A comprehensive guide to understanding what tokens are: from definitions to trading

When it comes to cryptocurrencies, many people often confuse the concepts of Token and Coin. In fact, understanding what a Token is, how it works, and how investors should trade them is crucial for grasping the modern crypto asset market. To truly master crypto investing, one must first clarify the nature of Tokens and their role within the blockchain ecosystem.

Definition and Evolution of Tokens

What is a Token? In simple terms, it is a digital asset built on an existing blockchain that represents specific rights, certificates, or other forms of value, which can be traded, transferred, and exchanged. In Chinese, it is often translated as “pass,” “token,” or “coin.”

In the early days of cryptocurrencies, the industry mainly used the term Coin to refer to digital assets like Bitcoin, Litecoin, and Dogecoin. However, this changed fundamentally after Ethereum introduced the ERC-20 standard in 2015. The ERC-20 standard made it easy for anyone to issue their own Tokens on the Ethereum blockchain, opening the door to application-based crypto assets. Today, Ethereum is the blockchain platform with the largest issuance of Tokens.

It’s important to note that Token is a general term and does not refer to a specific token name. Simply put, non-blockchain-based crypto assets can all be categorized as Tokens, including DeFi project tokens, Layer-2 solution tokens, NFT-related tokens (like APE, SAND), and more.

The Three Main Types and Uses of Tokens

According to the official classification framework of the Swiss Financial Market Supervisory Authority (FINMA), Tokens are mainly divided into three categories, each with its own functions and application scenarios:

Payment Tokens: Facilitating Value Transfer

The primary goal of payment tokens is to provide secure, efficient, and low-cost payment solutions. The most typical examples are stablecoins, which are pegged to fiat currencies, offering users a relatively stable store of value and medium of exchange. These tokens are widely used in cross-border remittances and daily commercial transactions.

Utility Tokens: Providing Access to Applications

Utility tokens are designed to grant access to various applications, acting as a “pass” to enter specific ecosystems. Most ERC-20 tokens within the Ethereum ecosystem fall into this category, such as Uniswap’s UNI and Aave’s AAVE. Holding these tokens allows users to participate in governance and enjoy platform services.

Asset-backed Tokens: Representing Actual Rights

Asset-backed tokens represent ownership or rights to a project or asset. Holding such tokens means investors become participants in the project and can share in its value growth. However, unlike traditional stocks, crypto investors usually do not own actual company shares or have dividend rights.

In reality, a single Token often exhibits multiple attributes—payment, utility, and asset-backed—highlighting the complexity and appeal of the crypto market.

Core Differences Between Tokens and Coins

The fundamental difference between Tokens and Coins lies in whether they have an independent blockchain. We know Bitcoin operates on the Bitcoin blockchain, and Ethereum on the Ethereum blockchain; these are native assets of their respective networks, hence called Coins.

In contrast, Tokens do not have their own blockchain infrastructure; they depend on existing public chains. This core difference results in various distinctions:

Investment Perspective: Advantages and Disadvantages of Tokens and Coins

For investors, both Tokens and Coins have their advantages; it’s not a matter of one or the other. If Coins are viewed as the infrastructure layer of crypto assets, then Tokens are application-layer assets. Coins address underlying blockchain technology issues, while Tokens develop various applications and services on top.

The advantage of Tokens is their rich application scenarios and ease of expansion. In contrast, the value of Coins is often limited to the infrastructure itself; if development directions are hindered, there’s little room for adjustment. For example, projects like Quantum Chain (QTUM) and Bytom (BTM) have stagnated due to limitations at the base layer, whereas Tokens can continue evolving—MakerDAO, for instance, keeps launching RWA (Real World Assets) to meet market demands.

Another notable point is that Token volatility is generally higher than that of Coins. Tokens like UNI, SNX, and MKR often experience price swings far exceeding BTC and ETH, especially during bull markets. This high volatility offers more profit opportunities for short-term traders but also entails greater risks. Therefore, investing in Tokens requires more cautious risk management strategies.

How to Trade Tokens: Detailed Methods

Investors mainly have two ways to trade Tokens, each with its own characteristics and suitable scenarios:

Method 1: Spot Trading

Spot trading involves directly purchasing actual Token assets. For example, if the current price of UNI is $3, buying one UNI gives you actual ownership of that Token. This method is straightforward and transparent, allowing investors to hold real Token assets.

However, be cautious of a major risk: fake tokens. Some dishonest teams may copy the name of well-known projects and issue counterfeit tokens with the same name but no value. If you accidentally buy such fake tokens, you may face difficulties selling them. To prevent this, always verify the token’s contract address on the project’s official website or blockchain explorers like Etherscan before purchasing, ensuring you buy the authentic token.

Method 2: Margin Trading

Margin trading is a leveraged trading method where investors only need to pay a portion of the total position as margin to control a larger amount. For example, using 10x leverage to go long on UNI at $3, you only need to pay $0.3 to open a position of one UNI. This type of trading (including CFDs and U-based contracts) usually does not involve actual token transfer.

The advantage of margin trading is lower entry barriers, but the risks are amplified. Due to the high volatility of Tokens, using leverage can significantly increase both gains and losses, with the risk of liquidation.

Key Points for Risk Management in Token Trading

Regardless of the trading method, investors must establish a sound risk management system:

Leverage control: For Token trading, it’s recommended to keep leverage below 10x. Compared to BTC’s typical 10% daily volatility, Token prices—especially new tokens—often fluctuate more than 10% in a single day. Excessive leverage can lead to liquidation during normal market swings.

Position management: Avoid putting all funds into a single Token; diversify your investments to reduce overall risk exposure. Adjust position sizes according to your risk tolerance.

Contract verification: For spot trading, always confirm the contract address through official channels rather than blindly trusting third-party sources.

Platform selection: Choose trading platforms with robust risk controls and regulatory oversight to ensure safe Token trading.

Summary

Understanding what a Token is and its fundamental differences from a Coin is a vital step from being a beginner investor to a mature one. Tokens, as innovative application-layer assets, bring abundant investment opportunities and business scenarios to the crypto market. Whether engaging in spot or margin trading, investors should always adhere to core risk management principles and conduct transactions on professional, regulated platforms.