The cryptocurrency world currently is in limbo regarding its market valuation, identity and regulatory stance. The crypto space is still highly speculative regarding coin/token/project values. There may be some confusion leading to overly bullish speculation, which begs the question: are utility tokens (most current cryptocurrencies) overvalued?
A Quick Explanation
For those who don’t know, a utility token represents “a unit of account for the network. The bigger the network grows, the more utility in the token,” as described by the popular Hackernoon blog.
Put simply, most altcoins have a project or business behind them which looks to use blockchain to solve a real-world problem, often via a unique ecosystem. Utility tokens play a part in that ecosystem helping it function.
For example, ether is a well-known cryptocurrency representing an underlying blockchain platform. Projects commonly use this platform to build Decentralized Applications (dAPPS).
The ether coin is used as “gas” to power transactions in this ecosystem. Sending Basic Attention Tokens (BAT – an ERC20 token built on the Ethereum blockchain) requires the holder to have ether coins in their wallet in order to power BAT transactions.
There is significant difficulty in this model. The underlying company’s success does not necessarily mean the associated asset’s price will rise in response.
Stocks (aka equities) are a good example of this concept’s inverse. Owning a share of stock essentially means owning part of the underlying company. Company profit and earnings impact the overall price valuation of the company, thus, impacting the individual stock’s price. Set benchmarks and methods exist to value a company and its stock price. (Although there is still speculation thrown into the equation as well.)
In contrast, cryptocurrencies do not function the same way. Just because an underlying cryptocurrency project excels does not mean the associated coin or token must rise in price. The two are not coupled in the same way stock values are.
Techcrunch’s Jeremy Rubin even wrote an article about a possible complicated scenario which saw Ethereum’s network succeeding, while ether coins dropped to a price of nearly $0.
Due to the above, it is still difficult to give an accurate price valuation for many cryptocurrency projects. This is especially true because most cryptocurrency ecosystems are not used in a mainstream sense. Their value and application to the public are unknown. No one really knows what will be applicable ten years down the road.
This speculation could be one of the reasons January saw such exuberance last year, when the total crypto market cap reached over $800 billion – roughly four times larger than the current $123 billion dollar market cap, according to coinmarketcap.com. (For reference, January 2017 saw an overall crypto market cap of only about $20 billion).
Exuberant expectation and speculation surrounding EOS, for example, lead the project to raise a massive amount of funds. The total market cap for EOS surpassed more than $17 billion dollars before even launching its main network. (Current market cap for EOS is roughly $2 billion dollars at the time of this writing.)
How can a business or product see accurate valuation if it has not even launched its main product? Not to mention the cryptocurrency space has not been around long enough to know what kind of impact the project will have.
Security tokens have come into conversations fairly recently. In short, a security token is basically a security (stock, bond, etc.), put into a token on the blockchain.
Security tokens may prove more effective than traditional securities because they remove some of the borders and limitations of traditional finance. Security tokens allow for fractional investment, among other benefits.
Rob Nance of City Block Capital gave a great applicable example for fractional investment. In an interview with YouTube influencer Crypto Bobby, Nance explained about fractional investment. “[I]nstead of having to buy a whole house, there would be an opportunity to buy a slice of a hotel, or a slice of a large building – and so the opportunity I think that exists there, is to take a lot of global liquidity and bring it into U.S. assets.”
Security Tokens Versus Utility Tokens
Security tokens are in the early stages of development currently. However, when they become more common, why would they not take the majority market share over utility tokens?
Anthony Pompliano of Morgan Creek Digital responded to a question on TokenDaily.co, stating that “the largest market opportunity in crypto is meshing the advantages of tokens with traditional finance markets. This will be most obvious in tokenized securities.”
With security tokens, the price will have significant ties to the success or failure of the underlying company or asset.
What’s It All Mean?
In the new and ever-developing world of cryptocurrency, the astronomical speculatory rise in January 2018 made sense. After all, security tokens were not in public conversations as much as is now the case.
But now it could make sense for security tokens to take the market majority. Utility tokens have a much more speculative value with essentially nothing “backing” them. Not to mention that security tokens often seek to comply with regulation. The verdict is seemingly more unclear on how to handle utility tokens with regulation.
So do utility tokens have any value? The future will tell. Decide for yourself based on your own research.
*Everything written is based on the author’s personal opinions and interpretation of the data/material (which can be subjective). Nothing is financial, investment or tax advice whatsoever. Take at your own risk. Readers may need to conduct further research. Make personal conclusions for yourself based on your own personal research.
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