The world of cryptocurrency is often more diverse than people expect. Although you might be familiar with certain coins, there are actually several types of assets within the crypto space. Along with the broader categories of coins and tokens, there are subcategories in each of these spaces. One example is the security token.
If you’re thinking about investing in crypto, it’s essential to understand what security tokens are, how they work and how they differ from other tokens. That allows you to make wiser investment choices, plan for tax implications and more. And because some financial experts believe the landscape is growing — with estimates security tokens will hit $162 trillion in volume by 2030 — now might be just the time to dive into security tokens. Here’s what you need to know to get started.
Security Tokens: A Basic Definition
A security token is a digital asset that represents ownership rights in another asset, such as a stake in a company from a stock. The main difference between these traditional securities and security tokens is that the tokens are part of blockchain environments, while other securities aren’t. Beyond that, the two financial instruments have quite a bit in common.
Security tokens are like securities you can acquire through a brokerage using traditional investing strategies. After purchasing one, you become a shareholder. This gives you the ability to have a say in the future direction of the company. The value of security tokens is also determined by the value of the underlying asset they’re tied to.
That latter point separates security tokens from coins. With coins, the value is primarily based on public sentiment — there’s no other asset backing the coin. With security tokens, there’s an underlying asset. This gives the token a basis for its value on the market.