Did you know that there are multiple forms of crypto - from cryptocurrencies to exchange tokens? Exchange tokens are native to their cryptocurrency exchange, like Binance or Cryptopia. Crypto exchange platforms allow users to trade in multiple cryptos and safely store assets in a personal wallet. Exchanges launch their tokens for various reasons, like giving users extra perks and improving loyalty.
This makes exchange tokens, also called crypto native tokens, popular with users, but they’re starting to lose their appeal. You may be looking for the best crypto investment opportunities, including exchange tokens. In this article, we’ll explain why you should avoid adding these exchange tokens to your crypto portfolio.
Cryptocurrency exchange tokens: understanding the basics
Cryptocurrency exchanges are like brokers for digital assets - giving users an anonymous outlet to safely buy, sell and trade crypto. With thousands of digital currencies in circulation, exchanges provide a secure platform for people to store and use multiple kinds of currencies at once. Exchange tokens are native to their cryptocurrency exchange, such as Binance’s BNB Coin, or Cryptopia CEFS (Cryptopia Fee Share). They are minted by their exchange platforms.
Decentralized exchanges such as Uniswap, which are more anonymous, also have exchange tokens. These tokens are usually just referred to as DeFi (decentralised finance) tokens or DEX tokens. Users can buy exchange tokens from the platform. Some exchanges will gift users with tokens, as a reward for completing tasks or being long-time users. However, these tokens don’t represent stock in the company itself.
Why do exchanges have native tokens?
Crypto tokens present advantages for both exchanges and users in theory. Crypto exchanges can use them to promote growth on the platform. For example, exchanges can drop tokens to new users, incentivizing more people to join. They can also function as a fundraising strategy, which will provide further equity as the exchange grows.
Exchange tokens add more functions and can accrue more value for the platform. They also act as a strategy to differentiate exchanges from competitors.
For users, tokens can
- improve liquidity,
- reduce trading fees, and
- provide voting rights.
Voting is especially important in decentralized exchanges, where users take a governance role to shape the platform’s development. With native tokens tied to platform-specific benefits, users become more likely to stick to their exchange, rather than try others. By holding more exchange tokens, users can access more benefits.
What is the difference between crypto tokens and native crypto?
It’s easy to become confused between crypto tokens and native cryptocurrencies, but there are several differences.
- Cryptocurrencies are native to their blockchain network and are integral to the blockchain’s functions. Native crypto powers their blockchain network. A blockchain can also only have one native crypto - for example, Bitcoin (BTC) and Ethereum Ether (ETH).
- Native crypto incentivizes people to use and run the network, which consists of many databases hosted all over the world. These databases are blockchain nodes requiring considerable money and electricity to run. With so much cost going into upkeep, native crypto functions as a financial reward system. With it, people can help run the blockchain’s nodes while also profiting from its many benefits.
- Native crypto is incredibly useful for many purposes, being very accessible, fast, anonymous, secure, and cost-effective.
- Crypto tokens are built on top of blockchains, but they’re not vital to the network’s success. They don’t operate as a consensus mechanism, which validates new blocks (or nodes) for the blockchain.
- They also don’t maintain the network’s security, or keep it economically stable. They instead represent bonus features of the blockchain, like voting rights, discounts, collectable assets, and more.
A blockchain can create multiple crypto tokens with their own unique and flexible uses. Compared to cryptocurrencies, they are relatively easy to develop and share with users. They can represent more than just digital assets, like financial instruments, fiat currencies, commodities, and utility.
Is it worth investing in cryptocurrency exchange tokens?
Despite exchange tokens having many hypothetical uses, they aren’t a good investment in practice. This is for multiple reasons.
Exchange tokens are weak indicators
One potential use for exchange tokens is their ability to signal the relative performance of their blockchain’s native crypto. For example, if Bitcoin’s BNB is trending upwards in price, Bitcoin crypto would correlate and trend upwards too. However, historical data has shown that this is the opposite of true.
Exchange tokens have a weak relationship with their native cryptos, with their prices and reported volumes drifting apart. This means you can’t use exchange tokens as good indicators to strengthen your trades in native cryptocurrencies.
Exchange tokens depend on the success of the exchange
Let’s say you’ve invested in exchange tokens on the “X” crypto exchange platform. As time passes, its rival, the “Y” crypto exchange, becomes more popular with crypto users. Y platform has a better public image, grows larger than the X platform, and has more loyal users.
X’s exchange tokens will now drop in value since its competitor has trumped its place in the market. This can also occur if the crypto exchange experiences a security breach loses investors, or garners bad publicity. If an exchange fails, your investment in its tokens loses all value. Native crypto doesn’t have this issue - since its value hinges on its many values outside of the blockchain.
Not only are exchange tokens subject to volatility based on their exchange’s success, but they also experience market volatility. Depending on investor sentiments, exchange tokens can experience significant price fluctuations.
Vulnerable to theft
Unlike native cryptocurrencies, which operate through a decentralized blockchain, exchange tokens are kept on the platform. Decentralized blockchains are incredibly difficult to hack or tamper with, as they don’t allow third parties to access or manage transactions. Many exchange platforms aren’t decentralised, making them vulnerable to hacking or theft. These cybersecurity risks can cause users major losses, as their online wallets are at risk of compromise.
WALBI focuses on client success - not profit
At WALBI, our main goal is to help crypto traders navigate the volatile environment that is the cryptocurrency market. We do this via WALBI Lighthouse - AI-assisted trading tools to help make your life easier as a crypto trader.