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âAn unsophisticated forecaster uses statistics as a drunken man uses lamp postsâââFor support rather than for illuminationâ, Andrew Lang ( Nobel Prize in Literature, 1912)
Recently, along with researchers from BNP Paribas and CDC Recherche, we published a report that identified the variables of analysis when building a token valuation model. The report is the first in a series of reports on this subject, but the objective remains the sameâââto build a token valuation model, one must first determine the variables of analysis.
In computer science, Garbage In, Garbage Out (GIGO), is an expression used to convey the concept that incorrect or poor-quality input data will produce a faulty output or âgarbageâ output. The token valuation space currently suffers from this issue. Since the launch of Token Sales or ICOâs in the past few years, the notion of developing valuation methodologies that can accurately ascertain the future price of a token has become a subject of increasing interest and debate, with some experts attempting to retrofit stock valuation models in the hope of creating accurate token price prediction models. While these efforts are laudable and necessary for this new investment vehicle, they suffer from multiple flaws. Having reviewed the existing literature and some of the work being done in the space, we found the following:
Firstly, there is a lack of empirical analysisâââmaking any kind of prediction model requires rigorous empirical evidence. Most of the ICOs that have been funded are still in the process of development. To be able to ascertain the market penetration, customer adoption curves and beneficial trade-offs of using token-based solutions in comparison to existing products/services, we need to track and analyse the related data. As some of these projects will only be released in 2019 or 2020, making a valuation today is based on a large number of assumptions.
Secondly, most of the current valuation models being explored (and used) are essentially retro-fitted versions of stock valuation modelsâââExcept a Token is not a Stock and does not bear the same features. This issue is further compounded by the fact that there is a significant degree of diversity in the token spaceâââtoday we have work tokens, utility tokens, security tokens, etcâŠ.. As we have no standard taxonomy for tokens, having a âone-size-fits-allâ valuation model is a gross oversimplification which does not respect the fundamental functions of the token. Thus using retro-fitted stock valuation models are ill-suited to this new investment vehicle.
Thirdly, tokens have currency-like properties along with functional objectives. This feature of cryptoassets and Blockchains is what makes it unique from other kinds of technologies. While AI, VR, 3D Bio-Printers, or any other kind of technology has a functional purpose which generates economic value, the distinction between the tech and the economic value its generates is clearly demarked. Cryptoassets, on the other hand, have the economic value intrinsically built into the functionality of the token, making every token project resemble a mini-macroeconomy with its own currency supply and velocity of circulation attributes.
This macroeconomic perspective of cryptoassets is often not taken into consideration when building valuation models and in most cases is unclearly addressed in the whitepaper. In mid-2018, when researchers from the University of Pennsylvania analysed the smart contracts of the 50 top grossing ICOâs, they found that most token issuers had failed to properly define the supply dynamics of the tokens (which directly affects its price) and even fewer had encoded these dynamics into their smart contracts. The image below summaries their results:
As a result of these issues, coupled with the turbulent regulatory changes in the space, the price of a token is highly subject to speculation effects of the market and to the corresponding actions of nefarious actors. A practice that highlights this point is Pump nâ Dump schemes where the price of a token is artificially inflated by a fringe group to make a quick buck in a short time. No consideration is given to the underlying business as value is sacrificed at the altar of easy money and FOMO.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.