Through the years, digital assets have steadily gained more acceptance from the mainstream. Between 2012 and 2021, the value of the bitcoin cryptocurrency rose by a whopping 200,000%! Though volatile, many of these investments have historically reaped high returns, with even more potential to grow as adoption becomes more widespread.
Cryptocurrencies aren’t the only assets that exist on the blockchain. Recently, a new type of investment has gained traction: the utility token. Utility tokens have given businesses new ways to offer their consumers products and services. In this article, we’ll discuss answers to many common questions about utility tokens, including what they are, what privileges they offer, what risks they come with, and whether they’re worth the investment.
What Are Utility Tokens?
Like cryptocurrencies, utility tokens are digital-exclusive assets that run on a blockchain. However, unlike cryptocurrencies, utility tokens can only be used to access privileges within a specific ecosystem. Cryptocurrencies are often used by businesses to give customers access to company-exclusive services. Since all transactions are recorded on the blockchain, investors should be guaranteed to reap the benefits promised to them.
Unlike cryptocurrencies, utility tokens are not mineable. Usually, teams behind cryptocurrencies mine all tokens at once and offer them to holders pre-mined. Like cryptocurrencies, utility tokens can also be bought and sold for profit.
What Are Examples of Utility Tokens?
One of the most well known examples of utility tokens is the Binance Coin. The Binance Coin was launched in 2017 by the popular cryptocurrency exchange, Binance. Holders of Binance Coin can use their tokens to pay for Binance transactions and fees at lower rates.
Utility tokens also have uses outside the finance sector. In the world of sports, many modern fan organizations sell fan tokens to give supporters new ways to interact with their favorite athletic teams. Holders of fan tokens can buy exclusive privileges, such as merchandise and event invites. Most notably, fan tokens can earn holders buying rights to sports team decisions, such as a team’s motto or starting lineup.
Where Do Utility Tokens Derive Their Value?
Similar to cryptocurrencies, utility tokens derive value from consumer demand. Demand usually stems from how much consumers value the exclusive services they can access using their tokens. Naturally, the more popular a business is, the higher its tokens can sell for. In the case of fan tokens, for example, tokens offered by top sports teams, such as Paris Saint Germain, FC Barcelona, and Manchester United, tend to be more valuable.
What Are the Risks?
Just like any digital asset, utility tokens are highly speculative and volatile, which means investment comes at high risk. Additionally, the lack of regulation within the crypto space has allowed many scammers to pass as legitimate companies, who lure investors into buying their tokens, then exit before delivering the value that they promised.
To responsibly invest in any crypto asset, make sure to only place money that you can afford to lose. Additionally, study the companies you plan on investing in. Stay away from offerings that market themselves with high returns within short periods of time. Anything deal that looks too good to be true probably is.
To conclude, utility tokens are worth the investment if you find yourself needing the privileges your token of choice offers. Though there exist secondary markets that allow profit from utility token trading, holders can only get the most out of their investment if they can derive use from their token’s offerings. Additionally, investors need to be careful when navigating the utility token market, as a lack of regulation in the current day allows scams to prey off the naive.
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