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What is the difference between Cryptocurrencies and Tokens? - #CryptoTrading

On the value of altcoins. Some cryptocoins are meant for payments and remittance, some are dApp tokens, some are quick spinoffs only used for pump and dump schemes.
Trading Strategy  .  Published  · By KarlVonBahnhof

The fundamental value of altcoins derives from their usage, as it is with any cryptocurrency. As the blockchain space grows though, frameworks are being developed to categories different types of cryptoassets which makes the assessment of fundamentals clearer. This is not done by crypto-hipsters for fun, a clear framework is needed so that regulatory organs can make decisions on how to regulate which asset.

For instance, in the UK cryptocurrencies do not have a specific place in the regulatory framework, but a cryptoasset will be regulated if it takes on sufficient characteristics of another, already regulated asset.

Types of altcoins

In 2016, when alternative cryptocurrencies started booming, the community liked to focus on differences in technology. Namely, which technology is the most novel, disruptive and revolutionary. Ethereum came about like this, prior to ETH there was no asset to act as a fuel for decentralized apps.

In 2018, we have hundreds of cryptocurrency projects that sound interesting but have very little practical use. The focus shifts on how is each particular altcoin used. The underlying technology is secondary; it may be the best known way to implement the function of the cryptocurrency but the function is decided first.

Cryptocurrencies as means of payment (Crypto-Money)

Some altcoins were developed as means of payment, in the same sense as Bitcoin was developed as means of payment. A cryptocurrency used for payments addresses certain weaknesses of the conventional payment system.

One such issue is the inability to exchange money freely without inevitably being flagged for false positive alerts, such as sending money to a far-away country. Another issue is the limited availability of banking in many areas of the world or the attempts of total control over how an individual spends their money: Here, an upper middle class person in Argentina received an accusation in tax fraud because the revenue office does not believe she does not have a hired cleaner.

Alternative cryptocurrencies developed for payments typically attempt to solve one of the well-known weaknesses of Bitcoin, the original decentralized payment network:

  • Implementing full privacy to correct the pseudonymous nature of Bitcoin (DASH, Monero)
  • Focusing on scaling and transaction throughput (BCH)
  • Making transactions faster and cheap or even free (LTC, IOT)

Some altcoins were even developed with the idea that there is still some sort of centralized governance needed, such as Ripple.

In the long run, it is not unreasonable to expect that BTC could be used for larger transactions, such as buying a house, while tiny transactions would run on an alternative blockchain, such as ones between IoT devices.

The value of payment-focused cryptocurrencies derives from the strength of the network - traders follow metrics like network activity, number of ATMs, the size of the OTC market, payment implementations.

Interesting Crypto-Money altcoins:

  • Monero

Monero is scalable and mined in a decentralized fashion because XMR mining is done via GPU which limits the usage of ASICs (application-specific circuits).

Monero payments are unlinkable, untraceable and fully anonymous which leaves the user so private that it is the preferred cryptocurrency in cryptojacking.

  • DASH

Dash is short for digital cash. The pivotal properties of DASH are anonymous blockchain and masternode system. The privacy system is less bulletproof than the one of Monero but the implementation of payment gateways is more widespread because implementing DASH requires less work than implementing Monero.

  • Litecoin

LTC used to be the second most popular altcoin before cryptocurrencies like ETH and XRP emerged. It was created to handle massive transaction volumes but so far, it was mostly used as a guinea pig for Bitcoin blockchain innovations due to the similarity of the two. Along with DOGE, it has been since its inception used by traders to move money between exchanges for less fees.

Cryptocurrencies as dApp tokens (Crypto-Fuel)

Some altcoins were developed with blockchain technology in mind. The original idea was such that whoever wants to engage with a decentralized app (dApp) needs to use an appropriate token to do that.

While that is still the case, on the part of the user it does not need to involve holding dozens of separate tokens since we have projects like Kyber Network that can do atomic token swaps between different tokenized assets.

These cryptoassets are still used for speculation, though. Vitalik Buterin, the creator of Ethereum, never endorsed ETH as a value storage. It was not supposed to be money, it is supposed to be used to fuel certain type of apps; Vitalik himself said he does not even care about the price of ETH at all.

Why are these tokens speculated so much then? The answer is Blue ocean Strategy. When ETH emerged, traders argued that crypto-fuel tokens were downplaying the monetary value of the coin on purpose: To show that it is not just another “better money”. Tokens are a new category,one that first came to existence with blockchain, and demand for this type of asset was quickly created.

