This is meant to be a brief note to anyone wishing to learn more about token/coin valuations and token economics within the cryptocurrency space.
Why should you care?
Well, simple lessons within economics are the key to your long-term success in cryptocurrency investing.
Example 1: The case for tokens trading hands
As crypto investors, we are all interested in the platforms that we see as being the most utilized. While speculative in nature, we as investors put value in the prospect that a platform will gain mass adoption, providing liquidity through its user base. However, could increased use and liquidity hurt the value of a token in the long-term? The answer is that it depends....
So what does it depend on? It is entirely dependent on the rate at which the token changes hands.
For instance, a platform like IOTA will require that tokens change hands regularly. This is because companies that require the mass exchange of data from their IOT devices will have to pay the network for each transaction or bulk transactions. These transactions will be extremely liquid because of the high speed, lack of fees associated with block transactions, and the ability to sell their data within the IOTA network. Additionally, there is increased liquiity due to a complete lack of third party miners within the network and exchange rates being relatively high (~1% of the total market cap trades daily as of this writing).
So why do you care? Well, as of right now there is little incentive for token holders to maintain their balances unless they are long-term investors (as far as I know there is no proof-of-stake incentive for IOTA). This will also be true as companies load onto the platform. They will most likely require immediate liquidity within their local fiat currency to adjust for volatility within the market. Thus, they will not likely hold a large stake of tokens. In this scenario, supply will reach an equilibrium point with demand based on liquidity (tokens changed hands) so that value of the token remains relatively constant. So even if billions of USD/per year is passed through the platform, the supply and demand will remain relatively constant. In other terms, the liquidity inherent to this particular token economy does not cater well to increasing token value.
Example 2: Does the platform provide a product?
Many decentralized platforms specialize in connecting to a network of decentralized nodes/verifiers for immutable transactions, rather than a defined product. A perfect example of this is bitcoin. Bitcoin is not a product, it is a store of value that can be transmitted immediately, with minimal fees, that is irreversible. Conversely, a company such as Filecoin or Siacoin offer the product of decentralized cloud storage.
So, what advantage does Filecoin or Siacoin offer over other cloud storage companies? Are costs reduced because decentralization can circumvent traditional server farms and/or minimize hosting fees? Further, what is the price/bit of storage? Is an immutable ledger critical to this industry? What portion of the total cloud market will either of these companies gain? Can they compete with the likes of Google, HP, and Amazon for cloud storage? Finally referring to example 1, is there an incentive to hold tokens so that demand increases as supply diminishes?
These are all questions that we as investors need to ask ourselves before investing in what we think may be a "product".
Example 3: Does the company have a way to generate revenue to pay for overhead costs?
I, like many others reading this, am a part of multiple mastermind groups. These groups are great for finding new ideas, but they often lack the critical nature of most investment firms.
What do I mean? Well, for the most part I see posts and comments like "OMG is gonna MOON!!!!", "TENX will get me my first LAMBO", etc. That is great for the people who believe that, but the reality is that often times these posters/comments have no idea how the company actually plans to make money. I have asked this in multiple groups and the major response I get is, "Who cares? They'll be millionaires because of the tokens they hodl."
Unfortunately, reality is not that kind. Some of you may be ahead of me and see the problem with this logic. In order to make revenue/profit on increasing token value, the company must sell the token to realize that value! Traditionally, this is not a sustainable business model (especially when thinking of tokens as securities in a company).
However, if the token econonomy is set in such a way that incoming token "payments" to the network match (or are higher) than the overhead costs incurred by the platform, than this logic may work. Again, the death and/or success of a company within this space relies on the token enconomy of the platform.
A recent podcast by Laura Shin (Unchained) featuring Chris Burniske of Placeholder Capital explain these concepts very well. You can find the podcast here: https://www.forbes.com/podcasts/unchained/#35c2ba855b4f.
Also, Chris wrote an amazing book and has a great website that you can find here: https://www.bitcoinandbeyond.com/
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