What do you own when you own a token?
There’s a lot written on this by very smart people, but most of it spirals into long technical diatribes about owning a piece of a decentralized network, blah, blah, blah. All well and good. But what does it really mean–in financial terms an ordinary person can understand? To answer this, I think it’s easier to explain what you don’t own when you own a token.
A BALANCE SHEET: Whether you own a bitcoin or an altcoin, you don’t own a piece of a company. You own a form of utility–a piece of code that can potentially be used by a company, organization or individual to create value. And while the assets inside these companies may hold value, you will not find something as tangible and concise as a simple balance sheet to calculate the value of the token a company uses to provide value. Determining a token’s intrinsic value is an evolving field, often uncovering more questions than answers, something I will attempt to tackle in another post.
OVERSIGHT: Without question, much of the attraction to cryptocurrencies is fueled by a lack of regulation and oversight. A complete lack of trust in centralized, established financial institutions spawned the original Bitcoin whitepaper. But any investor stepping into today’s cryptocurrency market must understand that there is no safety net. No SEC to govern the craps table. No FDIC to insure losses. No AG to slap cuffs on bad actors. The barrier to entry into the ICO market is low. A slick whitepaper and some basic coding know-how is all it takes to launch a multi-million dollar altcoin. Bitfinnex, Parity, Enigma–with little to no regulation and oversight, thousands of investors, and smart ones at that, have been bilked with no recourse. And millions more will certainly follow. No board of directors. No quorum. Make the wrong call and lose it all.
TRANSPARENCY: For all of the fanfare over the transparency blockchains offer, it is nearly impossible to peel back the curtain and unveil who or what is moving the market. The miners trusted to verify the blocks are diffuse, murky and clandestine global organizations that wield immense power to shape price and volatility. The coders counted on to build the code are bound to nothing more than their interest in seeing it succeed or fail (see SEGWIT2X, Bitcoin Cash, Bitcoin Gold). And then there’s the investors. From nation states interested in controlling cryptocurrencies to institutional investors looking to manipulate the markets to individual power brokers trying to influence the direction of the code–the lack of ability to see who is truly pulling the levers in the crypto investor landscape makes Wall Street seem transparent.
SUMMATION: As similar as they look, don’t confuse tokens with shares. Cryptocurrencies and blockchains represent an entirely new paradigm where yesterday’s financial conventions don’t always apply. What you can trust is value. No matter how innovative or disruptive the cryptorati make these instruments sound, if you can’t figure out how a token helps generate a profit, it probably can’t. And if it can’t, the businesses using it won’t grow. And when businesses can’t grow, they die, taking investors money to the grave with them–a principle even more immutable than the blockchain itself.