The value of crypto-fuel tokens is expected to surge with the demand, but ideally with an actual (non-speculative) demand.

Interesting Crypto-Fuel altcoins:

  • Ether, ERC20 compliance tokens

Ethereum is the original blockchain for development of decentralized applications and execution of complicated smart contracts. Simplified smart contracts, for example an escrow, can run on Bitcoin blockchain as well, but Bitcoin does not have the extent of programmable properties as Ethereum does.

At first, ETH was deemed the scalable cryptocurrency with fast and cheap transactions. This view was quickly annihilated when several dApps running on Ethereum became popular and started flooding the blockchain with data (Cryptokitties, for one). Ethereum is also the blockchain on which the 2017 ICO bubble happened, likewise showing how easy it is to make Ethereum transactions slow and expensive.

There have since been projects addressing this issue, just like it happened with Bitcoin. We got a new generation of app-platform cryptocurrencies that focus on scalability (EOS, ZIL) and we also got the sidechain implementation which allows for existence of decentralized cryptoasset exchanges and blocchain games that do not spam the network and are free to use.

Large amount of people hold Ethereum as investment. There in infinite amount of Ether to be mined but the inflation is kept low, in summer 2018 it was even lowered with the decrease of ETH block reward.

Some argue that especially with POS implementation the monetary value of ETH could stabilize and make for a value storage than legacy money.

Cryptoassets that can be exchanged for another predefined asset (Crypto-Vouchers)

Stablecoins belong to this category: They are assets living on blockchain that have a value redeemable in another asset, like IOUs.

There can be IOUs for other assets than money, though. A cryptocurrency can also be a tokenized access to service or an ecommerce gift card.

Security Tokens

The concept of utility vs security token is relatively new. It is a regulatory term that is used for tokens that represent an investment in entrepreneurial efforts of someone else, much like investing in stocks. This type of tokens is becoming regulated because they resemble stocks, an already regulated asset.

In the decentralized organization concept, anyone can become a “shareholder” by buying a token. The company’s work is then focused on revenue generation in whatever the company decides to call their profit unit.

The company’s token changes value based on the company’s revenues.

  • BitShares, DAO

BitShares was the first platform coming up with the concept of decentralized organization. The idea later became infamous with the fall of DAO, which was hacked but the consequences of the hack were mitigated by the ETH hard fork that produced ETC.

Shitcoins

Last category are shitcoins. It is important to note that there is a lot of people who want to call perhaps EOS or Tezor a shitcoin, but they do not fall into this category. Original shitcoins were not results of a cryptoasset project that seemed to have failed and disappointed, shitcoins are the cryptoassets that never had any value proposition in the first place.

We do see increasingly less of them in the blockchain space.

It is a now forgotten part of history but in 2016, the golden era of Poloniex, we did have coins that were seriously only created as an ego-blast of someone who could afford to pay the programmer. Max Keiser had his own coin, MaxCoin.

If you checked their websites you saw random strings of meaningless buzzwords, such as

Vcash was engineered to be innovative and forward-thinking. It prevents eavesdropping and censorship, promotes decentralized, energy efficient and instant network transactions. (Now defunct vanillacoin.net)

The value of shitcoins was always purely speculative. They might pump and you might be coming early enough to cash in but that’s it.

The 2017 version of the shitcoin mania was the worse end of the ICO bubble - fake token sales with barely a landing page, no plans to ever develop anything and fake names for team members. The actual people behind the scams would collect the crowdfunding and vanish, and like with the shitcoin bubble there were some brave traders who earned good money flipping tokens of proven scams on the greater fool.

In 2018 we see less of this activity, not because of regulation but because of how crowded the ICO space has gotten. It is increasingly difficult to stand out just like it is increasingly difficult to pump and dump maturing cryptocurrencies.

References

BURNIE, Andrew; BURNIE, James; HENDERSON, Andrew. Developing a Cryptocurrency Assessment Framework: Function over Form. Ledger, [S.l.], v. 3, july 2018. ISSN 2379-5980. Available at: http://ledgerjournal.org/ojs/index.php/ledger/article/view/121. Date accessed: 22 sep. 2018. doi:https://doi.org/10.5195/ledger.2018.121.

About the author

Written by KarlVonBahnhof

KarlVonBahnhof also on Reddit, Chris belongs to the crypto trader class of 2013. Located in the Americas most of the time, you're most likely to meet at r/BitcoinMarkets though.

 

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