VYSYN VENTURES WEEKLY INSIGHTS #17
Utility tokens built a bad reputation… and deservedly so. Amid the peak of the ICO mania in 2017–2018, projects with misspelt whitepapers were raising valuations comparable to the fundraising rounds of tech startups with five years of exponential growth.
The fallout of the ICO mania left countless investors with their capital lost. Some projects proved to be outright scams and disappeared immediately after raising funds. Most went bankrupt after the ensuing bear market. The projects that succeeded in delivering a project were oftentimes late and released poor products.
However, a small number of utility tokens have discreetly risen in the cryptocurrency market cap rankings. Projects including Chainlink (LINK), Binance token (BNB), and Crypto.com (MRO) weathered the bear market and emerged among the most highly valued cryptocurrencies.
In the latest VYSYN VENTURES insights, we analyse how some utility tokens have thrived while the majority failed to survive the bear market. We also assess the likelihood of utility tokens outperforming in future market conditions.
Current Market Conditions
At the time of writing, four utility tokens currently rank among the top ten cryptocurrencies by market capitalization. These tokens — Chainlink, Polkadot, Binance, and Crypto.com coin — all currently exist as tokens on the Ethereum network. Utility tokens fell from grace after many projects severely underperformed or died during the declining prices of 2018. However, some have resurged among the most valuable crypto assets.
These tokens have mostly displaced cryptocurrencies dominantly used for payments (Bitcoin SV, Monero) and cryptocurrencies tied to smart contract platforms (Tron, EOS). It is worth noting that the success of cryptocurrency payment networks and smart contract platforms is heavily influenced by network effects. Most utility tokens also depend on network effects but oftentimes to a lesser extent than the displaced cryptocurrencies.
The Utility Token Model
From an investor’s standpoint, the concept of a project raising money by selling utility tokens is simple. The project raises capital in exchange for tokens which will operate within the platform the team builds. The token will provide unique privileges within this platform and the investor may observe a return on investment based on the value which the token accrues.
The concept of a token giving holders unique privileges is not new and has existed for generations in consumer-oriented businesses. Retail businesses have often rewarded their customers with specific points that can only be used within their mini-economy. It is only the concept of raising money for the tokens of a future platform which is new.
Binance Token (BNB) Success Story
Binance has been among the most salient utility token success stories. The leading exchange by cryptocurrency trading volume raised funds through a token sale in 2017. Binance quickly rose to prominence and became the dominant marketplace for cryptocurrency trading. Binance facilitates roughly 10x the volume of competing spot marketplaces.
It is no surprise that other cryptocurrency exchange tokens also rank highly in the market cap leaderboard. The utility tokens of OKEx (OKB) and Huobi (HT) rank 18th and 24th respectively. Furthermore, FTX, a rapidly growing exchange, also has a token which has been rising in the cryptocurrency rankings.
Binance token exhibited extreme resilience in the tough market conditions of 2019. The token vastly outperformed the wider market. BNB appreciated roughly 150% during 2019 while the wider market increased by approximately 50%.
Binance and Crypto Market Cap 2019 Performance (Source: Tradingview.com)
One of the reasons which Binance has outperformed in a variety of market conditions is that the token is tied to a successful revenue-generating business. While the token is tied to several use cases, the most endearing is that a fraction of Binance’s revenue is used to purchase tokens on the open market and burn these tokens from existence. This has the effect of increasing the value for existing holders by decreasing the total supply.
With Binance executing roughly $3 billion of volume on an average day, the revenue generated from trading fees is significant. Purchasing Binance token gives cryptocurrency investors an avenue to gain exposure to this business model. Furthermore, holders can be somewhat protected from market conditions as Binance will execute significant volume even in the case of downward trending markets.
Binance token can also be used in several other manners like payments to specific third-parties, staking on the upcoming Binance Chain, and a reduction of trading fees. These use cases can all be considered when valuing Binance token. But the outperformance of the token ultimately rests upon Binance successfully building an exchange which executes billions of trading volume every day.
Chainlink and Crypto.com
The tokens linked to Chainlink and Crypto.com have succeeded for an entirely different reason. These tokens target huge potential markets and are considered the leaders in their fields. These tokens have typically outperformed in rising markets when investors place higher estimates on the value which the projects can capture.
Chainlink seeks to provide trustworthy oracle services for decentralized smart contract networks like Ethereum. If Ethereum realizes its vision of creating a vast smart contract ecosystem, these contracts will require an accurate and reliable oracle source. Chainlink provides a decentralized oracle system that relies on its native token Link to function.
Chainlink has already been implemented by projects that require reliable sources of information to function. The project addresses a clear market and the token is intricate to how the technology functions. Crypto.com is another example of a project which is targeting an enormous potential market. Crypto.com’s primary offering is a crypto debit card which allows users to spend, stake, and loan crypto.
Several projects have attempted to deliver crypto debit cards to market but almost all have failed. Crypto.com successfully delivered a debit card to its token holders and has also made promising progress in other areas. The project has launched an exchange which allows token holders to transition between crypto assets for low fees.
Crypto.com has also put in place a rewards programme for cardholders to incentivize staking in their utility token. The rewards programme allows cardholders to receive a certain percentage of tokens after purchases based on which tier of card they acquire.
Utility tokens like crypto.com and Chainlink are completely distinct from utility tokens tied to established exchanges like Binance. Holding utility tokens for a mature exchange with a record of impressive revenue flows is similar to owning equity in an established company that pays regular dividends.
On the other hand, the utility tokens tied to crypto.com and Chainlink are largely unproven. While the businesses tied to these tokens have both shown huge promise, owning the tokens is more similar to investing in the private shares of a startup. If the startup succeeds, holders will observe huge capital growth. On the other hand, there are huge risks to holding the tokens and it is vastly uncertain whether the projects will ultimately succeed.
Are Utility Tokens Making a Comeback?
Our analysis leads us to believe that there is no particular reason why utility tokens would outperform as a subclass of cryptocurrency assets. Those that have outperformed are either linked to a clear business model (i.e. exchange tokens) or capture value in potentially enormous ways (i.e. Chainlink, Crypto.com).
The fundraising hype surrounding utility tokens observed in 2017–2018 has returned in a different form. The excitement has transitioned to Decentralized Finance protocols which have begun raising funds through liquidity mining programmes.
Naturally, some utility tokens will emerge among the most valued cryptocurrencies. The most promising will hold an edge over cryptocurrencies which compete in markets that are strongly dependent on network effects (e.g. decentralized payment networks and smart contract platforms). But from an investment standpoint, they need to be assessed on a case-by-case basis and should not be anticipated to outperform as a collective.