Utility tokens vs. Equity tokens: Key differences explained

Utility tokens vs. Equity tokens: Key differences explained

Although crypto coins and tokens fall under the broader umbrella of cryptocurrencies, subtle technical differences between the two make each unique and warrant that investors understand these variances.

While crypto tokens and coins are largely the same from the end-user perspective, there are technical differences in how they are built on a blockchain that is important to understand.

Making matters more befuddling for new investors, crypto tokens can be classified into three types: utility tokens, security tokens or equity tokens. In the subsequent sections, we will focus on the differences between utility and equity tokens, and how these dissimilarities ought to drive decision-making when it comes to investment.

What is a utility token?

Commonly issued during an ICO, utility tokens provide token holders with privileged services and aren’t considered to be investments as they are speculative and act more like promotional tools for the issuing company.

Usually associated with initial coin offerings (ICOs), a utility token is a special type of cryptographic asset that is primarily aimed at garnering the funds necessary to develop a cryptocurrency project. Investors may purchase these utility tokens in different cryptocurrencies or even fiat currencies, and prices are generally static during the initial stages.

These utility tokens, once purchased, are stored in a crypto wallet associated with the buyer and can be used to access services provided by the blockchain project.

Moreover, utility tokens do not represent any ownership stake in the project being invested in and instead, allow the holder to buy or sell the underlying tokens on a preferential basis.

The value of utility tokens usually fluctuates, depending on the demand for the project and may generate profits for the token acquirer if the project ends up reaching its intended purpose with reasonable success.

Is Bitcoin a utility token?

Cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) are encoded into the software protocols of their respective blockchains and have digital assets native to their ecosystem. Therefore, BTC is considered to be a cryptocurrency in its truest sense and is used to transfer monetary value on Bitcoin’s peer-to-peer network.

Crypto tokens, on the other hand, have a transaction behavior that is the result of being implemented by smart contracts instead of being built into the blockchain software, itself.

Similarly, many investors wonder if Ripple (XRP) is a utility token. XRP and Basic Attention Token (BAT) are basically ERC-20 tokens that run on the Ethereum network wherein XRP is used to facilitate Ripple’s enterprise-grade payment solutions, which are faster, transparent and more cost-effective than traditional financial services.

BAT is driving the Brave browser’s global private ad platform, which has 54 million monthly active users and 1.4 million verified creators, benefitting from arguably one of the most successful blockchain projects to date. Both are classic examples of utility tokens that have grown multiple folds in price terms since their ICOs due to the immense value they have created since their launch.

Created on 27th May 2022