What Is the Difference Between Crypto Tokens, Currencies, and Commodities?
Merkle tree or hash rate, anyone?
The world of cryptocurrencies is awash with technical jargon. As a result, several words are often used interchangeably without much thought to their meaning. This can become problematic for investors interested in understanding and putting money into the crypto market.
Cryptocurrencies, crypto tokens, and crypto commodities are, perhaps, the most misunderstood troika of words. One stands in for the other in interviews and discussions. But all three mean different things. That difference becomes important within the context of establishing a valuation framework for investment. For example, cryptocurrency valuation is derived from a coin’s success in adhering to the characteristics of money. On the other hand, crypto token valuations depend on a different set of factors, such as protocol adoption and robustness.
Here is a brief primer on the differences between cryptocurrencies, crypto tokens, and crypto commodities.
- The term cryptocurrency is used to refer to coins that fulfill characteristics of standard paper-based money.
- Examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
- While there is some debate as to what constitutes a crypto commodity, the term describes a tradable or fungible asset that may represent a commodity, utility, or contract in the real or virtual world through exclusive tokens on a blockchain network.
- Crypto tokens are broader representations of a blockchain’s value. That value is manifested across a diverse range, from cryptocurrencies to loyalty points to assets built on the blockchain.
Cryptocurrencies present one of the most exciting investment options in the markets today. The term is used to refer to coins that fulfill characteristics of standard paper-based money. The characteristics are its function as a store of value, unit of account, and fungibility (or the ability to be used regardless of its history of transactions).
Examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin. Typically, frameworks valuing cryptocurrencies take into account factors such as traction for the said coin and its supply schedules. Altcoins and coins are synonyms used to refer to cryptocurrencies.
As cryptocurrencies continue to evolve, unique opportunities exist for both short-term traders and long-term investors.
While there is some debate as to what constitutes crypto commodities, in general, the term is used to describe a tradable or fungible asset that may represent a commodity, utility, or contract in the real or virtual world through exclusive tokens on a blockchain network. Some consider blockchains used for generating tokens as crypto commodities. Others have defined crypto commodities in terms of a computer system’s characteristics, such as CPU power. In both instances, however, crypto commodities are defined as building blocks for cryptocurrencies.
The term crypto commodity can also refer to the fact that the Commodity Futures Trading Commission (CFTC) stated in 2014 that "Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities."
Their relationship to actual coins can be made clearer with the help of an example.
Oil is considered a commodity in the physical world. There is a certain cost associated with extracting it from the earth and it is used to power the global economy. Crypto commodities work in a similar fashion. There is a cost associated with generating them and they are used to power the cryptocurrency economy.
For example, computing power (or the speed and number of processors deployed to generate cryptos) and storage capacity of a system are considered crypto commodities. Another example is Ethereum’s blockchain because it is used as a building block to generate smart contract tokens. Several large organizations have come together to form an Ethereum Enterprise Alliance (EEA) in order to establish a framework and common technology to make apps using its blockchain.
Crypto tokens are similar to cryptocurrencies in that they are built on blockchains. Cryptocurrencies are the most common form of tokens. But crypto tokens are broader representations of a blockchain’s value. That value is manifested across a diverse range, from cryptocurrencies to loyalty points to assets built on the blockchain.
Ethereum is the underlying blockchain for several tokens that are using its platform to develop services and products. For example, Tronix (TRX) is a token for the entertainment industry. EOS is a token for the infrastructure required to power decentralized applications. You can find a full list of Ethereum tokens here.
The Bottom Line
While they are sometimes used interchangeably in news articles and interviews, cryptocurrencies, crypto commodities, and crypto tokens are different entities. Their differences are important within the context of future regulation and valuation.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrency.