The 21st-century startup ecosystem is fast leveraging Initial Coin Offerings to pump capital into the company. The idea is so convincing that one startup raised a whopping $4 billion during the ICO without an actual product.
If you’ve been in the ICO game, you’ll know that you purchase Digital Tokens from the ICO organizer company and your money gets converted to the capital gained by the company.
Now for most people, this is the point of confusion. Are you buying the company’s assets in the form of tokens? Are you buying a cryptocurrency? Can you sell your tokens later?
As an investor, these are legitimate questions, that you must seek an answer to and the following points will bring you to speed with that.
A digital token is a unit of cryptographic information that is used to facilitate a real-world transaction. The transaction can be anything from an online money transfer to subscribing to a service.
Bitcoin and Ethereum are two blockchains that offer digital tokens. You can use Bitcoin as “digital money” whereas Ethereum’s ETH token has several developmental use cases.
For instance, digital tokens are similar to the chips distributed to players in a Poker game or Arcade tickets used to redeem rewards. Both of them aren’t regulated currencies but they hold some specified value.
Types of Digital Tokens
Broadly, the digital tokens in an ICO scenario have two classes;
- Security Tokens
- Utility Tokens
Security Tokens are used to offer securities to the investor which can be anything from a share in the company to dividends to assets. These tokens can be treated as property and hence invite regulatory guidelines while using them.
If your country or region has guidelines on the use of these tokens, they strongly apply and the company offering them needs to abide by.
The catch: Startups usually don’t offer securities like stocks or shares in an ICO but if you feel that’s the case, make sure you confirm which security are you receiving.
Utility Tokens are a form of internal points that the company offers for purchasing its services or products. These tokens are independent of jurisdictional intervention and only applicable inside the company ecosystem.
Although you can obtain products and services of the company with these tokens, purchasing these doesn’t mean you have a share in the company.
It’s similar to buying credits for using a software product — you burn the credits as per the usage of the software.
How do Digital Tokens Translate to Real Money?
When it comes to Security Tokens, they are treated as properties which means you are buying a sellable asset. The same dynamics that of a stock trade operate with security tokens — their value rises and falls as more people participate in the economy.
Utility Tokens are priced by the company and are independent of any economic impact. They don’t represent any real-world asset or property outside the company’s ecosystem. You simply purchase them to use the services of the company.
Podminers POMT token is also a utility token as it’s designed to facilitate internal transactions. You can purchase the token in order to use the services offered by the Podminers platform.