Volatility has been the kryptonite of the crypto industry since its inception. However, we are currently experiencing a historical crypto winter. During 2022, the majority of the tokens have lost more than 50% of their value. This consistent downfall of cryptocurrencies has been driven by negative market sentiment, high liquidity, and the decline of credibility in digital assets.
In the past year, we’ve also seen several major failures — from centralized exchange failures to scams and hacks — tarnish the industry’s progression. For crypto to recover its newly found credibility as a robust digital asset, tokens will need to become more resistant to wider market conditions and pessimistic market events.
One of the surest ways to support token prices and battle crypto volatility is to add utility and value. Let’s explore how this is realized and what features to consider when choosing safe-haven assets.
What is token utility?
Crypto is meant to be a decentralized and supply-restricted alternative to fiat currencies. Therefore, its fundamental goal is to achieve true utility: users should be able to perform a wide range of activities and actions on the blockchain with their holdings in a fully digital environment. This includes, but is not limited to, purchasing goods and services, governing protocols, and attaining investment and income options.
The token utility is determined by how extensively a cryptocurrency can be used to carry out critical activities. Therefore, a token’s utility depends on how many market functions it can facilitate and how easily users can access market services through the token. As a token’s utility increases, so does its perceived value.
How is additional utility value created?
The additional utility of a token depends on how well it’s integrated into a blockchain’s financial ecosystem and what functions its holders get access to.
One of the most effective ways to form additional utility value is by incentivizing users that hold the token as a part of their investment portfolio. This is also referred to as project-based boosting. For example, Midas Investments, a custodial crypto investment platform, gives additional upside to its users if they hold its native MIDAS token as a part of their investment portfolio. Other platforms can give exclusive access to various activities (e.g. token offerings, NFT sales, community roles) for token holders.
The different implementation of this method is through governance: token holders can vote and influence the future development of a project. Many crypto projects, like Aave, SUSHI, Maker DAO, and others, implemented this feature encouraging its users to hold their native tokens.
Staking can also be considered an utility feature, because holding project tokens is the only single source of the token emission. It’s also an additional upside as the holder of an underlying staking asset receives income in the form of staking rewards.
Liquidity management is yet another way to create value. Tier-1 cryptocurrencies such as Ethereum, Bitcoin, USDC, and USDT already have a substantial utility, as they can be used to perform several key investment and commercial functions in the broader markets. If a token can be seamlessly swapped for these cryptocurrencies or fiat currencies, it will have more perceived value for the users.
Buybacks: a key strategy to support token prices?
Token buybacks are an uncommon (yet, successful) way of increasing token worth. It’s a process where cryptocurrency platforms reinvest a portion of their earnings towards buying back and burning tokens held by their customers.
Token buybacks provide a utility feature and a means through which projects may regulate inflation or even cause deflation, increasing the token’s value by supporting a premium over its current price. Popular cryptocurrencies such as Binance Coin (BNB) and Stellar (XLM) use buyback to control their token’s inflation and support its prices in the market, trying to keep volatility at bay. This is a method of ensuring the token’s scarcity, keeping its price up even during the bear market, and creating a bullish sentiment.
How added utility can make tokens more resilient
Crypto will likely remain volatile until the global economic landscape becomes stable and the industry can retain its lost credibility for investors. However, tokens with high utility and added value will always be more resistant to negative market circumstances compared to others. The reason is that these tokens will see higher buy-up demand during drawdowns, as the community will still require them for usage in utility features (e.g., staking, initial offerings, incentivization programs, etc.).
For instance, all Tier-1 tokens have lost their value in the ongoing bear market. Still, Ethereum’s volatility index has been much lower than other major tokens such as SHIB, LRC, CELR. In fact, Ethereum’s volatility index in the past five months has been lower than the volatility of S&P500, one of the leading stock market indexes in the world, the reason for that being that Ethereum’s utility is higher than most other cryptocurrencies: the platform hosts other crypto projects, while ETH facilitates more comprehensive trading and investment options such as NFT trading, crypto staking, project governance, and smart contract validations.
To sum it up, utility will be the defining parameter of the space going forward. Therefore, tokens with more utility will be less prone to liquidations and more resistant to negative circumstances. As market sentiment continues to worsen, a token’s perceived value will define how its prices navigate during this period. I believe investors should consider tokens that have a high perceived value and great utility on the broader market.