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Understanding Why Utility Tokens Saw A Pump

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Understanding Why Utility Tokens Saw A Pump

The decentralized cryptocurrency market is a highly segmented one. This is because it contains various tokens and assets, all of them with different types, use cases, and potential value.

The blockchain is designed in such a way that tokens can be released and tethered to smart contracts. These tokens, depending on how well they do on the market, can be used to drive various ecosystems.

One of such segments in the market is that of utility tokens.

Utility Tokens: What Are They?

Utility tokens are easy to understand from their name alone. They are tokens with specialized use cases. In other words, the utility tokens in an ecosystem are carriers of a particular function or application.

Each of these tokens is tethered to a smart contract and possesses ‘access keys’ of sorts. These access keys allow them to represent the native method of payment on said ecosystems.

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Investors can purchase these tokens and use them to unlock certain benefits. However, this does not mean that a holder of a utility token holds any stake or ownership in the larger ecosystem. Examples of these utility tokens include

  • Cronos (CRO)
  • Binance Coin (BNB)
  • Uniswap (UNI)
  • Klever (KLV)

…Among others. 

What Causes A Utility Token To Pump?

‘Pumping’ is a term used to refer to a scenario where the prices of a cryptocurrency experience a sharp increase. These pumps can be good for investors who get in early.

The value of utility tokens is largely influenced by demand and supply. If demand for a token increases faster than its supply, then the price goes up.

When you see a coin pump, this could be for several reasons. One of these includes market manipulation by an individual with resources or by a group of investors. These investors simply create faster demand than a coin’s supply and wait for the pump.

To do this, these investors buy huge amounts of these coins at a time. Buying massive amounts of a cryptocurrency reduces the number of coins in circulation, causing a sharp increase in its price. A phenomenon we all know as a ‘pump’.

Cryptocurrencies like bitcoin have a fixed supply. This way, we know that only 21 million bitcoins will ever exist. Other cryptocurrencies like Ethereum have no fixed supply. This means units of these coins have to be burned regularly to preserve their value.

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Other Reasons For Pumps

There are several other reasons why utility tokens pump. Not all of these occur as a result of market manipulation by corporations. Some of these reasons can include:

Cryptocurrency Exchanges

Sometimes cryptocurrency exchanges offer mainstream cryptos like bitcoin and Ethereum to their investors. These tokens combined hold more than 50% of the market dominance. This means that the prices of bitcoin or Ethereum affect most other coins in the market.

When these tokens are listed on exchanges, they become more accessible to investors, causing a pump if more people invest in them.

Competition

There are more than hundreds of mainstream cryptocurrencies. All of these cryptocurrencies belong to different networks and therefore have to compete to stay relevant.

Utility tokens improve on the limitations of regular cryptos. This can sometimes make room for competition between them, further driving the prices of these tokens to the upside.

Internal Governance

Cryptocurrency networks are completely decentralized. This means that they abide by a different set of rules. These rules are not always static.

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Some tokens, called governance tokens, give their investors a say in the project as a whole. Including how much of the tokens can be mined or used. To come to this agreement, the entire network has to come to a mutual consensus.

The developers in charge of tokens like Ethereum are working on improvements to the network. These improvements will inevitably render much of the expensive mining equipment people own useless. A big problem that might affect how much people are willing to invest.

In general, investors prefer good governance. If there are flaws in how a network and its native cryptocurrency operate, this can negatively impact investment, and therefore its price.

In Conclusion

Utility tokens can pump for several reasons. Not all of these reasons are due to manipulation. Some of these pumps occur for several natural reasons—most of them including the ones highlighted above.

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Jim Haastrup is a freelance blockchain and metaverse writer. He helps founders, investors, startups, crypto, and blockchain enthusiasts connect with their audience and win investment through the written word.

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