By Jed Grant
After an extraordinary 2017, I imagine that things will start to settle down somewhat in 2018.
This doesn’t mean I think cryptocurrency price fluctuations will end, ICOs will disappear or enthusiasm for blockchain-fueled innovation will stop. However, there’s no denying that, during the past year, we’ve experienced an unprecedented amount of hype around the crypto-economy. As a result, a whole wave of new investors (and speculators) have entered the space and are asking the fundamental questions about this new asset.
I, for one, believe this is a good thing. Even those of us who have been involved in this field for sometime need to take a step back and look again with fresh eyes at the dynamics. You may have read my previous post on the topic of ICO due diligence and token governance. Following on from that, I think it’s worth looking at the valuation of the related ecosystems too.
Unhelpful Comparisons
Firstly, it’s worth saying that some of the semantics that have been transposed onto the cryptocurrency world are causing confusion. For example, an Initial Coin Offering (ICO) immediately draws parallels with an Initial Public Offering (IPO). But while the latter is all about selling equity, the former is not. When we think equity, the enterprise as a whole might be thought of as an apple while the equity stake is just a slice of it.
Another confusing parallel term is Market Capitalization or Market Cap. For an equity, this is the value of the enterprise as calculated by the total of the shares and their price. For crypto assets, the same term is used to refer to something completely different — the total value of all outstanding tokens issued. In this scenario, the apple analogy is more accurately thought of as follows — the apple, or total market cap of a company, exists on an apple tree just as the crypto company exists in a crypto ecosystem.
The Community Effect
It’s absolutely crucial to get your head around the link between a community and a token. Tokens should serve a purpose for a community. This means that they see value in the token’s ability to solve a transactional problem within the community. In this way, the token begins to be used within the community and thereby becomes more valuable.
Token economies are peer-to-peer networked ecosystems. As stakeholders transact, they create pockets of value. This is equivalent to the tree producing new apples.
Superpowered Currency
Cryptocurrencies are superpowered compared to traditional fiat currencies because there is no banking system introducing frictions, costs and errors between actors who wish to transact.
They are effectively network currencies and this is why Metcalfe’s law is relevant. This states that the value of a telecommunications network is proportional to the square of the number of connected users of the system. This is why cryptocurrency valuations differ from equity valuation models.
For coins and tokens that satisfy a mostly currency nature, it is likely that we will see value created on an exponential scale. However, a cryptocurrency token is not at all parallel in form or value to the stock of a single company. Instead, we should be talking about crypto GDP, the velocity of the token and the value created by the ecosystem that it enables.
Cross-chain exchange
Looking ahead, I believe that technologies such as Bitcoin and Ethereum are just the beginning of what we’ll see in the crypto-economy. I don’t believe that we’ll see a ‘great currency’ that replaces all of the others. Rather, I see decentralization of currencies themselves as the future of currency. I believe inter-chain protocols will become very important in this scenario and this design assumption is at the heart of my patent-pending PeerchainTM technology.
As mentioned, the token valuation approach that I’ve outlined above should be done in tandem with your due diligence work, for which I’ve written a separate T3GC framework.
You may want to utilise this when assessing the most exciting thing on my crypto horizon, Peer Mountain and the PMTN token that we will deploy. As the number of trusting participants in the PMTN ecosystem grows, its value will grow exponentially — which is why I am looking forward to HODLing on Peer Mountain.
Learn more about Peer Mountain, PMTN, and Smartcap in our white paper.