What it means
The word "token" covers several genuinely different things. A utility token buys access to a service, a governance token confers voting rights over a protocol, a security token represents a regulated financial interest, and a stablecoin aims to hold a fixed value against a currency.
Treating all four as one asset class is the quickest route to a bad decision. Tokens are issued using standard templates on host blockchains, most commonly Ethereum.
That makes them cheap and fast to create, which is both the attraction and the warning, because issuing a token requires no assets, no revenue and, in many jurisdictions, no regulatory approval. Value comes entirely from what the issuer actually delivers and what buyers are willing to pay for it.
Supply mechanics drive a large part of token pricing. Most projects mint a fixed total supply, release only part of it at launch, and release the rest to founders, staff and early investors on a published vesting schedule.
Those scheduled releases add sellers to the market on known dates, which is why circulating supply and fully diluted valuation are always quoted side by side. For a finance team, the practical questions are accounting, custody and tax.
Most accounting frameworks treat tokens as intangible assets rather than cash or investments, which can mean writing down falls in value while not recognising gains until sale. Custody of the private keys, and precisely who inside the business controls them, is a genuine internal control problem rather than an IT detail.
Regulation is tightening and varies sharply between countries. A token that behaves like an investment contract will generally be treated as a security whatever the marketing material calls it, and enforcement has followed substance rather than labels.
Any business issuing or accepting tokens should take specific legal advice rather than relying on industry convention.
In practice
Real-world examples.
Example
A software company is offered payment in a protocol's governance token for a $250,000 integration project. Its finance director declines, because the token would be recorded as an intangible asset, written down if it fell, and could not be used to pay salaries or suppliers without first being sold.
Example
An online marketplace issues a loyalty token that customers earn on purchases and redeem against fees. Its lawyers structure the token so it carries no profit expectation and cannot be traded on exchanges, precisely to keep it away from securities regulation.
Example
An investment committee reviewing a token opportunity notices that market capitalisation is $48,000,000 but fully diluted valuation is $200,000,000, with 40% of supply due to vest within eighteen months. It passes on the investment, concluding that the price is supported by a temporarily small float rather than by usage.
Formula
Calculation
Fully diluted valuation = token price x total supply. Market capitalisation = token price x circulating supply.
A protocol token trades at $0.40. Its total supply is capped at 500,000,000 tokens, of which 120,000,000 are currently in circulation, with the rest held under vesting agreements.
Fully diluted valuation is $0.40 x 500,000,000 = $200,000,000, while market capitalisation is $0.40 x 120,000,000 = $48,000,000. Only $48,000,000 / $200,000,000 = 24% of the eventual supply is actually trading, so the quoted market capitalisation flatters the picture considerably.
Next month, 30,000,000 tokens vest and enter circulation, lifting circulating supply to 120,000,000 + 30,000,000 = 150,000,000, an increase of 30,000,000 / 120,000,000 = 25%. If the amount of money in the market does not change and market capitalisation stays at $48,000,000, the implied price becomes $48,000,000 / 150,000,000 = $0.32, a fall of 20% from $0.40 driven purely by supply.Case study
Seen in the real world.
Tidewater Logistics is a fictional, illustrative freight brokerage that was approached by a blockchain shipping project offering a discounted allocation of its new token in return for becoming an early network user. The pitch was that the token would be needed to pay for tracking services, so early holders would benefit as adoption grew.
Tidewater's finance director asked three questions before anything else: what the token entitled the holder to, how much of the total supply was actually circulating, and who held the rest. The answers were that the token bought tracking credits at a rate the issuer could change, that 24% of supply was circulating, and that founders and seed investors held most of the remainder with vesting releases starting in six months.
The company negotiated a different deal in this illustrative account. It took a fixed-price contract for tracking services denominated in dollars, with a discount for a three-year commitment, and declined the token allocation entirely. It got the commercial benefit it wanted without putting an intangible asset of uncertain value and uncertain regulatory status on its balance sheet.
Watch out
Common mistakes.
- Using "token" and "coin" as if they mean the same thing. A coin runs on its own blockchain, while a token is issued on top of an existing network, and the difference affects both the technical risk and the economics.
- Judging a token by market capitalisation alone. With only a fraction of supply circulating, market capitalisation can be a small number sitting underneath a much larger fully diluted valuation and a queue of scheduled vesting releases.
- Treating tokens as cash on the balance sheet. Most accounting frameworks classify them as intangible assets, which brings impairment rules and means they are not available liquidity in the way a bank balance is.
Questions
People also ask.
What is the difference between a utility token and a security token?
A utility token is meant to buy access to a service, while a security token represents an investment interest, and regulators look at how it actually functions rather than what the issuer calls it.
How are tokens accounted for?
Commonly as indefinite-life intangible assets, which means they are tested for impairment and written down when value falls, with gains typically recognised only on disposal.
Who is responsible if the private keys are lost?
The holder, in almost every case, which is why businesses holding tokens need documented custody arrangements, split control and a recovery process signed off by the board.
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