- the issued token does not add value to the project
- the token price growth does not have the economic rationale
- the token price is overvalued
Quite often, unqualified investors do not fully understand the economy of the project, send their BTC/ETH and get tokens that do not add value to the invested project or, sometimes even do not fit into the business model. Moreover, these tokens usually do not give any voting power. In this case, the only winners are the founders, equity investors, and early buyers, who bought tokens with high discount rates (that sometimes can reach 80%). While the rationale behind introducing tokens for a particular business model might be debatable, the question of defining the type of token and its price seems more fundamental and have more explanations. Let us discuss it in more detail.
Types of tokens
At the moment, there is no unified classification for tokens. However, there are movements towards resolving this problem from SEC in the USA and FINMA in Switzerland. Both of the organizations divide tokens into two broad categories:
- security tokens (this type is to some extent similar to securities)
- utility tokens (this type gives its holders the access to services provided by the project).
Another category that can be emphasized might be called "real cryptocurrencies" — this type has its own Blockchain and is often considered as a mean of payment. However, there is one big difference between SEC and FINMA: while SEC focuses on comparing tokens with securities, FINMA is focused on the economic functions of tokens. Each type of token has key features.
Security token (SEC) / Asset token (FINMA)
This category of tokens represents assets such as participation in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.
Utility token (SEC) / Utility token (FINMA)
This category provides access to the goods & services that the project will launch in the future. Also, they can be used as a type of discount or premium access to the goods & services of the project.
Cryptocurrencies (SEC) / Payment tokens (FINMA)
Usually, the tokens of this category have no further functions or links to other development projects. Speaking broadly, cryptocurrencies purpose is to be items of inherent value (similar, for instance, to cash or gold) that are designed to enable purchases, sales, and other financial transactions. They are intended to provide many of the same functions as long-established currencies such as the U.S. dollar, euro or Japanese yen but do not have the backing of a government or other body.
Depending on the type of token, organizers and participants of an ICO might have different rights and responsibilities, which are briefly described in the table below.