Utility, Equity, and Debt Tokens: an Overview for Institutional Investors

Utility, Equity, and Debt Tokens: an Overview for Institutional Investors

Cryptocurrency – a digital asset designed to work as a medium of exchange using cryptography to secure the transactions – is shaking the foundations of the investment world. One of the biggest pluses of cryptocurrency is that it brings users together in a decentralized system of financial transactions. Not only do cryptocurrencies offer full transparency, they are also extremely secure.

It is now possible for start-up companies to raise capital through an Initial Coin Offering (ICO) or Initial Public Coin Offering (IPCO), without the involvement of banks or venture capitalists. Consequently, ICOs are rapidly growing in popularity. In the first half of 2017 alone, quite a few ICOs, like Bancor, EOS and Tezos, saw spectacular success. Each one of these ventures was able to raise more than $150 million in cryptocurrency capital alone. As Bloomberg reports, “While the record-breaking rally in Bitcoin has captivated markets, demand for other digital coins is surging as companies raise millions in minutes, or even seconds….”

New cryptocurrency ventures are usually financed through “crowdfunding,” which enables an entity to raise capital by soliciting relatively modest contributions from a wide range of individuals, usually via the internet. In a sale through crowdfunding, the investors are able to purchase the distributed coins, also referred to as tokens, utilizing a virtual currency. Tokens are digital assets that can be transferred between users on the cryptocurrency network. In essence, tokens can represent access to a current or future service, access to a current or future product, or some debt product or asset class such as the digital equivalent of shares in an IPO.

In an ICO, capital is raised through the issuance of different types of tokens. The terminologies are not yet fixed, due to the ever-evolving climate of the cryptocurrency world. However, cryptocurrency primarily includes utility, equity, and debt tokens. Each token comes with its own merits.

Utility tokens, also called user tokens, are defined as units of services that can be purchased. They are a form of virtual currency that enables the user to access the service provided by the developed project. As explained by Albert Wenger, a partner at Union Square Ventures, these tokens can be viewed simply as a ticket to get on a ride at the fair. Big names in the utility-token market are Filecoin, Flipcoin, and Storj.

The second type of token, equity tokens, are similar to equity shares in a company. Through equity tokens, programmers are able to fund the development of the network. There is no access to the services provided by the developed program; instead, investors earn “dividends.” In most cases, equity-token holders also have the right to vote on major company proposals. Digix is a well-known name commonly associated with equity tokens.

Debt tokens, the third type of token, are the equivalent of short-term loans on an interest rate on the principal amount loaned to the company. This is similar to capital raised through debt. One example of a debt token is the cryptocurrency Steem, which can be used to purchase Steem Dollars. The users who hold Steem Dollars receive a 10% interest.

The formation of entities through ICOs brings together the world of cryptocurrencies and traditional currency. While individuals had been the primary users of cryptocurrencies, companies are, with increasing frequency, embracing the token-based investment model as a means to finance the development of their projects. It is anticipated that this trend will continue to grow at an exponential rate. ICOs can thus offer a very promising venue for aggressive investors seeking a high return on investment.

Strategic Coin is your go-to source for crypto market research insight and education. Whether you need help understanding the basics of blockchain technology or desire to read an in-depth analysis of the latest ICO or token launch, Strategic Coin will provide you with the information you need to take advantage of market opportunities within the crypto space.