What is a utility token?

“Just because a company succeeds doesn’t mean the token should gain value, and vice versa.” …Crystal Stranger

The crumbling world of the utility token has meant a reassessment of what it means to be part of a company versus its ecosystem. To the uninitiated, I have often seized on the obvious metaphor to explain utility tokens: well, it’s like Chuck E. Cheese tokens, and if everyone wants to get their hands on that finite number of tokens to play another game of ski-ball, then the value of the tokens rises in conjunction with the success of the company.”

The past few months, utility tokens have vacated the market.

No one wants to invest without equity, no matter how many (or how few) tokens are in the company ecosystem.

They want a piece of the ski-ball machine, not the token granting “rights” to play.

Valuing a utility token

So what’s the difference between token success and company success?

The two do seem to track together.

However, the utility ICO was designed specially to solve a startup problem and it’s useful in that world, even as it disappears. It allows investment for development in a crowdfunding model and lets very early stage startups, especially those who need big investment to develop complicated tech, to get the chance to do so on the strength of their teams, integrity, transparency, and ideas.

That’s a concept I am 100% behind.

Tokens in a utility model were useful in the ecosystem, and in that way they incentivized use, with bigger communities fueling increased desirability, value, and in turn, new token owners.

Yet, at some point, the need for thousands of specialized tokens only usable in a specific ecosystem (Imagine if every single store made you buy in store-specific tokens, and not just the local kids’ pizza place) dissipated. If tokens were supposed to add liquidity, why not just use one big name token? Why a specific token to the company? Were they all just vanity tokens? The idea of utility was not always aligned with value in that investment in a specific token didn’t always mean a new startup was truly owned by its investors as users and community advocates.

Ownership versus investment

That’s the promise of cryptocurrency as a startup funding mechanism: decentralized has also meant democratized investment, cooperative ownership, and user-owned applications.

That’s also meant users aren’t owners in any formal sense. They own tokens, but they get no vote in how the company is run, by whom, or for what. They get no dividends. And ICO is not an IPO. So while utility tokens can rise in value with huge communities backing use of a project and a big ecosystem, translating that ecosystem into token value is not a straightforward road. Further, translating token use and value to company value is likewise slippery.

So the tokens in a system and their supposed value (a quarter apiece? A dollar?) is somewhat arbitrary, and may not be related to the number of paying customers, action on a platform, dollars generated, value made for users, or problems solved in the real world. But these concerns are on the minds of investors who want equity. An ICO is useful if it correlates with the profitability of the company. And guess what? Many don’t because they haven’t even put together or brought to market their platforms. They haven’t been able to invest in real community building. They’ve rarely invested in branding. Market research? Product/market fit? A profitable business already thriving, with users, fans, and income?

None of these things have been the traditional path in an ICO or crowdfunding raise.

Startup valuation

Further, there are only speculative ways to assess how most companies will start growing real customers and assets, and how successfully they can do it, in a future market once the product is made.

That requires knowledge of the industry and market, its trajectory, and the skill and experience of the startup team.

Valuations may be completely different. They’re often made with the following data:

· Monthly sales

· Price per product

· Income month over month

· Assets

· Time to profitability

· Industry

· Market size and growth

· Comparables and competition

But of course, none of these things go into a token hard cap and I can guarantee only month-to-month growth has ever been discussed in any room I’ve been in when planning an ICO (and guess what? Those estimates were a lot of numbers pulled from guesswork).

Even after an ICO and a product is live, the vigorous use of tokens within a huge community may increase a company’s valuation. However, it does not tell the entire story.

Startup Investing

Utility tokens are fading because investors are getting sick of the speculative nature of this kind of investing. It’s not a good fit for long-term investments. It’s quick and rough, with plenty of risks and imperfect, if not outright speculative, ideas about what the future for any one company holds. These ICOs are going the way of the dinosaurs, too. Increasingly, security tokens take the place of utility tokens, US investors are shunned for regulation, and the idea of the “equity token” is emerging.

AiBB is an Ai-based cryptocurrency trading platform — which means gathering information, checking its accuracy, and evaluating investment opportunities is part of what it does better than its human counterparts. Still, evaluating utility ICOs is notoriously hard.

Using more data and building on the histories of previous coins in all kinds of markets is the only way that technologies like this can continue to refine their algorithms, learn to predict the best investments, and lead traders to understand the best way to participate in these sales. If you trade in utility altcoins, checking out the AiBB advisor is one way to help reinforce your own strategy in a world where valuation is tough.