Coins are digital currency that can be used to pay for goods and services. Tokens are programmable assets that are managed through a smart contract and a distributed ledger. Tokens are classified as either Security Tokens or Utility Tokens and are sold (issued) to raise capital for companies. Security tokens are created as investments and are analogous to owning shares in a company as token holders receive dividends and have voting rights with the issuing company. Utility tokens are not created as investments and are analogous to digital coupons that only provide you with access to the product or service being developed by the issuing company.
Just like any other fiat currency, coins are just digital currency or electronic money.
The money that we use in our day-to-day activities to purchase goods and services such as the US Dollar, British Pound, Eurozone Euro, or Australian Dollar are fiat currencies that are issued by their respective governments. The supply and value of these fiat currencies are heavily influenced by the decisions made by the central banks of these respective countries/regions (i.e., The Federal Reserve System [FED], Bank of England [BoE], European Central Bank [ECB], Reserve Bank of Australia [RBA]).
It can be argued that the value of a fiat currency is based on the trust that users’ of that currency have in the government and central bank that issues and manages the money supply of that currency.
Bitcoin is the most popular and the first cryptocurrency or coin; however, other popular coins exist such as Ethereum’s Ether and Ripple’s XRP. There are no central authorities governing the supply and value of these cryptocurrencies. There is much controversy surrounding calculation the true fundamental value of cryptocurrencies, however one can argue that the price of cryptocurrency is truly reflected by supply and demand and the trust and faith that crypto-enthusiasts have in them.
Tokens are blockchain-based digital assets and are a unit of value that is being issued by a company. They are programmable assets that are managed via smart contracts and an underlying distributed ledger (i.e., blockchain)
Companies create tokens and sell them to raise capital. There are two types of tokens, basically security tokens and utility tokens.
Security tokens are created as investments. They are often called “digital assets” as there are dividends (i.e., future cash flows) that are paid out to security token holders. Some security tokens (not all) are created such that the security token holders have ownership of the company. For example, the blockchain has a platform that allows these token holders to participate in a voting system that allows them to exercise some control over the company’s decision-making process. Thus, security tokens are analogous to holding shares in a company if you are receiving both dividends and voting rights. Security tokens can increase in value, and can be sold for cryptocurrency or cash.
For example, the Orbyt token is a security token as individuals who complete the KYC (i.e., Know-Your-Client) process and hold more than 100 Orbyt tokens receive a Bitcoin dividend based on 20% of the BitOrb’sprofits. However, the Orbyt token does not provide token holders with ownership of BitOrb or any voting rights in BitOrb’s decision making process.
Utility tokens are not created as investments. They are also known as user tokens or app coins. Companies can issue utility tokens to raise capital; however, utility token holders can only use the utility tokens sold by the company as a means of payment for use on the product or service that is being developed by the issuing company. Intuitively, utility tokens can be perceived as a form of a digital coupon that can be redeemed in the future for discounted fees or special access to a product or service developed by the issuing company. Therefore, use of a utility token is limited and they need to be sold for crypto-coin or fiat money to buy products & services from other companies.