What Are Utility Tokens?

You may have noticed a lot of cryptocurrencies popping up in the last year, but did you know the word cryptocurrency refers to both coins and tokens? To a certain extent, these words have been used interchangeably, but it’s likely that the cryptocurrencies you are most familiar with like Bitcoin and Litecoin, are coins, not tokens. Coins have different investment characteristics compared to tokens. While coins are general storage of value that can be exchanged for goods and services, tokens are backed by a unique initiative and represent specific assets. In this article, we will take a deeper dive into utility tokens, which grant access to a specialized good or service in the future, like a voucher or coupon.

WHAT ARE UTILITY TOKENS?

The word token usually refers to a type of cryptocurrency that is tied to a unique project. Utility tokens give their holder special access to a product or service in the future. Usually, these tokens are distributed to reward investors for their interest in a project. However, for a utility token to hold any value, the custodian of the token must be informed of its use directly from the company. Since they have such specific functionality, these tokens are not easily exchangeable, compared to a coin like Bitcoin.

Utility tokens are powerful tools for companies to generate interest in their blockchain projects. When a company is planning a project, they will announce an ICO (initial coin offering) to interested investors. When an ICO is launched, the company conducts a Crowdsale, where interested parties can purchase utility tokens. Utility tokens are a special kind of virtual currency that resides on its own blockchain and give access to the specialized products or services the company is working on.

This helps the company generate capital, as a fundraiser, and allows interested investors to be rewarded for their contribution. It’s also important to note, utility tokens are beneficial for the company because they don’t cost much, but can be applied as useful marketing tactics.

INVESTING IN UTILITY TOKENS

It is important to understand that utility tokens are exempt from Federal tax laws governing other financial asset classes, meaning they are not yet regulated investment vehicles. A utility token is like a coupon for a retailer or a ticket to an event, which is why, investing in a utility token and hoping for its price to increase based on the hype around a project, is similar to buying tickets to a hockey game and hoping for the team to win more games. The demand for these tokens can be very difficult to predict, making the returns a lot riskier and certainly not guaranteed.

CONCLUSION

In these early years of cryptocurrency market development, there is still a lot of misinformation circulating the crypto space, so broadening your knowledge base becomes vital towards making informed investment decisions. Otherwise, it can be easy to get coaxed into exchanging your more easily transferable Bitcoin for a utility token you may know nothing about. The rule of thumb is, if you don’t know what a utility token does, then it’s basically worthless, like receiving a gift card for a store you’ve never even heard of.

Since authorities are still struggling with how to regulate the market, as an investor you must understand the limitations of your own risks and returns. By learning more about the characteristics of utility tokens, you can knowledgeably manage your own risk and return expectations.

You can start learning all about cryptocurrency here at CoinSmart’s GetSmart Hub, where we explain the basic concepts and discuss the hottest topics in cryptocurrency industry for all levels of investors from total beginners to the wolves of Wall Street. Share this article on social and let us know if you have any questions!