Some of the biggest cryptocurrencies on earth are exchange tokens, a type of loyalty or reward program for a cryptocurrency exchange. For example, BNB, OKB, CRO, and KCS.
Are they worth your money?
These tokens offer perks like discounts on trading fees and access to exclusive promotions.
When demand goes up, you can sell your tokens for a profit.
At the same time, exchanges control everything about those tokens. They can change the terms, supply, function, and benefits at will.
Unlike bitcoin or other cryptocurrencies that are governed by immutable blockchains and computer protocols that no single entity can change, exchange tokens function more like frequent flier miles or cash-back rewards that get delivered on a blockchain.
Some exchanges sell those tokens to fund their operations or cover liabilities. Many hold some tokens as reserves or collateral for loans. FTX did this with its FTT token.
In fact, FTX counted its token as an asset on its balance sheet while using its trading arm, Alameda, to prop up the price. Imagine General Motors creating one billion GM tokens, selling a single token to a Buick dealer for $100, then claiming to have $100 billion in assets*.*
Can you see why savvy investors might view exchange tokens with skepticism?
Can’t Say That About All Cryptos
Surely, good people can differentiate between permissionless, decentralized financial protocols and the businesses that use those protocols to create their own centralized money systems.
Does this mean exchange tokens are bad investments?
I’ll let the market decide.
If you value the benefits you get from holding the exchange token, you win either way:
- Price goes up — you get an appreciating asset.
- Price goes down — you get whatever perks the exchange gives you.
For those who think cryptocurrency is a game of greater fools, exchange tokens exemplify this (inaccurate) perception.
Few people buy Dave & Buster’s tokens because “THEY MIGHT GO UP IF PEOPLE USE DAVE AND BUSTER’S.” Lots of people buy Dave & Buster’s tokens because they enjoy playing games and winning prizes.
If only the exchanges promoted these tokens as such.
When you put it that way . . .
For example, Bitfinex frames its LEO token as “a token designed to empower the Bitfinex community.” Crypto.com says CRO is the “trading, payment, and financial services token for a cross-asset intermediary settlement layer.”
Gate and Binance built decentralized financial platforms around their tokens, ostensibly with community governance.
In reality, the exchanges still dictate the issuance, function, and utility of these tokens. Token holders receive no equity in the business nor any claim on its assets. You have to trust the exchange executives make good on their word, the exchange itself stays in business, and the token’s price goes higher than you paid for it.
Crypto doesn’t have the best track record for any of those things.
For what it’s worth, I hold trivial amounts of a handful of exchange tokens but I gave almost all of them a 3/5 survivability score on my list of Top 100 Altcoins. They have more “utility” than 99% of altcoins, but their fate depends 100% on the exchange.
This post is available as a collectible NFT on Mirror.
Mark Helfman publishes the Crypto is Easy newsletter. He is also the author of three books and a top bitcoin writer on Medium and Hacker Noon. Learn more about him in his bio.
This post is republished from the Luckbox Magazine article, “Tokens of Depreciation,” with expanded content.