What are Crypto Tokens?
Crypto tokens, also known as altcoins, are essentially digital assets that exist on top of a blockchain and can be transacted much like any other cryptocurrency. Unlike crypto coins like Bitcoin, tokens cannot be mined since they don´t have their own blockchain. They rely solely on smart contracts, so they have to operate on smart contract based blockchains like Ethereum or NEO. There are thousands of crypto tokens currently in existence, and new ones continue to emerge as developers come up with innovative ideas for different platforms and use cases.
Crypto Tokens and Smart Contracts
The characteristic that separates cryptocurrencies from tokens is that cryptocurrencies are the native asset of a blockchain like BTC or ETH. In contrast, tokens are built on an existing blockchain by setting certain rules and encoding them on smart contracts. The most common standard for tokens is the ERC-20; when someone transfers tokens their account signs a transaction telling a smart contract to debit an amount from one account and credit the units of tokens to another account. All the computing energy necessary to make these transactions needs to be paid, these computing fees are called gas money.
Types of Crypto Tokens
There are different categories of tokens that depend on their functionality and characteristics. Below we share a brief description of the most popular tokens today:
NFTs, the acronym NFT stands for Non Fungible Token. This basically means that the ownership of these tokens is attributed to only one person or entity much like a collectible. The value of NFT could be artistic or real estate. They are one of a kind pieces of electronic art that can be
Payment tokes function as coins. They are used for exchange, store value, and making payments.
Security tokens are assets used to buy ownership rights of a physical or digital asset that has been verified within the blockchain.
Utility tokens are used to fund projects of startups. Users that purchase these tokens gain certain rights, like access to services or products produced by the organization. Example: Basic Attention Token (BAT) is the unit of value given to users that choose to view ads within the BAT platform.
Wrapped tokens are assets that have the same value as their mother underlying asset but operate on the Ethereum blockchain. Example: Wrapped BTC, holds the exact same value as Bitcoin but interacts in the Ethereum Blockchain allowing BTC holders to use Ethereum’s DeFi apps.
There is a fair amount of speculation and hype when it comes to altcoins, but they still represent a small percentage of overall global assets. Therefore, these digital assets should not be considered mainstream investments yet. Although a qualified investor could make a decent return on them if they can predict which altcoin will rise or fall in value quickly, it could be tricky to invest large amounts into them — unless you really know what you are doing. Considering the freshness of altcoins and the fact that new tokens keep being launched every day, newbie investors should be mindful of the volatility of some altcoin markets and carefully take their first steps in this world. If you are interested in altcoins and are thinking about potentially investing, we recommend educating yourself on exchange apps, token swapping, and DeFi apps before exchanging. Once you see for yourself how the markets behave and find the most suitable app, you’ll gradually gain confidence and find your way through the altcoin market.