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Highlights
- Utility tokens are issued by crypto start-ups to raise funds
- Utility tokens can be traded on various exchanges
- Equity tokens are regulated while utility tokens are not
The crypto space is apparently a parallel universe where different terms seem similar to the words used in traditional asset classes but have a different meaning. In the beginning, things don’t make sense, but once you get a hold of them, you will find yourself in a more familiar place. Let’s take an example of the most common term used in cryptocurrencies – tokens and coins. These two are generally used interchangeably, but from a technical aspect, they have different meanings. Shocking, right?
Also read: What is IOTA (MIOTA) crypto and why is it rising?
All digital assets are described under a broader term, cryptocurrency; however, there are different types of cryptos. Tokens and coins are two types of unique cryptos. Coins represent a value which can be exchanged between the parties, such as bitcoins or stablecoins. Tokens, on the other hand, are something which can be priced and are built on blockchain. Utility tokens and security tokens are examples of cryptocurrency tokens.
In this article, we will be discussing the utility tokens and security tokens in detail.
Utility tokens
Utility tokens are specific use case tokens that are associated with initial coin offerings (ICOs). The main goal of this crypto asset is to raise funds for developing a specific crypto project. Any interested person can buy utility tokens through fiat currencies or another cryptocurrency. Generally, prices of utility token remain static during the ICO stage but after getting listed on an exchange, they rise or fall based on the prospects of the blockchain project. Utility tokens can be understood as a promotional tool for the issuing company.
It is important to note that ICOs should not be misconstrued as being similar to IPOs (initial public offerings). Crypto and stock market are completely two different universes, with similar terms but different features and meanings.
Unlike an IPO, a utility token holder does not get any ownership or stake in the crypto project in an ICO. The tokens purchased in an ICO are stored in the investor’s digital wallet. These tokens can be used for accessing the services offered by the crypto project on a preferential basis.
Special services include discounts at the launch of the product line. The products on the crypto platform can be software packages.
More importantly, utility tokens cannot be seen as an investment. They increase in value when the project becomes suddenly popular. Hence, people who missed that particular ICO often want to buy them for fiat or for cryptocurrencies at higher prices later. In addition to this, utility tokens can be traded on some exchanges.
Golem and Basic Attention Token (BAT) are examples of utility tokens.
How are utility tokens different from equity tokens?
Image source: © kkssr | Megapixl.com
Ownership - Equity tokens are more like traditional equity, where the equity token holder gets a stake in the blockchain project. However, utility tokens do not offer any kind of ownership in the blockchain project.
Regulation – Utility tokens are not regulated, while equity tokens are regulated. The justification for the same is that a utility token provides access to the services rather than a specific asset.
Image source: © Elenabsl | Megapixl.com
Trading – Utility and equity tokens can be traded on different exchanges.
Voting rights – Since utility tokens do not offer ownership in the company, investors do not have any voting power. On the other hand, equity tokens give away voting rights to investors and empower them to participate in the company’s decision-making process.
For beginners – Since equity tokens have similarities with the traditional equity market, it will be easy for beginners to understand the market. Utility tokens have different concepts and some technicalities involved. Therefore, it is generally suggested to read all the terms and conditions before investing in utility tokens.
Suggested reading: Is Digital Euro’s launch on the cards?
Risk Disclosure: Trading in cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory, or political events. The laws that apply to crypto products (and how a particular crypto product is regulated) may change. Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading in the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed. Kalkine Media cannot and does not represent or guarantee that any of the information/data available here is accurate, reliable, current, complete or appropriate for your needs. Kalkine Media will not accept liability for any loss or damage as a result of your trading or your reliance on the information shared on this website.
