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Who Controls the Price of Utility Tokens?

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The simple answer might seem to be ‘the market’ or ‘buyers and sellers,’
but this is not the full picture as we have an issuer who can pull some
tricks to affect the value of a token. Initially, the quantity of
goods/services that the tokens can buy is unspecified, so the price of the
token is subject to normal cryptocurrency market forces, and there is no
way to do fundamental analysis on what a fair market price should be
(you can’t price ‘cloud storage’ without quantifying how much, for how
long). During this period, some ICOs exert some influence on the price of
their tokens by buying them up when the price falls. Some ICOs even
discuss this strategy in their whitepapers. ICOs often retain a significant
amount of tokens in their treasury, so they can sell some if the price
rallies too aggressively. Essentially, they may act like a central bank of
rallies too aggressively. Essentially, they may act like a central bank of
their tokens, managing the price.
Later, there comes a point when the project has to make a decision: Do
they set prices in fiat or in tokens? Should 1 GB of cloud storage for 1-year
cost $10, payable in tokens at market rate, or should 1 GB of cloud
storage for 1-year cost one token?
Let’s explore the options.
1) Priced in fiat, paid in tokens
If this is the case, then at first you’d think that the price of tokens should
be irrelevant. Customers hold fiat, then when they want to use the
service, they buy the tokens then quickly redeem them. This process
could be automated so the customer doesn’t know it is going on in the
background. This is the same argument that remittance-by-Bitcoin
companies use when they say that the price of Bitcoin is irrelevant to
their business.
In this case, are tokens a good investment? Perhaps. As tokens are
redeemed against the issuer, fewer and fewer of them exist in circulation,
so long as the project does not re-issue them and sell them for fiat to pay
their staff. Fewer tokens may mean a higher price due to scarcity. So a
project in good financial health, not reliant on reselling redeemed tokens
to pay their costs, can allow tokens to become more scarce over time,
perhaps putting upwards pressure on their price. Perhaps. But a project
in poor financial health will need to keep reselling their tokens to cover
their costs. So actually, the financial health of the company may impact
the pricing pressures on the token.
2) Priced in tokens, paid in tokens
This is wonderful: if the company sets the price of the goods or services in
tokens, the company will have control over the value of their tokens, just
as an airline controls the value of the air miles they issue. How does this
work? Unless the product or service is unique, customers will have some
idea about how much they are willing to pay for it. Imagine that a
competitor sells a similar product for $10. If the project wants their
tokens to be worth $10, then they set their product at a price of one
token. If they want their tokens to be worth $20, then they set their
product at a price of 0.5 tokens! The competitor’s pricing helps to peg the
token’s price and as long as the products are somewhat substitutable, the
project can make their tokens worth whatever they want. They should
understand that as they do this, their liabilities change. Their liabilities
are the outstanding tokens in circulation, and by changing the price of
one product from one token to 0.5 tokens, existing tokenholders can
redeem tokens for twice as many products.
If the company decides to price their product in tokens, are tokens a good
investment? Probably. The founders of the project, provided they haven’t
done a quick exit scam, also hold tokens and are financially incentivised
to keep the price of tokens high and relatively stable.
So, projects have more control over their token price if they price their
services in tokens, and I would expect that, as projects come to maturity,
we will see projects priced in tokens, providing that the projects haven’t
been shut down for violating securities regulations first.
Anshuman Mehta attempted to price a fictional utility token on his blog240
and concluded that, ‘In a fiat currency world, the market or traded price
of the token is completely de-linked with the usage and velocity of the
token’.

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