Types of Crypto-Tokens by Van K. Tharp, Ph.D.

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Not all cryptocurrencies are equal. They are not equal and in fact, they are not honestly represented. In addition, very few companies selling tokens are clear about what their token really is.

The first type of token is a currency token. These types of tokens are used as a medium of exchange and Bitcoin is the prime example. For all of those who say Bitcoin is not real money, try buying any other cryptocurrency on a typical exchange without having any Bitcoin. You can’t – because Bitcoin is the medium of exchange in the crypto world.

In essence, there is no real money. Currencies like the US Dollar, the Euro, the British Pound, the Australian Dollar, and the Canadian Dollar are called fiat currencies. This is because there is no commodity backing them up. They only way you know it’s money is because the government of each country declares it to be real currency and says that if you try to produce it yourself, you will have committed a crime by counterfeiting.

But the US Dollar is actually printed by a privately-owned company called the Federal Reserve. Banks are allowed to lend as much as ten times the money they have on deposit. Let’s suppose you have $10,000,000 in your account at Bank of America and someone wants to borrow $100,000,000. Bank of America can lend them that much money and the Federal Reserve just prints up $90,000,000 in new currency to make it official. So, as a result, “real” money was just created out of thin air.

Also, suppose the US government is in debt by a trillion dollars, (since that’s pretty much the norm each year for our government). The government issues bonds to borrow the money and other people buy up the bonds. Foreign governments buy some of the bonds but the Social Security Administration buys lots of bonds too. This is important to understand; the US government creates a trillion dollars in debt and the Social Security Administration (SSA) buys up much of that debt. Then, the SSA lists those bonds as an asset to show it owns something.

Under the Qualitative Easing Programs, the Federal Reserve actually bought up US government debt and held it, however, it didn’t pay money to buy the debt. Instead it printed money to buy the debt. This is a third example of how a fiat currency is not real money. The Fed just created it out of thin air.

Bitcoin has a little more backing that a typical national currency. It’s getting harder and harder to create Bitcoins. Currently, Bitcoin mining by large computer networks consumes about 0.15% of the worlds supply of electricity each year. That could become something like 10% of the world’s supply of electricity by the time the final bitcoin is created in 2041.

Also, most fiat currencies tend to be inflationary. This means that the currency buys less and less over time. Why? Because the government continues to print more and more money to finance its debts. I remember when the USPS stamp was 3 cents, a hamburger cost 15 cents, and I could see a double feature movie for 50 cents. Not anymore. That’s inflation.

On the other hand, most cryptocurrencies are deflationary. This means that the currency is worth more and more over time because of scarcity. Supposedly, only 21 million bitcoins will ever be created. 16 million of them have been created to date, but of those, an estimated 5 million coins have been lost forever. People lost their secret keys or had their bitcoin information on a hard drive that got thrown into the dump, etc. Demand goes up for the coin (i.e., to buy other cryptocurrencies and simply because people want what is going up). But there is a smaller and smaller supply to meet the demand so prices skyrocket.

What’s interesting is that some countries are now talking about issuing their own cryptocurrencies. The bank of England has suggested it will. Russia has suggested that it will too. I think Estonia is already well on its way to having one.

So could I create money out of thin are by issuing a token? Yes. How? First, we could mint 1,000,000 VTI tokens and cap the quantity at a million tokens. No more will ever be issued. Next we make it a utility token (discussed below) in that it allows you to attend one workshop and when you use it, it ceases to exist. Let’s say the average workshop costs $3,000 and a using a token would allow you to attend one. It would have some value but how much? I own them all but say I would be willing to sell 5 tokens. Instead of paying cash for our workshops, let’s say that you could buy the 5 tokens in an auction in exchange for attending 5 workshops. Let’s say the highest bidder paid $2,500 each for the five tokens. That establishes a value but remember that I have 999,995 more tokens. Have I now created an equity base that is worth $2,489,875,000? We have suddenly gone from a company with an annual revenue of several million to a billion-dollar company.

Let’s look at the Utility Token. It allows you to do things. Ether is the first major utility token. And Ether is required as payment to execute “smart contracts” on the Ethereum blockchain. There are more than 100 ERC tokens created on the Ethereum blockchain. In fact, as an experiment, I created a dummy VTI token in the Ethereum blockchain just to see what was involved.

As an example, let’s say I had a token that represented my Tesla P85D. That token might represent the car itself and in that case, it would be an asset token. Instead, the token could represent the right to drive my car one mile. In the second case, it would be a utility token.

Asset tokens are another type of token where the token represents some sort of asset or product. In the future, the blockchain might be used to identify the ownership of some asset, say a particular piece of gold. Right now GLD, the gold ETF theoretically allows you to hold a small share of their gold. But they sell rights to their gold on deposit in a bank and that bank might have leased the gold to someone else. As a result, owning GLD seems like owning gold but really, it isn’t. A gold token, however, would be tracked to a particular block of gold in a vault or to a particular gold coin. And, you would actually own that piece of gold through a cryptocurrency with no question about the ownership. That’s a real asset token. And in the near future, all assets might be stored the blockchain in this way.

Another type of token is the Equity Token. At one time it was thought that this might be a new way for forming companies. You could get the necessary funding quickly through an Initial Coin Offering (ICO) and that would be big. The SEC says, however, that if you act like an “equity” then you have to behave like one and follow the SEC rules on equity. In 2018, I expect that the SEC will come down hard on some well-known token claiming it to be an equity token. Their action will probably drive that token out of existence and have a very damaging effect on the entire cryptomarket.

I’ve noticed recently that most of the interesting ICOs are opening their doors to anyone in the world except US investors and that’s because they are afraid of US (really the SEC). The Ethereum based DAO coin was the first major token that was offered explicitly an equity token. The owners of the DAO tokens had control over the organization’s behavior so it was clear cut case, however, the rules are quite complex about token types. If your are thinking about creating a token, consult a lawyer. Does your token get you a reward of the actions of others with you as a distant owner? Does the token involve making money exclusively off the actions of others?

It can be very hard to tell if a new coin offering has any value whatsoever. 80% of new coins are probably scams so be careful and maybe just stick with coins that are already traded on an exchange. That’s much safer.

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