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One of the arguments typically presented by those in the finance industry who oppose cryptocurrencies is the lack of intrinsic value. Unlike gold or other physical financial instruments, those who do not back cryptocurrencies state that there is no actual value of the assets themselves but is rather assigned value by those who invest and believe in the project.
Although this argument does have some validity, the fact that cryptocurrencies can be used as a digital form of currency and have found plenty of applications in both of the financial and technology industries has proven only to add value to tokens rather than cause resistance in the crypto industry. The biggest question, however, is, how are these assets valued? Why are some tokens worth more and how does this happen? In this article, we will evaluate the valuation process for tokens, utility tokens specifically.
What Are Utility Tokens?
Unfortunately, there is a lot of information out there regarding the differences between several types of coins and not all of them provide the clarity or the information necessary to successfully differentiate the different options on the market.
To put it simply, utility tokens, which are commonly utilized in ICO crowdfunding campaigns, are units of value that represent the product an organization intends on developing and distributing at a future date. Users purchase utility tokens to help fund projects and for their investment, they will receive their invest (sometimes more) once the project and token have officially been launched.
How Is the Value of a Utility Token Determined?
Because you cannot value cryptocurrency offerings using the traditional financial frameworks, we have to use other methods to properly evaluate a utility token.
The driving factor that lies at the heart of all utility token values is speculation. Since the projects that utilize utility tokens are mostly startups who have yet to produce the product and are currently working on acquiring the funds needed for development, we cannot yet compare them to other crypto companies, judge them by the market that they are in, or base the value on past and current revenue.
Therefore, most utility tokens are valued based on the concept of a crypto project, how well their business plan and whitepaper are developed, the qualifications of the team behind the product, and the likelihood that the project will succeed in its mission and the expected/current demand for the product and network.
In assessing the value of a utility token, investors also take into account factors such as hype, total supply, and inflation/deflation. One commonly used model is the equation of exchange (MV=PQ), although this can approximate the potential valuation of a token, this method also has its drawbacks.
These current valuation techniques give you insight into how tokens are priced at this point in time and why some are often more than others.
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