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 space.
Cryptocurrencies, crypto tokens, and cryptocommodities is, 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.
The importance of nomenclature was brought home in a recent Goldman Sachs note, in which the investment firm argued that bitcoin should be valued as a cryptocommodity instead of a cryptocurrency. Goldman’s argument has implications for the status of bitcoin futures and their regulation.
Here is a brief primer on the differences between cryptocurrencies, crypto tokens, and cryptocommodities
Cryptocurrencies are the most common and high-profile investment option 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’s ether, and Ripple’s XRP. (Note that ethereum and ripple refer to the underlying blockchain and not to their cryptocurrencies). 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.
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There is some debate as to what constitutes cryptocommodities. Some consider blockchains used for generating tokens as cryptocommodities. Others have defined cryptocommodities in terms of a computer system’s characteristics, such as CPU power. In both instances, however, cryptocommodities are defined as building blocks for cryptocurrencies.
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 global economy. Cryptocommodities work in a similar fashion. There is a cost associated with generating them and they are used to power the cryptocurrency economy.
For example, compute power (or the speed and number of processors deployed to generate cryptos) and storage capacity of a system are considered cryptocommodities. This is an example of the latter kind of cryptcommodity outlined earlier. An example of the former 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. (See also: What Is The Enterprise Ethereum Alliance?)
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, even, 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 used interchangeably in news articles and interviews, cryptocurrencies, cryptocommodities, 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 0.01 bitcoin.