Both are indispensable and complement each other.

Compared to Coins, Tokens offer greater service extensibility and more room for innovation. The failure of a single Coin often means the end of the entire project (e.g., QTUM, BTM did not meet expectations), but Tokens are different—if one application fails, new applications can still be launched. For example, MakerDAO continuously introduces new services and product lines to adapt to market changes.

Investment risks and opportunities coexist. Tokens tend to be more volatile than Coins. DeFi tokens like UNI, SNX, MKR often experience price swings exceeding those of BTC and ETH, especially during bull markets, with more intense fluctuations. This creates more opportunities for short-term traders but also higher risks.

How to invest in Tokens? Two core methods

Method 1: Spot Trading

Spot trading is the most direct way to invest. You purchase real tokens with actual funds, and once the transaction is completed, you own the tokens outright. For example, if UNI is priced at $3, you buy 1 UNI for $3, and after the trade, the token belongs to you.

But here’s an important tip: beware of fake tokens with the same name. When a token’s value rises, scammers may issue tokens with the same name to deceive newcomers. They might create a “ABC” token with the same name, but it’s worthless and no one will buy it. Once you buy, you could be stuck in a dilemma. Therefore, before purchasing, always verify the token’s contract address via the official website or blockchain explorer to ensure you are buying the genuine project token.

Method 2: Margin Trading

Besides holding actual tokens, you can also participate in Token price movements through margin trading. This method does not require full capital; you only need to pay a portion as margin to operate larger positions.

Using 10x leverage to trade UNI at $3, for example, means you only need $0.3 to control a 1 UNI position. If trading via CFDs or U-based contracts, you do not actually hold the real UNI tokens—you’re simply betting on the price rise or fall.

Leverage trading carries significant risks. The inherent volatility of Tokens, combined with leverage, greatly increases the risk of liquidation. Newly issued tokens are even more volatile, with daily drops of 30% or more possible. Therefore, always control your leverage ratio, generally not exceeding 10x, and set proper stop-loss and take-profit levels.

Basic steps for Token trading

Whether spot or margin trading, the basic process is similar:

Step 1: Choose a trading platform and register. The key is to select a safe, regulated, reputable platform. The platform’s security directly affects your funds’ safety.

Step 2: Complete account verification and deposit funds. Submit identity information as required and verify, then deposit via bank transfer, Alipay, or other payment methods.

Step 3: Search and select the Token. For example, input “UNI” in the search box to find the Uniswap token.

Step 4: Set trading parameters. Fill in buy or sell orders, trading amount, leverage (if margin trading), stop-loss and take-profit prices according to your strategy.

Step 5: Place the order. Confirm the parameters are correct and click the order button. The platform will display your position and floating profit/loss in real-time.

In conclusion

Tokens and Coins represent two different dimensions of the crypto world. Coins are the infrastructure, while Tokens are the application layer. Understanding this distinction is crucial for investment decisions. Tokens attract many investors due to their diverse applications and innovation potential, but their higher volatility also requires investors to have stronger risk management skills. Regardless of which you choose to invest in, always select legitimate, secure trading platforms and keep risk management in mind.