What Are Crypto Tokens?

A crypto token is a representation of an asset or interest that has been tokenized on an existing cryptocurrency's blockchain. Crypto tokens and cryptocurrencies share many similarities, but cryptocurrencies are the native asset of a blockchain.

Crypto tokens are often used to raise funds for projects and are usually created, distributed, sold, and circulated through an initial coin offering (ICO) process, which involves a crowdfunding round.

History of Crypto Tokens

Prior to the 2017 ICO boom, there were cryptocurrency forks from Bitcoin and Ethereum, but Mastercoin was the first known initial coin offering (ICO) and token. J.R. Willet created Mastercoin, which was first revealed on the Bitcoin Forum in January 2012. 'The Second Bitcoin Whitepaper' is the title he gave his document.

Mastercoin was one of the first projects to describe using layers to enhance a cryptocurrency's functionality. The project linked the value of Mastercoin to Bitcoin's value and explained how the project would use the funds to pay developers to create a way for users to make new coins from their Mastercoins.

The Boom of ICOs

Between 2012 and 2016, crypto token creation and ICO increased until 2017-token offerings skyrocketed as investors seemed to become aware of them and the possible increase in value they promised. 2 Developers, businesses, and scammers began creating tokens rapidly in attempts to take advantage of the fund-raising boom-so much so that regulatory agencies began issuing alerts to investors warning them about the risks of ICOs.

IMPORTANT: Not all crypto tokens and ICOs are scams. Many are legitimate efforts to raise funds for projects or startups.

After the Bubble

The ICO bubble burst in 2018 shortly after, initial exchange offerings (IEO) emerged, where exchanges began facilitating token offerings. 5 Yahoo Finance UK. 'Unsustainable Crypto Startup Funding Bubble Has Burst.' Scammers utilized the exchanges to publicize their schemes, despite the exchanges' claims to have investigated the token offerings and minimized investor risk.

Regulators warned exchanges that they had to register with the authorities if they were assisting these fund-raising operations, and they also warned investors about the risks associated with taking part in an IEO. The reasoning for this was that the exchanges might be functioning as broker/dealers or alternative trading systems, which are obligated by law to register.

Cryptocurrency tokens are still being developed and utilized in initial coin offerings (ICOs) to fund projects; whitepapers, which resemble pitchbooks, describe the goal of the token, how it will be sold, how the money raised will be used, and how investors will profit.

Concerns About Crypto Tokens

The single most fundamental problem with crypto tokens is that because they are used to raise funds, they may be and have been used by scammers to steal money from investors.

However, it can be difficult to distinguish between a scam token and one representing an actual business endeavor.

When examining a crypto token, consider the following factors:

Depending on the jurisdiction, registration can be required. Tokens must be registered with the SEC in the US if they are not exempt from being treated as securities.

Examine the backgrounds of the ICO team members. Examine their address and phone number to see if they are a real company. You can also look them up on the Secretary of State's website in the state where they say they are registered. It may be a fraud if the only places you can get information about it are on a bespoke website and white paper.

It could be challenging to investigate initial coin offerings (ICOs) from countries other than the United States. BananaCoin was one such currency that was distributed to collect money for Laotian banana plantations. Following launch, investors were informed they could trade their tokens for funds or bananas of the same value.

On unregulated exchanges located outside of the US, a large number of cryptocurrency tokens are listed. The likelihood of it being a scam is significantly higher if it is not listed on an exchange that is governed.

There are scams even with cryptocurrency tokens published on regulated exchanges.

How Crypto Tokens Work

The terms 'crypto' and 'cryptography' describe the several encryption methods and cryptographic strategies like hashing functions, public-private key pairs, and elliptical curve encryption that protect digital tokens and currencies. Conversely, cryptocurrencies are digital money stored on a blockchain. These systems enable the storing of value and safe online payments.

Crypto tokens are transactional units created on top of existing blockchains by blockchain companies or projects. They are created using standard templates like that of the Ethereum network. Such blockchains work on the concept of smart contracts or decentralized applications, wherein the programmable, self-executing code is used to process and manage the various transactions that occur.

