With all the recent news surrounding ICOs and how they work, you’ve probably heard the term “token” come up tons of times, but are you aware of the different classifications of tokens? From utility to security tokens, there are actually several different classifications of coins and every informed investor should understand the difference between them. Security tokens have been especially popular as of late and are usually obtained through participating in ICOs. With that being said, let’s go over what security tokens are, how they work, and why they matter for the cryptocurrency industry.
This is not financial investment advice.
This article will explain what security tokens are and how they function.
Token: Token is a unit of value issued by a tech or crypto start-up, intended to be a piece in the ecosystem of their technology platform or project.
ICO: The cryptocurrency space’s rough equivalent to an IPO in the mainstream investment world. ICOs act as fundraisers of sorts; a company looking to create a new coin, app, or service launches an ICO. Next, interested investors buy in to the offering, either with fiat currency or with preexisting digital tokens like ether. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO.
Blockchain: The easiest way to understand blockchain is to think of it as a fully transparent and continuously updated record of the exchange of information through a network of personal computers, a system which nobody fully owns. This makes it decentralized and extremely difficult for anyone to single-handedly hack or corrupt the system, pretty much guaranteeing full validity and trust in each exchange of information.
Familiarize yourself with these key terms in order to better understand how utility tokens work.
What Are Security Tokens?
As it turns out, there are multiple classification of tokens which every investor should understand before making investment decisions. To put simply, security tokens are cryptographic tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders. These types of tokens usually get their value from an external, traceable asset.
What makes these types of tokens so revolutionary is that they’re Issued by smart contracts, meaning that they can be coded to self-execute. This achieves a degree of liquidity never seen before in any other securities market. Smart contracts autonomously and automatically carry out actions subject to fulfilment of a set of predetermined conditions, allowing for more efficient management of securities. This means that investors can have greater autonomy to move and control their own assets in a frictionless manner, supplemented by a transparent record of ownership.
On top of that, because they are backed by a regulatory network, security tokens allow for free market exposure and essentially guarantee global access. This can lead to improved asset valuations which will benefit the industry as a whole in the long run. Anyone with internet access around the world can participate in trading or purchasing security tokens, which is the first step in opening up the cryptocurrency world to everyone.
Security tokens are cryptographic assets that pay dividends, share profits, and invest in other tokens or assets to generate profit for the token holders. They are open and accessible to anyone around the world.
Importance of Security Tokens
Other than giving token owners a chance to earn a share of some profits, security tokens provide a plethora of advantages to anyone who owns them. With seemingly unlimited use cases, these tokens provide the much-needed regulation that the cryptocurrency market needs to advance its own infrastructure.
As a result of this, future cryptocurrency-based projects will receive much more support from investors who trust the security tokens. Broadly speaking, this could completely eradicate the need of having a back office which can be replaced — or at least minimized — by security tokens that are fully automated. Additionally, programmable security tokens leverage the power of blockchain technology, something that many businesses are seeking to incorporate.
Security tokens provide global access to anyone with internet access, truly expanding the scope of the crypto industry. On top that, they have the potential to completely replace the need for back offices for the securities market which can be fulfilled by these tokens.
Pros & Cons
Just like any other coin or asset, security tokens have their own set of advantages and disadvantages that every investor should be aware of. To start off, security tokens offer much more regulation than utility tokens, which has been one of the biggest concerns for investors who discuss them. The implementation of security tokens in most ICOs will increase the accountability for these companies to perform well and ensure returns on their investors’ investments. With utility tokens, nothing is guaranteed and companies have the ability to quickly disappear with no real products or earnings.
On top of that, traditional finance institutions have a lot of middlemen involved which simply increases the execution time. By removing these middlemen, securities allow for faster execution time for successful issuance of security tokens. Because of this increased speed, the security tokens are bound to become attractive investments for any investor who seeks to gain large returns with relatively moderate to high risk.
However, as with any other asset, security tokens aren’t all positive. The removal of middlemen leads to the shifting of responsibilities onto the buyer or the seller in the transaction. These middlemen — otherwise known as financial institutions — serve a lot of important functions in the financial ecosystem. Many critics feel that the creators won’t be able to successfully execute these functions without traditional financial institutions. Of course, only time will tell whether or not these fears have any basis.
These tokens provide much more financial inclusion, regulatory framework, and global access for all to participate in the cryptocurrency network. However, the eradication of middlemen also poses a threat for investors seeking to successfully execute these functions without traditional financial institutions.
When it all comes down to it, security tokens offer a compelling investment opportunity backed by global accessibility and the potential to earn a share of the company’s earnings. Acting as an asset similar to that of traditional securities, these tokens make up a significantly small portion of the cryptocurrency industry compared to utility tokens, which comprise a majority of the industry. Only time will tell how crypto users react to the influx of capital coming in for security tokens, which have the potential to significantly revolutionize the cryptocurrency industry.
What are some of your favorite security tokens? Let us know why you like them in the comments!