FUNDAMENTAL VALUE & CLASSIFICATION OF CRYPTOCURRENCIES & TOKENS
Hi all, this week I’m gonna talk a bit about the importance of classifying coins & tokens properly from a fundamental POV in order to establish a better long-term investment strategy.
I know that fundamentals doesn’t matter at all nowadays, because as you will see, even the largest and most reputable cryptos have an outstanding lack of fundamental value that supports them. Speculative smart capital & dumb money represents almost 100% of the capital invested in the crypto sector nowadays. As a consequence, rules & cycles for these markets are very different from traditional markets & traditional valuation methods make no sense here.
There’s actually well known “fundamental” factors inside the pure speculative markets that can help to invest better such as: project with tons of buzzwords, ability to generate hype, SUPERSTAR team with HUGE advisors & HUGE connections in the space, partnerships with mega-firms, etc, etc, etc.
But today we’re not going to analyze these hype factors that have been working very well in the crypto markets. Today we’re going to classify the current existing crypto projects in the markets as if we were a serious financial investing company and trying to unmask the fundamental value of these digital assets beyond speculation.
CRYPTOCOINS (BTC, LTC, XMR, DASH, ZCASH…)
Cryptocoins intrinsic value comes just from the amount of people/capital that considers this coin as a good store of value over time. As we commented in the previous post, for a cryptocoin to be considered a store of value it needs to guarantee in a hard way the blockchain immutability & censorship over time. The most robust the network is, the easier is to justify it’s properties as a store of value.
But being a robust immutable network is not enough. The most important thing to determine the fundamental value of a cryptocoin is the amount of people (or money), that BELIEVES deeply in their minds that this digital thing is a store of value. The more believers, more fanboys, more people convinced in agreement with the topic (for example: BTC is the digital gold), the more intrinsic value the cryptocoin will have.
At the end, the math is very simple, if BTC is considered as an investment and a store of value for 1000 people, it’s price is gonna be way low than if 1 million people BELIEVE that. That truly sounds like a ponzi scheme, where the profits from 1st believers come from the last ones, but it’s no different in classic “safe heaven” assets like gold or real estate, way overvalued if we just took into account them real utility.
There’s another factor to consider to calculate the fundamental value of a cryptocoin, and that is utility. Logic says that if there’s more people transacting with X coin, then it’s value will have to be greater. Well, it’s not so easy: if everyone transacted with BTC but got immediately converted to fiat after the transaction, it’s effect on the price would be literally 0. Again, the value effect will come for the amount of people, not that TRANSACTS, but that BELIEVES and holds this coin as an investment.
It’s logic that if 1Billion people did payments with BTC it’s value would rise up significantly. It would not rise by the transacting fact itself, but for the marketing effect that this would generate. At least 10% of these 1Billion people would believe in the “digital gold” story, and would keep a part of these transacted BTC in HODL mode, draining the supply and making it much easier to rise in price.
Conclusion: When investing in cryptocoins, look for the network robustness, look for it’s supply emission, but especially, look if the history behind can be sold to the masses & create believers 😉
NETWORK PROTOCOL TOKENS/GAS (ETH, XRP, EOS, XLM, ADA, TRON, NEO, GAS, VET…)
In the case of protocol-based tokens the valuation is not so easy. “Store of value” history cannot be sold here since there cannot be 10000 stores of value in the world.
Protocol-based tokens fundamental value should come from the UTILITY of such networks, plus the way this utility affects the tokenomics systems (basically how holders are rewarded or how is the network token supply affected).
The objective is clear: We need a network that is secure and incentivizes the parties to keep securing it (through POW rewards or POS), and we need a network that is USED for people & dapps, and they pay for it (in the form of gas or network protocol itself).
The most important thing comes with what is done with those fees coming from the usage of the network. If fees are distributed to the token holders, but then the supply inflation (to secure the network) is superior than these fees, the fundamental value of the protocol token is actually 0 (just having this factor in mind). If instead of sharing the fees to the token holders, the network itself burned tokens from the network (buying them previously), there would be a supply deflation effect that would rise fundamentally the price of the network over time. Again, if the supply inflation was bigger than the burn of tokens, this effect would be 0.
So as you can see, it’s not only necessary that the network allows 1 trillion TPS & 1 Billion dapps living in it, but that the fees & numbers have to make sense for the token holders, in order to incentivize the investment (not only holding) in it.
Nobody would invest in a network with 0 fees, no burns or no rewards for holders, even if it was the best network on the universe.
A simple calculation of which is the fundamental value of certain network would be to calculate the equivalent of the PER (price-earnings ratio) on that network. In a network case, earnings would be the net fees that go to reward token holders or to burn the token. Then it would be needed more supply factors such as token inflation (if there’s) or other demand factors (network growth expectation, a % of holders considering it a store of value, etc). I will go deep in a practical analysis in another post with real examples.
Conclusion: When investing in protocol-network tokens we have to look at the potential usage of it (realistic one), and the tokenomics behind it. If tokenomics are weak, and usage is not translated into a real mathematical effect for the token holder, you shouldn’t invest on it (speculation reasons not included).
UTILITY TOKENS TO ACCESS DAPPS
That’s an easy one. Pure utility tokens that are used or supposedly used just to access a certain dapp, and where there’s no burnback or reward to token holders, their fundamental value is 0, and their price will obviously head to that value in the long term.
It’s the same case that merchants transacting cryptocoins and selling them immediately. The effect to fundamental price is 0. To have a real effect to the token-holders, dapp or the company that issues the dapp should either burn a % of these tokens that users pay to use the app, or should reward the token-holder with some of the profits/rights from the activity. And as you can suppose, when a token meets any of these conditions will be considered a security token. So it’s not actually a utility token.
It’s not that rotund that the fundamental value of utility tokens is 0. There can be complex lock-up structures that come with the usage that can generate the same effect as burning or rewarding token –holders, but it’s just a pain in the ass and these models only work for a certain very specific distributed businesses.
Conclusion: Don’t even think of buying a pure utility token for fundamental reasons, it’s literally worthless even if market cap says 200M $.
SECURITY TOKENS (THE REAL THING)
Coming in the next report…
PD: As you can see, if we where a serious investing company which invest in value, we would not invest in almost ANYTHING. Sadly, the only crypto asset that can be fundamentally half justified nowadays is BTC itself, because of it’s network effect and the “digital gold” story that has behind it. In the protocol-based tokens area, tokenomics for these networks are very very weak. And in the utility tokens area there’s nothing to talk. Any serious investing company would even take a look at those things.
Big capitals are waiting for the security token wave that is coming. Not for the projects that will come with those tokens, which can be worse than the current ones (which is hard), but because of big capitals will have at least a way to calculate WHAT are they investing it and AT WHICH POINT are they investing it.
Have a nice week.