Disclaimer: Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. This article is for informational purposes only, and is not financial advice. The information does not constitute investment advice or an offer to invest.
For the modern investor looking to diversify their portfolio, digital assets could be the future. This is particularly true of ICO’s (Initial Coin Offerings) which have exploded over the past few months. An ICO is a relatively new method of crowdfunding, which typically allows projects or companies to sell crypto tokens in exchange for bitcoin or ether. The difficulty for the modern investor surrounded by ever-increasing ICO’s is how to differentiate between the good and the bad when valuing these crypto tokens. It can be daunting particularly due to the current crypto bear market’s effects on prices. To help simplify this, we offer 5 core resources in this piece to valuate tokens that align with your personal investment strategy.
Resource #1: Evaluate the Team Behind the Token
The first step to valuating a crypto token is to evaluate the team. A proven development and advisory team with crypto experience is worth their weight in gold to an investor who wants to add digital assets to their portfolio. The way to do this is to research the ICO team’s prior projects, career highlights and professional reputations. This search should start on LinkedIn: search for each individual team member’s profile and take note of their role, past projects and companies. These are all questions you should seek to answer with your research. Another way to find this information is to check places like ICOBench and TrackICO which have dedicated sections for each ICO team.
Make sure to also note the community aspect. ICO’s should be run transparently, and the company should provide an independent audit report, regular updates on their progress and communicate future plans with their contributors. Check the ICO’s social media pages and their Telegram group to establish their community reach.
Resource #2: Token Economics 101
Token economics is a system which defines a unit of value to represent a particular asset. In simple terms this means that you are given a token which represents value without being inherently valuable itself. Rather, it’s a promise of value. In terms of crypto tokens there are three distinct categories:
- Equity tokens
- Utility tokens
- Security tokens
Equity tokens can be likened to the ownership of shares in a business. This type of token gives you a right to a portion of the project or ICO. Utility coins are tokens that provide token holders with access to a product or service. An ICO could present a specific service which will cost a set amount of utility tokens. Lastly there is the Security token which acts very similarly to stocks in that it derives value from a tradable asset and is subject to regulation. Establish which category the token is part of prior to establishing value.
Resource #3: Chris Burniske’s Utility Token Model
Chris Burniske, author of Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond, has his own equation for valuing tokens. His equation is based on forecasting demand for the asset which is then divided by the size of the supply of the asset. It looks like this:
V = PQ / M
In Burniske’s equation, the breakdown is this:
- P is the price of the digital asset which is provided and Q is the quantity of the digital asset. Note that P does not represent the price of the asset but rather the price of the resource provided by the crypto network.
- M is equal to the size of the supply of the asset
- While V is the number of times the token is spent on the resource provisioned by the network.
This method can be used to not only find the value of a crypto token, but also to predict adoption and growth rate.
Resource #4: Warren Buffet’s MOAT method
Popularized by Warren Buffet, the MOAT method traditionally refers to the ability of a business to keep the competitive advantage. This framework can be applied to ICO’s as intangible assets with the use of a MOAT scorecard as shown below:
Identify which blockchain technology is used and if there are any trademarks in place to protect the ICO offering. Switching costs refer to the difficulty an investor will face if they were to choose a competing project. The importance of this will become more apparent along with the adoption of cryptocurrencies in the future. Cost advantage refers to the investment into the ICO: procurement of assets, marketing and investment backing. In the case of ICO’s scalability is determined by blockchain protocol, the algorithm used to maintain the blockchain and smart contracts. A key part of the MOAT method comes back to answering three questions:
- Are there any trademarks or intent to trademark to protect the ICO?
- What is the level of marketing for the ICO?
- What is the team functionality and who are their advisors?
Resource #5: Token Velocity Thesis
The idea behind the token velocity thesis is that velocity is the driver of the token price, and the lower the velocity goes the higher the token price will be. The tokens which have lower velocity and remain in wallets for extended periods of time are thought to eventually be priced higher than other tokens with higher velocities. This is calculated as follows:
Velocity = Total Transactional Volume / Average Network Volume
This method can be used to determine the long-term value if the project provides enough reason to hold a coin rather than spend it.
There are some methods not included in this piece that warrant some further investigation. Daily active addresses is a methodology where the daily number of users that make use of the crypto network in transactions can be an indicator of trends. Another approach is the Network Value-to-Transaction Ratio which measures the dollar value of a cryptoasset in transaction when compared to the network value.
There are multiple methods of valuing tokens, and as the industry evolves there will certainly be more. ICO’s have become the new norm for growth hacking and the investor who knows how to value tokens will be able to identify unique opportunities. Many giants of the tech industry are set to move into the ICO space, with Amazon and Facebook slated to launch their own. This, and the amount of ICO projects created each year makes token valuation more crucial than ever. Informed investors can use crypto assets such as ICO’s to diversify their portfolio and find projects that are in line with their personal investment strategy.
Which method of token valuation do you use?
Disclaimer: Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. This article is for informational purposes only, and is not financial advice. Future profits are not implied nor guaranteed, past performance does not guarantee future outcome. The information does not constitute investment advice or an offer to invest. Caviar tokens are not, and will not, be registered with the SEC, and are not offered or sold to persons and entities from the USA and the Cayman Islands.