What Token Are You Smokin’?

Token mania is in full force and many are being lured into the “blockchain” frenzy and throwing their money at the “latest and greatest” coin offering.

First, what is a token? Tokens fall into two primary categories: community currencies and glorified pre-paid gift cards.

Community Currencies

Community Currencies have been around forever beginning with the most commonly valued commodities that became a medium of exchange within those communities. Gold being durable, divisible, and scarce became one of the most popular. It is the most useful commodity that gains market share over time and eventually becomes the primary medium of exchange.

Nevertheless, there always exists certain sub-communities and affinity groups that, for whatever reason, choose certain commodities as their own preferred medium of exchange. The ultimate value of these currencies rests upon what someone is willing to trade for it. The most commonly accepted are the most liquid and, those holding the minority currency, face ongoing liquidity challenges. Without strong enough support by the communities these currencies can wither and die.

There are many community currencies in the crypto space with bitcoin being the largest and most liquid. In fact, due to its size and acceptance, it has become the primary (and often only) gateway to all other currencies/tokens.

Glorified Gift Cards

The next type of token is nothing more than a digital credit certificate (gift card) that can be redeemed for the products and services of the issuer (sometimes not even that!). It is an I.O.U. and a promise to pay you the products and services of the issuer at some future date.

The problem with most of these Initial Coin Offerings (ICO’s) is that they are issuing digital gift cards for products and services that don’t even exist yet. The more successful that the ICO is, the less incentive there is for the issuers to deliver the goods and services unless they “lock up” certain coins that can be claimed after accomplishing certain benchmarks in development. But, for the most part, they have essentially pre-sold their products and services. You are essentially investing in a high-risk start up when you buy these coins. Similar to what has traditionally been referred to as “penny stocks”.

Many people in the bitcoin space worry that these ICO’s distract and attract capital away from bitcoin but this is incorrect. Capital always flows to where it is respected and protected. I suspect that most of these ICO issuers convert their proceeds right back into bitcoin as the primary store of their wealth. Hence, they are indirectly attracting capital to bitcoin.

Summary

Think clearly before smokin’ that token and use the above metrics to help you determine the ultimate value of the token being pitched to you.

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