A token
value is the sum of
- its utility
value (price for service * quantity sold)
- trust in
the project to manage the token to be a store of value.
Do you
agree or am I way off?
If it’s
only a utility token, I will buy the token I need for the service today, use it
tomorrow and the project will sell it the day after to next user. Only a never-ending
increase in demand for the service will slowly increase the price of the token.
But when
people see that the price goes up over time and they trust the project, they
will start to buy more tokens then they plan to spend, as a store of value. A positive
spiral start, leading to higher and higher token price when both the service
users and the store of value purchasers will chase fewer and fewer tokens in circulation.
Based on
above, a high-level summary of items impacting the value (that I think of right
now):
- The project
actual and potential utility value
- Level of
project decentralization
- Level of
decentralization for the token platform (Ethereum, Stellar, side chain to
BitCoin, own block chain etc.)
- Token
supply policy – pre-mined or mining, with cap or not
- Tokens
controlled by the project team
- Number of
tokens required to hold by service usurers and/or providers (staking)
- Total
number of asset holders
- Store of
value holders (HODL share), expecting the price to at least be stable over time
- Liquidity
in exchanges and trading pairs
So to find the
next Microsoft in the crypto space, I need to look for projects with a future high
utility value and a project with a high degree of trust.
A token-based
project is like a start up with all it challenges including financing. The
connection between service price, project profit and the distribution of the
profits need to be understood, e.g. if the service price is 1 token and the USD
value for the token increase with 10%, good for project and token holder but
most likely less service required. Or the team don’t have any token holdings
and the profit is fully distributed to them leading to no incentive to create a
store of value.
I think the
utility value part is straight on, difficult and requiring hard work but it’s
tangible questions to be identified and “guestimated”. Maybe the trickiest one
right now is the adoption rate for users to pay for a service with a token.
The store
of value (SoV) part is much trickier.
All
succesful companies and tokens have three phases (before decline):
- preparation
and launch
- growth
- maturity
phase with slower growth
The risk
and expected return goes from high to low over this cycle and this means that
the SoV parameters impacting the price are changing as well.
In
preparation phase there is no utility value and the token price are only based
on trust on the team for managing the project and creating a SoV. But around service
launch my guess is that all focus will be on the utility value, partly because the
project has “proven” they can deliver and this creats a high degree of temporary
trust.
Continuing guessing,
over time when the utility value gets visible (actual and better predicted) the
valuation focus will change from the utility value to the trust part and the
crypto characteristics becomes important for the token: the level of decentralization in project and
platform, token policy and the policy of the tokens hold by the project will
become the important factors.
High level
of decentralization in the project and blockchain minimize trust issues,
ensures predictability and transparency and minimize the possibility for
individuals to enrich themselves on behalf of other token holders. Decentralized
open source projects will be valued at a premium over centralized projects.
For
projects with low decentralization (as Smartlands) the token is more like a 1900th
century bank note backed by gold. If the bank was well run with low risk (high
coverage of gold to papers issued) the people trusted them with more gold
deposits but even at a rumor about issues they would collect their gold. In
other words, the margin of error for the centralized token-project will be very
small.
So maybe
the “token valuation formula” is more like dashboard with two legs, utility
value and project trust? Let’s dig in to all the details going forward!
I’m sure
some of you have already thought allot about token valuation and reached other
conclusions, I don’t think there is a right or wrong, just like share valuation
models differs between investors. Looking to myself I have different models for
different sectors, and they get developed and changed over time. Also, the time
frame for the investment makes a big difference, are you a short-term trader or
a long-term holder the valuation models differs.
To a large
extent I’m a buy-and-hold stock investor and learned the difficult way about bust
and burst cycles. I’m looking for projects that have a decent risk-reward ratio
over the long run and where I have a good understanding of when it gets highly overvalued
so I can leave, take a profit and return later.
