What are Crypto Tokens?
There’s a lot of confusion around the difference between cryptocurrencies and crypto tokens, with many investors erroneously believing the two are one in the same. Despite their similarities, they are, in fact, different. Cryptocurrency is generally the more well-understood concept, but it’s nonetheless important to understand what crypto tokens are.
In simplest terms, crypto tokens are a unit of measurement that represent denominations of cryptocurrency. They’re fungible and tradable assets, which gives them a level of practicality. For instance, you can use crypto tokens to buy goods and services, or trade tokens as a means to invest in what they represent. Ultimately, they can represent anything within the context of digital assets on a blockchain.
Here’s a closer look at crypto tokens: where they come from, what they are, how they work and the different types of tokens and their uses.
Crypto Tokens Within the Crypto Ecosystem
Before diving into crypto tokens, it’s best to get some context as to their place within the crypto ecosystem. In descending order of hierarchy:
- Crypto is the algorithm used to establish a specific blockchain.
- Cryptocurrency is the standard for transacting on a specific blockchain.
- Altcoins are standards that have spun off of the framework of major cryptocurrencies.
- Crypto tokens operate on top of a blockchain, representing its commoditization.
The most important thing to remember is that crypto tokens represent denominations. They quantify interaction with the blockchain, which makes them valuable. Investors can buy, sell and trade crypto tokens based on what they represent.
Where do Crypto Tokens Come From?
Crypto tokens come into being through an Initial Coin Offering (ICO), which is similar to an Initial Public Offering (IPO). An ICO is a kind of fundraising effort by a company to support its digital products or services. The company creates and distributes coins to raise capital for development efforts. Over time these tokens can appreciate as they’re traded based on the underlying value of their denomination.
Once issued, crypto tokens become applicable within a particular ecosystem. Their application and value depend on what type of token they represent: security tokens or utility tokens. Both denominate value; however, investors capitalize on that value in different ways.
What are Security Tokens?
Security tokens issued through an ICO are more akin to a share of stock. They represent an equity stake in the issuing company and its blockchain efforts. In fact, they’re regulated in almost the same manner as shares of stock.
Security tokens illustrate why it’s so important to understand the difference between cryptocurrency and crypto tokens. Holding cryptocurrency means the value of your digital asset is directly tied to the sentiment of other investors. If confidence in the currency drops, so does the value of your cryptocurrency holding. Security tokens, on the other hand, represent the intrinsic value of the company. They appreciate or depreciate based on its actions.
Security tokens are an investment above cryptocurrency. Those investing in crypto are, for lack of a better designation, currency traders. Those investing in security tokens are akin to stock investors.
What are Utility Tokens?
Utility tokens don’t represent an ownership stake in a company. Rather, they entitle the holder to the value of a digital asset as-recorded on the blockchain. There are virtually limitless uses for utility tokens:
- A company might issue utility tokens that give holders access to service time. For instance, one token might equal one hour of service through a SaaS platform.
- Utility tokens might designate special privileges. For instance, token holders might get 10% off of a service or special access to limited time offers.
- A utility token can identify the holder, such as in the case of accessing restricted features or authorizing a particular transaction.
There are boundless applications for utility tokens thanks to their security. Because every token represents a snippet on the blockchain, these tokens are impossible to fake or duplicate, which lends control to the issuer.
The Benefits of Crypto Tokens
Crypto tokens are the foundation of blockchain applications. One simple benefit is that they represent a tradable asset within the context of a specific app or service on a blockchain. That equates to a turnkey transaction. For instance, ABC Company might issue utility tokens to exclusive investors that allow them to demo its new SaaS platform. Those tokens are exclusive for that application.
Perhaps the most prevalent benefit of crypto tokens is that they establish value to users, while simultaneously becoming tradable tokens in the open market. This structure lends to their liquidity and capitalization opportunities, both of which are essential for digital asset management.
Finally, crypto tokens represent a viable fundraising practice for companies with decentralized applications. In fact, the crowdfunding efforts through ICOs have raised billions of dollars in recent years, across hundreds of startups worldwide.
Applications for Crypto Tokens are Always Expanding
Blockchain technology is finding more and more applications in virtually every industry. As it continues its rise to prominence, tokens are paving the way for more robust interaction with this technology and the companies enabling it. Where security tokens represent more of a traditional investment, utility tokens are valuable in their own way as representations of blockchain commoditization.
Investors looking for crypto investments that are less erratic than cryptocurrency will find opportunities with tokens. Capitalizing on these digital assets starts by understanding what they are, the intrinsic value they hold and the way they behave on the open crypto market.