When most people think of cryptocurrencies, what often comes to mind are major coins such as Bitcoin and Ethereum. However, there is another exciting classification known as security tokens, that are becoming increasingly popular in the cryptocurrency space.
What are Security Tokens?
What makes something a security token comes down to the Howey Test. In 1946, the US government had a case known as SEC vs Howey which set the ground rules on what makes something security.
Here are the two basic properties of what makes a security token:
Requires an investment
There is an expectation of profit
Tokens are typically handed to contributors during public and private sales in exchange for Bitcoin and Ethereum. In these sales known as ICOs, companies crowdfund to launch a service or network. For a token to be valuable, it must have clear and popular use cases.
For example, CEDEX launched an ICO in 2018 which raised more than $20,000,000. CEDEX tokens are used on the platform to purchase and trade diamonds. Because the exchange can only be used with Cedex Coin, the price should naturally increase as the demand to use the exchange grows. If CEDEX succeeds in their goal of creating the ultimate decentralized diamond exchange, adoption should be expected. In exchange, all public sale participants would be rewarded based off a token price increase.
As with any cryptocurrency, adoption is the number one factor in its success. If a coin isn't accepted anywhere or used often on a platform, it’s difficult for its price to climb. Tokens aren’t meant to be a store value or an everyday currency. They are specifically designed for a certain purpose on a network. This means that even without a fixed token supply, investment in security tokens can be profitable if the business you invest in is successful.
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