Token value: what it all boils down to. If you’re a long term holder or a day trader, those green candles are a welcome sight. But how can you know that the token will rise in value?
In economics, or “tokenomics”, tokens can act like normal stocks. This means tokens can generate value for you in three ways: dividends, token buybacks, and price appreciation. Unless you’re looking to dump your tokens immediately after exchange listing, you’ll likely to be holding on to your tokens for a long while. So how do you avoid a wallet full of spam coins?
Token Supply and Demand
Let’s get some basic economics out of the way: in order for the token value to increase, there has to be more demand for it than there is as a supply. That means you are looking at two sides of the equation: how will the demand increase, and how will the supply stay the same or decrease. Basically what you are looking for is the bottom left quadrant of the following image:
Let’s first take a look at the ways a project can influence the supply of the token:
Token cap: The most straightforward way is to put a cap or limit on the amount of tokens that are available. As the supply never changes, but the demand increases, the token value goes up.
Token buy back: The project can chose to buy up tokens that are in circulation, and “burns” (destroys) the bought tokens by smart contract. This increases the value of the token as there is less supply. This can be done continuously, or as a one time thing to boost / correct token value.
Token creation by third parties: The project can allow tokens to be mined or gained by other ways without actually buying it. Mining is the most simplest form, as you know how much time it takes for the next block to be mined. However when there are faucets, referral programs or other incentives at work it becomes a bit more complex.
Token creation by the project: A project can simply chose to create more tokens when necessary. For example when the token value has become so high that the users do not use it anymore for the services offered.
Token demand is based on services offered
Token demand is based on utility of the token, or in plain terms: how the token is used. Tokens can be used in different ways depending on the business model, however we’ll focus on token utility in terms of service within the product (or other products). For this, we’ll have to take a closer look at the services the product offers, and the market size potential.
Services: are the services offered so enticing that they will generate a high demand? The more people use the services and pay for it in the token, the higher the token value will be. Generally speaking, services offered that cater to the crypto crowd or depend on demand of other crypto ecosystems are generate more value. Let’s take a look at the biggest crypto projects in terms of RoI since ICO (at the time of this article’s publication). Notice anything? They are all catering to the crypto or tech crowd.
source ICOstats website
The main reason is that there is not a mass market adoption for cryptocurrency yet, meaning that the people who will use the services most likely be in the early majority markets and their affiliates. Think people in technology, IoT, scientists, medical/pharmaceuticals, gaming/gambling. A good indicator that we’re moving out of early adoption into early majority market is the fact that the legislative bodies of countries are catching up with laws surrounding crypto, and the fact that VCs and Angel Investors from outside the cryptospace have been popping up as backers for recent ICO projects.
Market size: where size does truly matter
This ties nicely with the above mentioned services. There are two ways to judge market size: from the top, and from the bottom.
Top down: Most ICOs market by using top-down market size: they show the entire market (without competitors). As an example, let’s say you want to make a blockchain product for beers in the US. For this, you can put in your ICO paper that the total market size of the beer industry in the US is expected to be 464$ billion dollars in 2020! However this doesn’t mean that the product will conquer the entire 464$ billion market, especially if you take a look at the current distribution of beer companies in the US:
source: Kristal Project website
Your blockchain beer per definition will fall in 19% of “Other” beer companies, and within that market share there are already established competitors too. Not to mention that as a newcomer, you have to do a lot of marketing to catch up with the other brands, AND convince people to buy your blockchain beer in “beer tokens”. Meanwhile they can go to the store and exchange their dollars for any other brand. So going by total market size is not actually a very good measure of how the token will rise in value. Rather, try to estimate how the team will actually penetrate the market and how much of the market size they can capture.
In traditional investing this is called your market opportunity, and it is calculated by multiplying the (total market * the penetration %). So if you think the blockchain beer has a chance of 0,1% to penetrate the market, the formula would be: 464,000,000,000 * 0,001 = 464$ million. Not a bad number, but because you are multiplying with a very large number and a very uncertain percentage, the market opportunity number is pretty much a ballpark figure.
The second way to judge market size is bottom up: which is projecting the growth of the product based on current numbers. The core of this estimation is taking a transaction (customer pays token, you perform service) and scaling it up. Let’s say you sell the beer for 10$USD per crate, and the customer has to buy it in “beer tokens”, which they can exchange on Livecoin. You know that in your area, blockchain beer is very popular and you expect to sell at least 400 crates per month. To get the market size you calculate the (items sold * price), so (400 * 12 * 10$) = a market size of 48,000$ yearly for the first year. That’s a bit more sobering than the 464$ million figure from the top-down approach.
In either case, take the number supplied from the team with a grain of salt. Most ICO teams do not readily show their books and metrics if they have a working product with paying customers, and even more ICOs don’t even have a working product yet, so they rely on speculation of top-down market size.
Back to supply and demand
So now let’s get back to the topic: how to judge if the token will rise in value after the ICO.
Investing always has associated risks attached to it, and will never be risk free. The least risky ICO would be a project that has disclosed their market size bottom-up, with a product in a space that is favourable for crypto adoption. In other words, not something like the Karmatoken. However those projects are rare unicorns, so you will have to take a risk somewhere.
The more complex the token economy is in regards to supply and demand, the more time you will have to invest in due diligence to extract the actual value of the services offered and the market served. You’ll have to be well aware of the problems the product faces before it can start generating your 5x, 10x or 20x returns.
By the way, if anyone wants to start a blockchain beer company, don’t forget I had the idea first!
Disclaimer:the author does not promote any of the exchanges or ICOs mentioned in the article as better than others. Do your own research and pick wisely!.