The following abstract considers the Kexcoin token offering in an effort to determine if it is a project worthy of consideration. This article is simply my attempt to understand the Kexcoin token sale and should not be taken as investment advice. The following analysis may contain errors, and I make no claims of accuracy or that one should base their purchase decision on the ideas presented below. If you are interested in purchasing the Kexcoin token, you should do your own due diligence. Now with the disclaimer out of the way, let’s begin.
To my knowledge, Kexcoin is one of the first token sales with a purchase proposition derived from real estate rental income. For conciseness, the following analysis assumes the reader is already familiar with the details of the token sale and thus will not be repeated here. For those not already familiar with the token sale, the whitepaper may be found on the Kexcoin website (http://www.kexcoin.com) here Kexcoin Whitepaper.
Parameters of the Token Sale:
There will be 10 million KEX tokens created and allocated as follows:
- 8.5 million tokens will be sold at a minimum price of .0025 BTC/token.
- 1 million tokens will be distributed to the project sponsors
- 500,000 tokens will be held for contingency
Token Benefits:
- On a quarterly basis starting in November 2017, Kexcoin will use 50% of the net rental profit to repurchase tokens in the open market. Token holders will be notified of the repurchase date and Kexcoin will repurchase tokens starting with the lowest ask price orders and working their way up the open sell order list until that quarter’s profit has been exhausted. If the amount of quarterly profits exceeds the volume of sell orders in a given quarter, those profits will be held in escrow and added to the token repurchase in the following quarter.
- The remaining 50% of the rental profits will be reinvested to purchase additional income producing real estate in an effort to compound future rental income.
- A snapshot of token sale participants will be taken at a random time within 48 hours after the completion of the sale. After a 30 year period the value of the property acquired will be reassessed and any appreciation in value will be divided and distributed to those token sale participant addresses as well as to any remaining token holders.
Upon learning of the Kexcoin offering, I was immediately interested because this token sale marries the new world of blockchains to perhaps the oldest asset in world history, real estate. The project team appears to have a solid track record in developing and managing rental properties evidenced by the success of the Kexgill Group. So, as a cryptocurrency advocate the next order of business is to determine if this offering is a worthy project to participate in as compared to other choices in the market. To do this one must weigh the potential risks versus the expected reward.
Proponents of the project advocate that there are 3 ways to benefit. They claim:
- The value of the token should increase over time since:
a. The supply of tokens will steadily decrease via the quarterly repurchase events.
b. The amount of funds available to repurchase tokens at each quarterly event will steadily increase as a result of additional rental profit generated from the 50% reinvestment of prior quarter’s profits. - Any token holders who are still holding onto the token at the end of the 30 year period will receive a distribution of the capital gains accumulated from the property.
- Token sale participants will gain the extra benefit of receiving a portion of the final capital gains distribution regardless if they still own the tokens. The distribution will be sent directly to their Bitshares account in the form of BTC.
Based on the premises above Kexcoin supporters claim that token holders will see overtime an increase in value of the token. The token holder has the flexibility to choose to either sell their tokens back during one of the repurchase events or to another speculator on the open Bitshares market at any time. So let’s talk valuation.
Valuing the Token:
If the tokens are sold at minimum price of .0025 BTC with an average $4300 BTC price ($10.75 USD per token), then the project sponsors stand to raise roughly $91.4 million USD. So if one distributes the capital raised of $91.4 M over 10 million tokens, a starting value of $9.14 can be ascribed per token. Now, what will the token be worth after 30 years? For starters a portion of the future value of the token can be attributed to the increasing value of the underlying rental property. The starting value of the property is roughly $91.4 M and will very likely increase overtime due to appreciation and the reinvestment of half of each quarters net profit. Typically over a 30 year period the growth in real estate value can be quite substantial. The whitepaper mentions an expected gross profit in the range of 8 to 12% per annum. Simon Lee, the founder of the Kexcoin project, has stated, for projection purposes only, that one might expect operating costs to run between 25 and 30% of gross profit. This would result in an approximate expected annual profit between 5.6 and 8.4% of the invested capital. So, with an initial capital investment of $91.4 M and a yearly net profit ranging from 5.6% to 8.4% and half of those profits reinvested, what would the value of that capital grow to after 30 years? Using time value of money (TVM) calculator the capital would grow to between $200 and $300 million USD. Adding in the appreciation of the property one might approximate that the capital could grow to between $300 and $500 million USD after 30 years. Per the stated terms of the token sale, the only value of the property over and above the original capital raise can be claimed by the token hodler and token sale participant. So if we conservatively estimate the value of the property to be in the $300 M USD range then token holders and token sale participants can ascribe roughly $208 M USD residual value to the tokens. So, depending on how many tokens are still in circulation at the end of 30 years will determine the value per token distributed. If all the tokens have been repurchased by this time then the $208 M would be distributed only to the token sale participants or the original 10M token holders. So this would yield a maximum value of approximately $20 per token. If there are any remaining token holders then the residual value would be distributed over a larger group thus decreasing the residual value per token. Okay, the token sale participant paid $10.75 per token and after 30 years receives $20 per token payout over and above any potential profit (or loss) they received when they sold their token. This is definitely a nice benefit for the token sale participant, but maybe not so much for token holders who got in after the token sale. It really depends on the price you pay, how long you’ve held the token, and the amount of accumulated capital gains. Given the above analysis is somewhat accurate and the capital gains payout is likely to be in the $20 per token range; then one can make a reasonable decision and attempt to purchase at a beneficial price. Now that we have an idea how much the capital gains benefit could be (benefit 3 listed above), let’s try to quantify benefits 1 and 2.
The only way to capture benefits 1 and 2 is to sell your token. So, how much can you sell the coin for during the 30 year period? Well, not only do I don’t know, but it’s tricky to even try to calculate. But let’s make an attempt anyway to try and quantify what might be realistic to expect. Every quarter the Kexcoin Company is going to provide demand. Using the rental profit rates described above, once the Kexcoin Company gets the entire portfolio producing rent they should start out generating about $1M in quarterly profit available for token repurchases. So, let’s assume that the tokens could be repurchased in an orderly and even fashion in which Kexcoin were to evenly purchase all the tokens over the 30 year period at a constant appreciable rate. In other words, let’s say all token holders (except a few) are willing to divide their tokens into 240 equal lots and sell one lot per quarter until all the lots are sold. According to the profit rates above, the coin would appreciate at a rate of about 1.14% per quarter in order to exhaust all tokens after 30 years. This would result in an ending value of the token around the $40 mark. For the few token holders that waited to sell their entire inventory at the end, this would provide them with about a 4.5% return over 30 years. If these few token holders were token sale participants they could add in the $20 capital gain value (from benefit 3) bringing their ROI to around 5.8%. However, as you probably already figured out, this scenario is highly unlikely. More likely is that sellers will want to hold out until the price appreciates to their target value and then sell. In this case very few tokens will likely be repurchased early on to allow rental profits to accumulate in escrow. At some point the desire to sell will reach a tipping point. Also, the rental profit token repurchases will be conducted in the open market and so short term speculators will probably place sell limit orders at high prices in hopes of a windfall fill. I could envision a price chart with quarterly price spikes that coincide with these repurchase events. Think of a candle chart containing the repurchase day candle with a reasonable body height but with a tall spike out the top where a few trades get executed at a much higher price. And perhaps this might be the best way to reap the benefits of 1 & 2. Regardless of your chosen exit strategy, Kexcoin is an early innovation in a cryptocurrency based real estate portfolio.
I welcome your comments and feedback.