Lesson 2 — Bitcoin, Ethereum, Coins, Tokens & Altcoins

In the previous lesson, we understood what cryptocurrency is and why Bitcoin was created. In this lesson, we will understand Bitcoin, Ethereum, coins, tokens, altcoins and some important crypto categories.

1. What Is Bitcoin?

Bitcoin is the first major cryptocurrency. It was introduced in 2009 by a person or group using the name Satoshi Nakamoto.

Bitcoin allows people to transfer value directly over the internet without depending on a traditional central authority to maintain the Bitcoin network.

Bitcoin runs on its own blockchain. The Bitcoin network is maintained by computers around the world that verify and record transactions.

2. Why Is Bitcoin Different?

Bitcoin was designed with a very different approach from traditional currencies and payment systems.

It has no single company that controls the Bitcoin network. The network operates according to rules implemented by its software and maintained by participants around the world.

Bitcoin also has a limited maximum supply. This limited supply is one of the important reasons investors are interested in Bitcoin.

Bitcoin is often described as digital money or digital gold. Investors may hold it as a long-term digital asset.

3. Why Does Bitcoin Have a 21 Million Maximum Supply?

The Bitcoin protocol was designed with a maximum supply of 21 million bitcoins.

New bitcoins are introduced into circulation through the Bitcoin mining process.

Over time, the number of new bitcoins created through mining becomes smaller because of Bitcoin's halving mechanism.

The important point for an investor is that Bitcoin is designed to be scarce. Unlike currencies that can have their supply increased by a central monetary authority, Bitcoin follows a predefined supply schedule.

4. What Is Ethereum?

Ethereum is another major blockchain network. It was launched in 2015.

Its native cryptocurrency is called Ether, or ETH.

Ethereum was designed to do more than transfer digital money. It provides a platform where developers can build applications using blockchain technology.

5. Why Is Ethereum Different From Bitcoin?

Bitcoin mainly focuses on secure and decentralized digital money and settlement.

Ethereum focuses more on programmability. Developers can create programs that run on the Ethereum blockchain.

These programs can be used for financial applications, digital assets, games, marketplaces and many other use cases.

This is one of the main differences between Bitcoin and Ethereum. Bitcoin is mainly known for its monetary role, while Ethereum is also a platform for building blockchain applications.

6. What Are Smart Contracts?

A smart contract is a program that runs on a blockchain.

It can automatically execute predefined rules when the required conditions are met.

For example, imagine a digital agreement where a payment is automatically released when a particular condition is satisfied. A smart contract can be designed to perform that process according to its programmed rules.

Smart contracts are an important reason why Ethereum became the foundation for many crypto applications.

7. Coins vs Tokens

The words coin and token are often used interchangeably, but there is an important difference.

A coin normally refers to a cryptocurrency that operates on its own blockchain.

Bitcoin is a coin because BTC operates on the Bitcoin blockchain. Ether is also a coin because ETH operates on the Ethereum blockchain.

A token is normally created on an existing blockchain. For example, many tokens are created using Ethereum's infrastructure.

So, a simple way to remember it is:

Coin = its own blockchain.
Token = built on another blockchain.

8. What Are Altcoins?

Altcoin is a general term used for cryptocurrencies other than Bitcoin.

Ethereum, Solana, BNB and many other crypto assets are commonly called altcoins.

Altcoins can be very different from each other. Some are designed for blockchain networks. Some are used for applications. Some are designed for payments. Others may have very specific purposes.

Because of this, investors should not treat all altcoins as if they are the same type of asset.

9. What Are Stablecoins?

Stablecoins are crypto assets designed to maintain a relatively stable value compared with a reference asset, usually a fiat currency such as the US Dollar.

USDT and USDC are examples of widely used stablecoins.

Stablecoins are commonly used for trading, transferring value between platforms and participating in blockchain applications.

But stable does not mean risk-free. Investors should understand how a particular stablecoin is backed, issued and redeemed.

10. Layer 1 vs Layer 2

A Layer 1 is the main blockchain network.

Bitcoin, Ethereum and Solana are examples of Layer 1 networks.

A Layer 2 is a separate system built on top of a Layer 1 to improve certain functions such as transaction speed, scalability or cost.

A simple example is to think of Layer 1 as the main highway and Layer 2 as additional routes built to handle more traffic.

Layer 2 networks are especially important in the Ethereum ecosystem.

11. What Are Utility Tokens?

A utility token is a token designed to provide a specific function or access within a blockchain project or ecosystem.

For example, a token may be used to pay transaction fees, access a service, use a platform feature or participate in an ecosystem.

The important point is to understand what utility the token actually provides and whether there is real demand for that utility.

12. What Are Governance Tokens?

Governance tokens are designed to allow token holders to participate in certain decisions related to a blockchain project or decentralised application.

Depending on the project, holders may be able to vote on proposals such as protocol changes, fees or other decisions.

Governance rights and token ownership do not automatically mean ownership of the company or project behind the protocol. Investors should understand the exact rights attached to a token.

Key Takeaway

Bitcoin and Ethereum are both major blockchain networks, but they were designed with different primary purposes.

Coins normally operate on their own blockchains, while tokens are generally created on existing blockchains.

Altcoins include many different types of crypto assets, while stablecoins, utility tokens and governance tokens have specific purposes.

Before investing in any crypto asset, understand what it is, which blockchain it belongs to, what the token is used for, and why people may want to hold or use it.