One of the major holes that we are seeing right now in the crypto market space, is how to assign a fair 'market valuation' to any of the ICO's and Tokens that are on offer.
From a general standpoint, when valuing a new startup there is a very clear process that individuals or businesses can use to make fair assessments. Here is a link to common methods for valuation http://www.wikinvest.com/wiki/Valuation_Methods
However, there are some inherent problems in the token/ ICO space that makes valuation almost impossible:
No cash will ever change hands - this is a big one to wrap your head around! Whether is is Eth and GAS being used in transactions, or Steemit, with a mix of Steem, Steem Dollars or SteemPower, essentially what these platforms are suggesting is that their token is the currency. It may or may not be pegged to any fiat currency and without a peg, it is very difficult to apply a valuation technique. There is NO revenue, NO profit or loss, ONLY the guiding hand of the market as compiled at this moment by places like http://coinmarketcap.com/
Circulating supply, inflation and deflation - this is also a major issue in tokens and ICO's. If you do not understand these terms its time that you read up or watch a movie. For this example, in the movie The Social Network, based upon the actual rise of Facebook, one of the co-founders Eduardo Saverin, signed to shares that were not 'preferential' or in other terms non-dilutable shares. In this scenario when Facebook raised more funding, Eduardo's shares were diluted as more shares were created to be sold. I.e. I own 10% of a company that has 100 shares. My shares are dilutable so, if that company decides to increase the share cap to 1000, that would make my ownership now 1%. In the case of Cryptocurrency, this is true for many tokens. Take Ripple (XRP) for an example (note this is true for loads of tokesn). Ripples current circulating supply of tokens as of today is 38 Billion (rounded to the nearest billion) at a price of $.28USD cents per token. However, the total supply of allowable tokens is 100 Billion (again rounded). So given the Facebook example is shown here, If Ripple decided to release their total supply of tokens immediately the price per token would move approximately 1/3rd to around $.09c per token. Or all holders of XRP would have their USD valuation sliced by a 3rd!
The inverse effect can also be true, in that some tokens plan to 'burn' tokens into time, decreasing their supply.
In both cases for inflation/ expansion, or deflation by burning or using tokens, I would say that 95% of people (including myself) are not clear on how these functions work either due to it being not clear in companies whitepapers, or simply it is being hidden for a malicious reasons. That is a scary thought!
So what is a token? Right now I have not yet met anyone who can define what a token is currently, or, what it will be in the future, which is what is also fueling the wild speculation. Here are some possible things tokens could be and you can see how their 'value to society' can widely vary depending on its usage:
- A token is a share of a company - just like the stock market. So token value would work similar to valuing companies
- A token is a form of transaction - in the case of decentralised exchanges, payment platforms, market makers (including but not limited to futures, ETF's, backed securities, derivatives, currency exchange etc) in which case a token should be valued at some % level of the total trading
- A token is a CURRENCY - many countries are now making large tokens such as Bitcoin and Ethereum currencies!
- A token is an expression- such as up-votes on Steemit and in the future a substitute for other creative markets such as music
- A token is a store of value - such as Gold, Silver or any other item that appreciates in value over time due to scarcity
Or a token can represent ALL OF THE ABOVE! And this is where Cryptocurrencies become extraordinarily hard to understand. There are those out there saying its all a scam and Bitcoin will go to $0 on conversely HIGHLY respectable businesses and business people who are giving valuations of Bitcoin eventually worth millions a token/ coin.
Right now the truth is no one knows and for me, this is exciting and scary at the same time.
I would love to hear your thoughts:
- What is a token/ cryptocurrency to you?
- Where do you think this is going - up, down or sideways?
If you like this article and want me to produce more, please up-vote me here on Steemit and share on other social sites. I will upvote all your replies to say thanks for the support.
Enjoy The Ride - KTB