Ahh, the simple questions that have more complicated answers than you would initially think. To understand a utility token you need to understand what they are and what they are used for.
So, what is it?
A utility token is a form of cryptocurrency that is specific to one ICO or DAPP. A few of these tokens include bravo coin and BAT. While in theory they can be used the same way most cryptocurrencies are used they are not generally accepted outside of their host environments or exchanges.
An example of how this works is with BAT you can use it to tip content creators through their browser. The recipient then can cash out monthly in any form of crypto they want. I imagine most chose BTC or ETH. Outside of this purpose, BAT isn’t really used for anything which begs the question, why not just pay us in BTC or ETH in the first place.
Why even have utility tokens?
This is a question that could drive you mad if you don’t look at it from the startup’s point of view. Basically, it all comes down to funding. ICO’s serve the purpose of funding a project and the utility token is what they sell in order to develop the project. This is similar to how companies will start IPO’s and sell stock or share in the company in order to fund their projects. Utility serve this purpose.
Well, what’s the downside to this?
Yes, downsides! If a product you buy tokens for fails you lose this is the biggest downside and most obvious. The other downside is if a product doesn’t find a use case outside of using the coin in their internal ecosystem then the coin will die. This is why using utility tokens as an investment is a huge gamble. Most will die, but some will flourish but stabilize. While we want every coin to have used in the space most will not find it beyond their initial use case of funding the project.
This isn’t to say you shouldn’t ever invest in utility tokens but you should do so with extreme caution. Initial coin offers can make you big money but you can also lose it all as the project could never come to light. If the project is already stable and productive then buying some early on isn’t as big of a risk but still a risk. As always never put in more than you can afford to lose as any investment is a gamble.