With rapid proliferation of ICOs, evaluating the credibility of propositions and tokens can be quite overwhelming. When a market becomes highly saturated, it stands to reason that most ICOs and tokens are destined to fail.
A recent study by Deloitte found that ‘about 90 percent of projects developed on GitHub become idle, and the average lifespan of a project is about one year, with the highest mortality rate occurring within the first six months.' This is not a trend exclusive to crypto currencies, 75% of traditional startups backed by venture capital funding also fail to make any significant inroads beyond the funding stage.
Investing in startups as a whole is risky business. It's important for investors to carry out duly diligent research and consider the merit and scope of a project before throwing weight behind it. Once you do your ‘homework' on a project and come to the conclusion that a particular project is worthy of your investment, your next question is how will the project's value accrue to the token?
Aenigma Capital sets out to answer such a question with the result of developing our fundamental valuation framework for investing. Aenigma's investing philosophy is that tokens are no different than any other financial asset.
By understanding and measuring the way in which these value drivers translate into token price, we may assess the intrinsic value of crypto assets to make stronger, more informed investment decisions.
Intrinsic Value Driver
While tokens per se lack intrinsic value in a fiat economy, Tokens have value akin to a product or service measured in a particular fiat currency. Their utility as a product or service generates the demand for tokens.
The initial step in assessing any cryptocurrency is understanding its primary utility use case. When designed effectively, each token performs at least one job which benefits its users. These jobs constitute the fundamental utility of the token. Each token with a current job takes on the inherent intrinsic value of that job while active in the period of exchange.
Defining Fundamental Utility
Cryptocurrencies act as a medium of exchange or payment rail for transferring values between parties. The fundamental utility stems from users purchasing them to fulfil their need to transfer value. The actual amount of payments facilitated indicate the fundamental utility demand at a given time.
For valuation purposes, in a world where the value of real goods and services are measured in fiat terms, the utility of tokens is represented as fiat-equivalent within a given market where the fiat is primary metric of utility. When value is sent for goods and services using a cryptocurrencies network, their token gains the tangible value of those goods and services during the period of value exchange.
The fundamental utility value of a payment tokens network is backed by the transaction value exchanged for these real goods and services flowing through the network. As such, the transaction value backs the crypto currencies' inherent underlying fundamental intrinsic value no differently than the gold standard once backed the U.S. dollar.
Total Network Value: Current and Forecasted Utility
Cryptocurrencies generally offer two forms of utility value to their users:
Current fundamental utility, which is the level of current demand and resulting portion of the token's value that is solely derived from users who purchase it today for its intended use case. This value benefits token users.
Forecasted utility (sometimes also referred to as ‘speculative utility'), which is the demand and the resulting portion of the token's value that is based on the market's perception that the utility value will increase in the future. This value benefits token holders.
Network Velocity and Active Supply
At any given time, a level of demand exists for the current fundamental utility of the job a token provides. Tokens may be removed from the active supply in various ways, including being held for investment, used as a perceived value storage, or even lost. Each type of removed token reduces the amount of tokens currently available to provide their designated job
Once a token has finished providing its designated job, it can be resold and returned to the system at market price for its type of job. The period of time required in aggregate for the network to execute the job demand cycle is known as its “token turnover” or “network velocity.”
Bringing It All Together: Required Network Value
The most effective way to value a crypto currency's required network value is to forecast the amount of its current fundamental utility demand and network velocity in a given time period (e.g., one year). When current utility demand is divided by network velocity, we arrive at the network value required to facilitate that demand.
Token Network Value = Current Utility Demand/Network Velocity
Token price is therefore total network value divided by the current total issued token supply.
Token Price = Token Network Value/Total Issued Supply
The Aenigma Capital model demonstrates that the value of a token is not its scarcity or utility as a store of value. Instead, a token’s value is a reflection of the utility expectations of its users, both now and in the future.