I hope we are effectively facing a crypto winter for ‘dumb money’ utility tokens

JON WALSH: "Maybe utility tokens can exist as a true utility, but this would also require a degree of certainty to their value"

Over the past 18 months roughly 90% of all ICOs have been based on the ERC20 token and can take no more than 20 minutes to write. At the same time, almost all ICOs have been developed off of the back of a claim that the token is a “utility token” which is not held to the same regulatory rigour as someone issuing a security token (an STO).

So what is a utility token, and why are so many ICOs using this method? The answer is pretty simple; no regulation, and until Spring of this year, fairly easy to raise (dumb) money from, even if it’s just a pretty whitepaper and three guys in a room with an idea.

To create a utility token, all you need to do is come up with some way of jamming a token into your business and blockchain where it goes in one end and falls out another, and hey presto, you have a utility token and can raise some mega cash.

Get rich quick?

We now have two problems to deal with, a) ICO investors are just that, investors,  and are dreaming of the day when the token goes to the moon, and they can buy their “Lambo” – most have almost zero interest in actually utilising your project as a consumer and think they’ll get rich. And b) when you have eventually launched your business and your token is needed to run through the blockchain, you’ll find that the velocity of the token makes it a seriously depreciating asset. This is akin to being paid in your British Pounds, yet the second it hits your account you convert it to gold and all the products and services that you use only accept gold, and no one is genuinely interested in your valueless GBP. If there is no reason to hold it, there’s no value to it essentially.

I’m hoping that now we are facing effectively a crypto winter (or at least an Autumn), that both start-ups and investors alike, will start to really consider what role tokens serve in a business, and what is their real value beyond the discount you might have received by buying early, and therefore being able to dump early and still make a profit and how that then impacts the value of the tokens that the project – and the late investors – are still holding.

Public capital will dry up

The problem has been created by a real lack of regulation, and a market that has been thirsty for easy returns. The interesting thing here is that we will probably see a rise in blockchain start-up failures from the reported 40% dying within four months of their ICO completing. This, in turn, will see a drying up of the public capital that was once available for blockchain start-ups and will hopefully see the emergence of these start-ups doing things the right way, with at least an MVP and some proof of concept before they probably go to qualified investors (high net worths, angels and VCs) for an initial injection of capital to get them to the next stage.

Maybe utility tokens can exist as a true utility, but this would also require a degree of certainty to their value. Why would someone spend that token, if they thought the price has a good likelihood to rise? Or why would they hold it if the intention is to use it as a utility? No one I have ever met buys a gift card for themselves with the intention of holding it as it may become more valuable.

The other interesting thing to note, is that with the popularity of ERC20 tokens, and Eth being used to purchase these, we have seen many start-ups keep their treasury in Eth, and then seen their money raised reduce in value by as much as 70%. If that’s your working capital, then you’re pretty screwed now. Additionally, when Eth was worth close to $1,000 per coin, and you had made a phenomenal return on your investment, it was easy to gamble on using it to buy into Eth based ICOs… not anymore, and this has just further negatively impacted the ICO market as a whole.

The original dream could be lost

Ultimately, all this nonsense will work out well for the space, as it will reduce the ability for crap projects to start and crapcoins to be pumped out. My only fear, is that the original dream of the ICO market to be able to democratise the investment market, and let the common man or woman get invested in projects early could be lost. What we may actually find is that it’s only the institutions which will be able to get involved, and nothing really changes.

At least maybe, ordinary retail investors will get protected for their own good away from these highly speculative (bordering on utter garbage) projects that do no good for anyone.


Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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