Almost every day, I get some very intelligent questions in my mailbag and do my best to answer them. Here’s a good example:
James C. writes:
I’ve been investing in stocks for 60 years. I agree with you and Martin on the exciting future of DLT. I started investing in crypto in November, before your announcement, and soon lost $8,000. I wouldn’t have made those mistakes if I’d had your guidance. I’ve read all your writings I’ve found, but I haven’t learned the answer to a basic question that bothers me:
Do the tokens (“coins”) have any intrinsic value?
Ownership in the issuing company, like stock?
Trading them for stock at the issuer’s IPO?
Discounts on the issuer’s products?
Ease and speed of trading for goods and services?
Is the money “invested” at ICO’s just free money for the issuer?
Maybe the value/price is just based on the opinions of the market participants? If so, what are they looking for?
First and foremost, please do not confuse two entirely different realms:
• Native tokens. These give direct exposure to blockchain protocols themselves. Examples include Bitcoin, Ether, NEO and Steem. Also included in this category are tokens that will be native tokens, such as EOS and Icon. We consider these to be the only true cryptocurrencies, and they’re the only kind we currently rate or recommend.
• Non-native tokens. These are usually issued via Initial Coin Offerings (ICOs) by a wide variety of companies, typically start-ups. Their goal is to raise funds for projects that have rarely intended to use blockchain, or DLT, in their business model.
The only connection these non-native tokens have to cryptocurrencies is the fact that they use one of the cryptocurrencies as their medium of exchange. In other words, instead of raising money in dollars, pounds, euros or yen, they raise money in cryptos like Ethereum or NEO. Their tokens are also deployed on top of these blockchain platforms. They live on the Ethereum or NEO blockchain. They do not have a blockchain platform of their own.
So, here’s the simple answer to the question: Both the native and non-native tokens can have intrinsic value. But most non-native tokens are trash. For the longer answer, let’s look at each separately …
Native tokens directly represent the underlying software technology, called blockchain or Distributed Ledger Technology (DLT).
On the Ethereum network, for instance, the native token is Ether, and it does have solid intrinsic value.
Why? One reason is because it has very broad and practical uses: Ether is issued for fees to operate on the network. What’s more, it’s used as the currency of countless ICO tokens, with new ones hitting the market all the time.
Another reason: It takes energy or work or some valuable contribution to create the native token.
Non-native tokens are usually more speculative. They give you exposure to a startup business that’s looking to use blockchain in some way. These tokens are often required to use in the company’s business you’re betting on. But as a rule, you get no ownership in a public company. Nor can you ever expect a swap for actual shares. The issuers are almost invariably private start-up companies, usually very small, and often with little or no experience.
Plus, in this new era of privatization, most of them will want to stay private so the only way to “invest” in them is to get their tokens, which act as proxy shares of the company. That means these companies will never do an IPO and they will never swap your token for shares.
So, yes, in the end, when you buy these non-native tokens, for the most part, you wind up giving the issuers free money.
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| Ethereum is a good crypto-platform. We expect an ecosystem to grow around it, and for countless businesses to build their products on top of it. |
What confuses investors is the fact that many of these non-native tokens are what’s called utility tokens.
A good metaphor is airline miles vs. airline shares. As you know, companies like American or Delta award points to frequent flyers, which can be redeemed for tickets or other goods and services. In that sense, these are similar to utility tokens.
The key difference: Unlike airline miles or loyalty points, many utility tokens can be traded like investments.
Another key difference: You would never confuse American Advantage points with shares in American Airlines Group Inc. (AAL), would you?
But in the crypto world, utility tokens do get confused with investments. In fact, some ICO issuers confuse them deliberately. They want you (and the regulators) to believe they’re issuing utility tokens — that all they’re doing is giving you vouchers for some future goods or services.
In reality, however, they’re mostly trying to raise money. And according to the SEC, that’s akin to selling unregistered securities.
Finally, let’s talk about the exceptions.
Exception #1, as I indicated at the outset, are the non-native tokens that will be native tokens in the future. They are issued in ICOs for blockchain projects prior to the launch of a native token.
For example, EOS is an excellent project scheduled for launch in June, but investors can already buy its tokens.
These are the only non-native tokens we rate. Why? Because they will be directly exchangeable for native tokens.
Exception #2 are the non-native tokens issued in ICOs by a small handful of solid start-ups with viable products and experienced teams. If the business is successful, demand for these tokens will go up, and so will their price. Please be aware that we do not currently rate these tokens, but may do so in the future.
Why We Currently Rate Only Native,
Or Soon-to-Become Native, Tokens
At this very early stage, we believe this is where most of the money will be made.
It’s like buying the land where a city will be built.
The city itself is still a dream. The businesses that service that city are even more remote.
But we know the city is coming. We know the businesses are also coming. So at this early stage, owning the land is clearly the way to go.
Similarly, if we think Ethereum is a good crypto-platform, if we expect an ecosystem to grow around it, and we expect countless businesses to build their products on top of it, we can also expect the native Ether token to get a massive boost in price. Ditto for NEO, Bitcoin, EOS or any other crypto we rate.
But, that’s not to say all these native tokens are created equal:
Bitcoin can only be used as money, either as a medium of exchange or store of value.
Ether has a wide variety of applications.
NEO is far faster than Ethereum. Plus, the NEO token represents a kind of ownership stake on the NEO network, as NEO holders are entitled to a share of the profits generated and get paid in GAS.
Hope this helps clears up some of the confusion!
Best,
Juan
P.S. Join our crypto conversation on Twitter here.