According to the Merriam-Webster Dictionary, a utility token is:
“A digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency”
A utility token is a non-tangible token created for the purpose of crowdfunding. Through the crowdfunding process, a buyer participates in order to help the company raise the financial resources needed to develop a product or service that the buyer can later redeem using the tokens he bought.
An ICO is the process of issuing utility tokens in a crowdfunding manner. Why do people venture into utility token crowdfunding?
Crowdfunding is a very risky investment in the cryptocurrency landscape. Moreover, speculation and fear of missing out (FOMO) have been identified to be the main factors that push people to venture into it. Although you can’t redeem a utility token for a good or service, after crowdfunding, utility tokens are listed on crypto exchanges where they are traded in exchange for other more valuable cryptocurrencies.
Thus, a person purchases a utility token hoping that there will be positive sentiment towards the underlying project, which will entice someone else to want to pay a higher price for the same token. Another person sees how the utility token has been increasing in price, and fears that if he or she does not buy now, he or she will miss out on buying the utility token cheap enough (i.e. FOMO), and thus buys the utility token at the higher price.
Utility tokens derive their prices and values mostly from speculation and the price appreciation continues as long as there is a third party willing to buy it at a higher price. How this is achieved is beyond the scope of this article. I hope this article has given you an insight on what utility tokens are.