Tokens of Depreciation

Cryptocurrency exchanges issue tokens to reward loyalty— but the terms are subject to change

By Mark Helfman

Of the top 50 cryptocurrencies listed recently on CoinGecko, seven were exchange tokens, a type of loyalty or rewards program for a cryptocurrency exchange.

These tokens serve legitimate purposes on their exchanges by offering perks that include discounts on trading fees and access to exclusive promotions. When demand for those benefits increases, investors can sell their tokens for a profit.

At the same time, exchanges control the tokens and can change the terms, supply, function and benefits at will.

Unlike Bitcoin or other cryptocurrencies 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 delivered on a blockchain.

Some exchanges sell the tokens to fund their operations or cover liabilities. Many hold some in reserve to sell or use as collateral for loans. The failed FTX exchange did that with its FTT token.

Investors sometimes sell their tokens for a profit, but many view them with concern.

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 1 billion GM tokens, selling a single token to a Buick dealer for $100, then claiming to have $100 billion in assets—and borrowing against those (imaginary) assets.

It’s no wonder savvy investors view these tokens with concern.

Not all cryptos

But if all cryptocurrencies are worthless, then their form is irrelevant, right?

Perhaps investors can tell the difference between permissionless, decentralized financial protocols and the businesses that use those protocols to create their own centralized money systems.

Are exchange tokens bad investments? For the most part, yes.

The former is a new technology secured by token incentives. The latter is a substitute for revenue, profits, yield and productivity.

Does that mean exchange tokens are bad investments?

For the most part, yes.

For those who consider cryptocurrency a game of greater fools, exchange tokens exemplify that (inaccurate) perception.

Few people buy Dave & Buster’s tokens because “they might go up if people use Dave & Buster’s.” Lots of people buy Dave & Buster’s tokens because they enjoy playing games and winning prizes.

If only the exchanges promoted the tokens that way.

Seeking proof

Bitfinex defines its LEO token as “designed to empower the Bitfinex community.” Crypto. com speaks of a “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 the tokens. Token holders receive no equity in the business nor any claim on its assets.

When exchanges create tokens, they do the same thing credit card companies and retailers do with loyalty and rewards.

Users can debate the utility of tokens as perks. As investments, the conclusions are far more straightforward.

Mark Helfman, crypto analyst at Hacker Noon, publishes the Crypto Is Easy newsletter at cryptoiseasy. substack.com and wrote Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency. @mkhelfman