As more and more startups are created every day, our world is also getting filled up with tokens - a digital currency that represents one’s special access or profit share within a project, company or asset. Last year, more than $800 million worth of tokens were bought.
However, aside from the benefits received from buying tokens, not everyone is aware of the characteristics of what they are buying. Before investing in ICOs, here are a few things you need to know about tokens.
What tokens actually are
Instead of donating money to projects through crowdfunding platforms and receiving the pre-offered rewards, investors or interested parties can purchase the tokens issued by their favorite project. Buying or owning symbols means that you are interested and want to gain access to what the project has to offer in their ICOs.
Since most tokens are Ethereum-based due to the smart contract capabilities of the Ethereum blockchain, it could only be purchased using Ether, not fiat money or any other cryptocurrency. However, it could be bought by exchanging other currencies into Ether.
Basically, a token is a piece of code, which is capable of storing the wallet addresses of its buyers. Transactions such as trading between token owners are automatically made and recorded in the storage, with automatic balance adjustment to both sender and receiver accounts.
Anyone can create a new token, issue it, share it or sell it. However, selling or making profits out of it depends a lot on what value the token has to offer and if anyone is interested enough to buy.
Types of token
Token buyers only buy certain types of token for two types of promises: a positive return on investment, or some utility within the business ecosystem of the token issuer.
Security Tokens are tokens created to meet the first promise. If the project is successfully set off or the company is making profitable returns, a profit will be distributed to token holders. However, this type of token has liquidity issues since most of them are not accepted on token exchanges and requires a great deal of trust.
The second promise is fulfilled with Utility Tokens. This type of token is capable of providing specific use within the platform. The more successful a project or a business’ existing ecosystem, the more demand for its token. If the need for a particular token is high, there will be a massive increase in its price and could then be sold for a profit.
If you want to make good investing decisions, it is highly important to recognize what type of token you are throwing your money at along with all the risks and opportunities it could bring.
What about token total supply cap?
If you have never really paid enough attention to this figure, from now on, you should. ICOs that do not declare or notify investors about the total supply cap of their token in the Token Smart Contract could put investors under risks. Some time after the release, they can issue more tokens unknowingly and inflate the value of your token the way fiat systems work or delete existing tokens.
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