What is a crypto token?
Tokens are cryptographic assets that can represent a variety of things, including real-world commodities, crypto coins, or utility tokens. They are also often called cryptocurrencies.
The most popular type of token is the utility token. These tokens are typically created by startups to use in their networks or services. Utility tokens have the potential to provide users with future access to a company's products and services.
A well-known example of a utility token is Bitcoin (BTC) which has grown tremendously in the past few years because it provides its holders with future access to Bitcoin’s network and service.
Crypto tokens can also represent real-world items like gold or silver. However, these types of tokens are not very common because they lack value for both buyers and sellers.
Evaluating crypto tokens
Crypto tokens are becoming increasingly popular. Their popularity is largely due to the amount of money that can be made through investing in them, which is why many people are putting more and more resources into crypto tokens. Yet it is important not to invest blindly; there are five questions you should ask yourself before investing in any crypto token.
- What is the business model?
- What purpose does the cryptocurrency serve?
- Is the team credible and qualified?
- What are the token distribution terms?
- What is the token’s governance structure?
Business model
What is the business model for the token? The business model includes what customers will receive from the company in exchange for the tokens, as well as how customers will be able to use those tokens.
For example, if a company offers a consulting service and they charge $10 per hour and you pay with tokens for that service, then you're receiving consulting services and using those tokens as currency.
Purpose of the token
The purpose of a token determines what problem it solves and who it is intended to serve. A nonprofit, for instance, might issue tokens as a way to raise funds. A company that builds smart-contracts might also issue tokens as a way to distribute ownership of its products or stake in the company's success.
In order to understand whether a token has value, you need to know what role it serves. In some cases, tokens represent equity stakes in a company or promise access to a service later on. In other cases, tokens are designed solely as a means of transferring value.
Team
The team behind the project is one of the most important aspects to consider before investing in a cryptocurrency. There are many examples of cryptocurrencies that have launched without an initial connection to the founders, but were later revealed to be scams or otherwise illegitimate ventures. Is there a well-known team behind the cryptocurrency? If not, you should be cautious about whether or not it's legitimate.
Do the members of the team have relevant experience? The best projects will have a team with varied backgrounds and skillsets, which will make it more likely that they will be able to execute on their vision.
Are any members of the team well-known? A big name can help legitimize a project and give potential investors confidence in their investment.
Token distribution
One of the most important factors in evaluating a crypto token is token distribution. Think about what you’re investing in. You want to be confident that you are investing in something which will be valuable down the road.
Token distribution is important because it gives investors insight into the future of the company. It provides valuable information related to how many tokens will be distributed, how tokens are distributed, and what percentage of tokens are reserved for private or public funding. Investors can use this information to determine whether or not they should invest in a certain cryptocurrency project.
Tokens may only be distributed through an ICO, whereby early backers receive tokens at a discounted rate or via mining, whereby holders receive new coins for performing algorithms on their computer. When considering token distribution terms, make sure to investigate how many tokens are offered during the ICO, when they will be available for purchase, and how long they can be held before they expire.
Governance structure
Governance is a critical component to take into consideration when evaluating a crypto token. For example, Dash uses a masternode network to facilitate governance. This network can vote on proposals, execute them if approved, and fund development work. Other coins use a proof-of-stake consensus mechanism whereby coin holders can vote or delegate their stake to delegate voting power.
Some tokens use the ‘airdrops’ method where projects distribute free tokens to users who sign up or meet certain conditions. These tokens are distributed for free without the need to purchase them through an exchange. These tokens are given away in limited quantities, typically as part of an initial distribution strategy rather than as part of a fundraising effort like an ICO (initial coin offering).
Conclusion
The success of any crypto token is dependent on many factors, including the team behind it, the business model, the token distribution, and governance. By doing your due diligence in evaluating these aspects of a crypto token, you can make an informed decision about whether or not it’s worth investing your resources.