Utility of tokens vs. Speculation - aren't they contradictory?


#1

Bitcoin recently got a lot of flak as it was built to be used as a currency, however people/speculators started to treat it as a commodity/asset and held on to it. This led to the bubble of 2017, and crash of 2018.

Now, Bitcoin believers say, that to bring things on track, it should be used as a currency. Let more people pay for their morning coffee, cabs etc. with bitcoin and we will see its adoption increase exponentially.

However, that brings a doubt, if bitcoin has fixed supply and utility, speculators know that its value will increase if its being used and they will hold on to it. On the other hand, someone who wants to pays for coffee knows that the value of bitcoin might change, he will not pay for it with bitcoin, rather use fiat. (Even after lightening network is implemented)

I think this argument can be extended to other utility tokens such as BNB too.

So, my question is - if people invest in utility tokens only for them to increase in value, aren’t they securities? Conversely, if they invest in utility tokens for them to actually be of use, then what is the use in investing in them as they won’t increase in value.

What are your thoughts?


#2

Great question. However, I think it’s a bit flawed. Simply put, an asset which has utility is no longer speculative.

If someone is investing in a token for it to increase in value, I’d argue it can’t be considered a utility token yet. It’s still speculative (e.g. most ICO tokens today).

For it to be a utility token, it should not be something people invest in purely for profits. People acquire it because it gives them some utility (e.g. to pay for a product or services) that they couldn’t otherwise get (e.g. staking REP in Augur to make bets). It could indirectly give them profits (because the utility of the token goes up and so the token value goes up), but if the investment is purely for speculative gains, then it’s not a utility token.


#3

I think if something helpful it will be valuable. But speculation happens when the products are lying at the seed stage, the introduction stage and the growth stage because after that the products would reach the maturity stage which would be usable rather than speculative.


#4

Good ask - I think there is no clear line of thought when it comes to speculation. Speculation can be done on both things of utility and securities. Welcome to the world of future markets !

  • Futures is huge and speculation is made on property of the assets which have utility - For e.g. wheat. We all consume wheat and it a good example of asset that has utility and is speculative. Countries/people speculate on quantity of wheat (‘asset’(y) behavior), quality, seasons of produce and any other properties you can link to demand supply
  • Futures also run for gold and 10 Yr US treasury bonds, two of the purest securities by definition. Here, the game is mostly played around confidence/belief in the asset vs. time

So seem interchangeable?

Securities, by design, are put to assets which can limit their own supply. That is why BTC is considered digital gold. However, utilities also carry value but supply can be shaped closely to demand. For e.g. Wheat, Coke etc. where production was increased as soon as demand increased.

You can think of investment as a language that people use to agree on scope of things/business. People from around the world want to have a consensus on value or utility of something, what helps them do this? - Use price as a proxy to have this discussion. While price is clearly communicable, it also is a confident measure as it out-rightly shows skin-in-the-game for people.
As price moves around and settles, consensus will come in.

To summarize:

  • Speculation happens for almost all things - if not purely from a value (read securities) PoV, then on the properties, supply-demand etc.
  • Investment is a way to speculate. This is basically people eventually agreeing onto something with the help of language ‘money’
  • Things of utility can be speculated upon on usage (as you said) - demand and supply are the marker here

#5

excellent point @RathiSaahil RE: Futures on wheat being both utility and speculative. Based on what you outlined here, how would you respond to @ankit’s original question:

If people invest in utility tokens only for them to increase in value, aren’t they securities? Conversely, if they invest in utility tokens for them to actually be of use, then what is the use in investing in them as they won’t increase in value.


#6

If the mother of all evil is speculation, the father is deflation, if both form a couple and have a baby, the baby name will be depression.


#7

What is considered utility in the future market is electricity, nat gaz, oil, etc… is no evidence by my point of view that wheat fill into the utility category.


#8

I think this is not something like ‘because B, hence A’

  • Investing in utility tokens for them to increase in value, aren’t they securities - Not necessary, as pointed out, wheat/oil etc. are examples. However, in crypto space, most of the splurge (ICOs) are in utility space and heck, people wanted to get in. Hence price reflected a function similar to securities in traditional markets

  • Investment in utility tokens for them to be actually be useful, then what’s the use of investing as they won’t increase in value - False, utility shows value and promise, it grows and goes big. Investing in utilities then might be better than securities.

Cheers


#9

Wheat is a primary building block of food industry worldwide - huge utility!


#10

I understand your point, but if we go further and we ask normal people to name a utility company, I doubt somebody will point a wheat business. Why it’s matter, the cryptoconomy is just the extension of the real economy, if we start conflating different business logic together it will be more difficult to explain the token business logic in layman term.

I will favor the use of a different token definition for modealizing different market business logic category, like harvest token ‘‘need example’’, commodity token ‘‘Bitcoin’’, utility token ‘‘Ethereum’’, reputation token ‘‘Augur’’ etc…


#11

For tokens related to consumption (human) economy, one example is supply chain integration with blockchain. Here is a quick read:

While this solution is costly, but long term, incremental benefits, accruing just out of solving trust issues + adulteration might out weigh the expense on infrastructure. For similar commodities, if we’ve something on similar lines it will reduce uncertainty in production life cycles, supply etc. thus reducing speculation and tertiary markets like future might die a slow death as things become super predictive.

The point I’m trying to make, speculation holds a purpose now but works with a combination of information + heuristics and exists for both utilities and securities