FAST FACT: A smart contract is a self-executing program that automates transactions. Two parties agree on terms. Then code is written to execute the transaction once the agreed upon terms are met.

For example, you might receive a crypto token representing a certain number of customer loyalty points on a blockchain that manages such details for a retail chain. Another crypto token might give the token holder the entitlement to view 10 hours of streaming content on a video-sharing blockchain. A token can even represent other cryptocurrencies, such as a crypto token equalling 15 bitcoins on a particular blockchain. Such crypto tokens are tradable and transferrable among the various participants of the blockchain

Investors can use crypto tokens for any number of reasons. They can hold onto them to represent a stake in the cryptocurrency company or for an economic reason to trade or make purchases of goods and services. As a practical example, decentralized storage provider Bluzelle allows you to stake your tokens to help secure its network while earning transaction fees and rewards.

WARNING: The Financial Industry Regulatory Authority (FINRA) continues to issue alerts about cryptocurrency and token fraud, so be sure you research before investing in any cryptocurrency the same way you would with any stock.

Crypto Tokens vs. Cryptocurrencies

Erroneously, 'cryptocurrency' and 'crypto token' are frequently used interchangeably. These terms are not interchangeable, though.

Using a blockchain, a cryptocurrency is used to send and receive payments. The most well-known cryptocurrency is called Bitcoin (BTCUSD). Alternative cryptocurrencies known as 'altcoins' were introduced following Bitcoin's enormous success. The phrase refers to cryptocurrencies other than Bitcoin, or alternative coins. They were introduced as improved alternatives to Bitcoin, claiming to solve some of its drawbacks. Typical examples of altcoins are Dogecoin (DOGEUSD), Namecoin, Litecoin (LTCUSD), and Bitcoin Cash (BCHUSD). While others have experienced varied degrees of success, none have been able to achieve the same level of popularity as Bitcoin.

Crypto tokens are created on an existing blockchain that serves as a platform for the development and implementation of decentralized applications and smart contracts, whereas cryptocurrencies have their own blockchain and are their native asset. On the blockchain, the tokens are utilized to make transactions easier. Tokens frequently go through an initial coin offering (ICO) before moving on to this phase.

What Is the Purpose of Tokens?

Crypto tokens generally facilitate transactions on a blockchain but can represent an investor's stake in a company or serve an economic purpose, similar to legal tender. However, tokens are not legal tender. This means token holders can use them to make purchases or trades just like other securities to make a profit.

Is Bitcoin a Token or a Coin?

Another name for a coin is a cryptocurrency, such as Bitcoin. It can be used for buying, selling, and storing value.

What Is the Difference Between a Crypto Coin and a Crypto Token?

Tokens are constructed on an existing blockchain, while cryptocurrency coins have their own independent blockchain. This is the primary distinction between the two. Crypto tokens are meant to reflect an interest in an asset and make transactions on a blockchain easier, whereas cryptocurrency coins are meant to be used as money.

Which Are Some of the Various Token Types Stored on Blockchains?

Reward, utility, security, governance, and asset tokens are examples of blockchain tokens.

The Final Word

Tokens for cryptocurrency are digital representations of interest in an asset or a way to make a blockchain transaction easier. Because they are tradable and exchangeable like cryptocurrencies, they are sometimes confused with them.

Crypto tokens are frequently used to raise cash for projects through initial coin offerings. Many parties have taken use of ICOs to dupe investors into giving funds just to disappear, yet many are legitimate fundraising efforts by real firms. If you are thinking about investing in crypto tokens, make sure to examine the team or company that is offering them.

Investing in cryptocurrencies and other Initial Coin Offerings ('ICOs') is extremely dangerous and speculative, and neither the author recommends investing in them. Because each person's circumstance is unique, it is always advisable to consult with a knowledgeable specialist before making financial decisions. Investopedia makes no guarantees or warranties regarding the accuracy or timeliness of the information provided herein. As of the date of writing, the author did not own any cryptocurrency.