The crypto-token economy has been around since the introduction of bitcoin in 2009 but for many potential investors it is still a mystery. Crypto-tokens are new kind of asset that are becoming accepted for payment for goods and services. There are also online crypto-currency exchanges where it is possible to buy, sell or exchange crypto-currencies and tokens for other digital currencies or for fiat money. Crypto-tokens are typically first distributed through an Initial Coin Offering (ICO). Unlike an Initial Public Offering (IPO) an ICO gives the investor a claim to the usage of the token but not a claim to the equity of the company.
Crypto-tokens are distinguished from crypto-currencies, such as Bitcoin, through not having their own blockchain. Many ICOs choose to use the Ethereum blockchain. The second half of 2017 saw a large number of new crypto-tokens launched, but not all will succeed. The biggest problem for anyone investing in crypto-tokens is identifying the tokens that will prove successful in the long-term.
Complexity and technology
If the crypto-token economy is going expand then investing in tokens will have to become attractive to the wider public. At present tokens are frequently seen as a niche investment. The decentralised nature of the system and the blockchain technology behind the tokens can be difficult to grasp, as can the lack the infrastructure and the liquidity that underpins the traditional financial market.
The evolving nature of the economy can make it difficult to compare tokens with each other and to judge whether any particular crypto-token will prove to be a long-term success. Before committing to invest you must conduct a detailed investigation of the token and look at how the crypto-token is used within the business model and whether the crypto token can be used outside its ecosystem. Once you have determined that the business model is potentially viable it is helpful see if the project team behind the token have a proven track record in the crypto-asset and blockchain industry.
Can you have trust?
Trust is probably the biggest single issue that prevents most ICOs succeeding. Crypto-tokens are not backed by gold or fiat money and have no intrinsic value. They are of uncertain legal status, with no country so far specifying an ICOs legal status or setting out requirements for companies desiring to raise funds in this way. Those looking to invest in tokens are often faced with a website that offers no clear business plan, no details of the team behind the ICO and no information on any external advisors they may be employing. A traditional IPO is subject to stringent regulation but an ICO is subject only to self-regulation. The lack of transparency with which many companies approach their ICO along with repeated accounts of money laundering and fraud have scared off potential investors and left ICOs failing to reach their stated goals. Even beyond the ICO the uncertainty doesn’t stop. Hacker attacks on crypto-exchanges have left many investors questioning the wisdom of storing their assets in a system that appears to be so open to manipulation.
Increasing liquidity?
A lack of liquidity is one of the chief factors limiting the expansion of the crypto-token economy. In the traditional finance world liquidity is provided by companies such as Merrill Lynch and Goldman Sachs. In the crypto-token world there is no business taking on a similar role. As an increasing number of crypto-tokens are introduced the liquidity problem is becoming acute with most of the existing tokens being illiquid and there being no way for investors and traders to purchase crypto-currency at a stable price. One way in which this is starting to be addressed is through the use of blockchain for repo transactions. Using blockchain can reduce the inherent risks of the repo market, while at the same time providing the required liquidity for the crypto-token economy.
Conclusion
The future of the crypto-token economy is potentially bright but it is not without significant challenges to overcome. The value of crypto-assets continues to grow each year, but most new ICOs fail to reach their target funding levels and the top 10% of crypto-assets account for around 90% of the total of all traded volume. In the longer-term only a few crypto-tokens will prove to have any significant impact, while most will fade into obscurity. Many new ICOs are often badly thought out without an obvious long-term business strategy or real need for the crypto-token. These schemes are frequently promoted by technical people with no relevant marketing and business experience. For a crypto-token to succeed in the long-term and go on to be truly global it must be capable of widespread use and be backed by a strong management team with a solid business plan. For the crypto-economy to grow work needs to be done to simplify the way in which consumers can invest in and make transactions using crypto-tokens. Investors need to be offered valid reasons to choose to make their transactions using crypto-tokens instead of fiat money. The present lack of trust in the crypto-economy could be addressed by greater external regulation to remove the scammers presently attracted to the field, and internally by a tightening of security to deter hackers who see crypto-exchanges as a tempting target.