Where do ethereum tokens get their value from?

Bitcoin was the first blockchain, and the leader in a technological revolution. On the back of fundamentals in the underlying technology, a prominent advocate of blockchain, Vitalik Buterin, built a new technology which many are quoting as a decentralised world computer, or the Web 3.0 for short – the Ethereum network. 

The network has its own cryptocurrency known as Ether. However, there is also an option to create a ‘token’ which can be used to run specifically coded smart contracts. These tokens are generally sold to markets to generate cash, to fund a company’s vision via an initial coin offering (ICO), which works in a similar way to an initial public offering (IPO). From here, a new token economy has formed, with people investing and trading these tokens, which sit on the top of the ethereum network.

Tokens have value because they have scarcity, and they have utility. They are scarce because they have a limited number of tokens available, and they have utility because they have an inherent use, in the smart contracts which are built on the Ethereum network. The number of different verticals in the space is astounding. If you can think of it, it’s probably already being developed somewhere in the world. Online casinos, decentralised exchanges, outsourced computational power sales, micro payments processors, consensus algorithms, and cross chain compatibility tokens are all on the market.

This is basically crowd funding on a different level. Individuals aren’t putting up cash for an equity stake in the same way as they are in an IPO, but rather they are putting up cash for a speculative use case on each company themselves. By analogy, it’s similar to buying the digital coins (which have a guaranteed limited supply), which are required to gamble on an online casino. In reality, these tokens are sometimes speculative, but have huge potential to disrupt the industries they are targeting. If you can get in early, then you may just be investing in the new William Hill, Amazon Web Services, or New York Stock Exchange (NYSE), only time will tell. 

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.

Find articles by analysts