SLT valuation formula, part 2 of many

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):

1. preparation and launch
2. growth
3. 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 1900^th 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.