Factors That Affect the Value of Token
By: Genson C. Glier
Tags: Bitcoin

Whether you’re a day trader or a trader with a long-term perspective, you need to understand what determines the value of tokens so that you can know what to expect in the market. Tokens experience the same ups and downs that normal stocks do in the stock markets. Therefore, this means you get value for your tokens through price appreciation, token buybacks, and dividends. Unless for some reason you plan to drop the tokens soon after they are listed, you should hold them for a while.

How do you know whether your wallet has valuable tokens?

Token Supply and Demand

Simple economics here; for your tokens to increase in value, they should drive more demand than the existing supply. Therefore, you need to look at this from both sides of the equation. How or what causes an increase in demand, and how will this affect the supply? Will the supply decrease or will it remain the same?

Token Supply

Certain things can affect the supply of a token.

Token Cap

This is a way of limiting the number of tokens made available to the masses. The supply remains constant even though the demand keeps rising, and in the process, the value of the token will rise.

Token Buy Back

There are instances when projects decide that the best way forward is to buy all the tokens in circulation and destroy them. This is done through smart contracts. As a result, there’s a shortage of token supply. Hence the value will appreciate. This can be done once to correct the value of the token or to boost it, or it can be done periodically.

Third-Party Tokens

Some projects encourage mining of tokens or earning tokens without buying them. The simplest form of gaining tokens is to mine, especially when you know the amount of time it takes before the next block is mined. However, this can be a challenge when other factors like referrals are taken into consideration.

Project Tokens

Some projects choose to create tokens whenever it’s deemed necessary. A good example is a situation where the value of a token rises so high that those who hold it no longer use it to pay for products and services offered.

Service-Driven Token Demand

The demand for tokens is utility based. Depending on the business model, there are different ways in which tokens can be used.

Let’s take a look at the utility in the case of services rendered. This means looking at the market potential given its current size, and the services that the product is offering.

Services

Is it possible that the services are so enticing they can create a high demand for the tokens? When more people need the service and have to pay for it using the tokens, the value will rise. Generally, in the crypto world, services that rely on the demand for other crypto ecosystems or any other service that meets the demand of the cryptocurrency holders will push the value up.

A good example would be some of the biggest cryptocurrencies in use at the moment. Since their ICOs, their ROI has been very good so far. This is because they are all used in one way or the other in the crypto world or in tech spaces from time to time.

This happens because cryptocurrency is yet to become mainstream. Therefore, those who use cryptocurrency are either the early adopters in the crypto markets or their affiliates. This includes scientists, technology enthusiasts, pharmaceuticals, medical research, gamblers, gamers and anyone interested in the Internet of Things.

A good sign, however, that early adoption is about to expire, and usher in entry into the mainstream markets is the fact that legislators in different countries are already coming up with laws on how to deal with cryptocurrency. Recently, angel investors and VCs who have not been players in the crypto world have been increasingly backing ICOs.

Market Size

To evaluate the market size, you have to look at it from the bottom and from the top, to understand how it’s affected or affects the services discussed above.

Top-Down Approach

A majority of the ICOs use this approach. They eliminate the competition and then display the whole market. Let’s work with an example where you want to list a blockchain product for whiskey in the US.

Your estimates in the white paper might indicate that you expect the whiskey industry to be worth $460 billion by the year 2021. However, this estimate doesn’t mean that the product will actually cover the whole $460 billion, especially when you look at the number of whiskey competitors in the US market.

By definition, your whiskey will fall into the category of “other whiskey companies” which makes up around 19% of the liquor market. In this market, we already have competition, especially from established brands.

Besides, as a new entrant, you have to invest in serious marketing to make a name for your brand and compete fairly with other established brands. You will also need to encourage people to buy your whiskey by using “whiskey tokens.” However, take note that they can still go to any store and buy any of the brands they are used to, in dollars.

Therefore, what we see here is that the total market size approach might not really be the best estimate of the potential for token value to appreciate. What you should do, however, is to come up with a market penetration strategy, and how much of the market size you can claim.

This is the market opportunity, and you establish it by multiplying the percentage penetration by the total market.

So, let’s assume your blockchain whiskey has a 0.1% chance of penetration in the new market, this would be 0.001x 460,000,000 = $460 million. Remember that this is an estimate, so you don’t get carried away.

Bottom-Up Approach

In this approach, you will be building estimates from the current market position to determine the projected market size. To do this, you scale up a transaction, especially when a customer has paid in the token.

Using the example above, say your whiskey costs $20 a crate. The customer must purchase it in whiskey tokens, which they can exchange on their favorite token exchange platform. To be certain that your blockchain whiskey is popular in your region, you are determined to sell at least 400 bottles a month. To estimate the market size, you calculate as follows (price * items sold), which translates to 20 * 12 * 400 which gives you a market size of $96,000 within your first year of operation.

This method seems more realistic than the top-down method that might have you all excited. Whichever the case, you still need to remember that all these are just estimates, and the true picture on the ground might not be the same.

Besides, most of the ICOs barely have a ready product for the market at the time they are releasing their whitepaper. So most of the time they speculate using the top-down approach.

Back to Supply and Demand

So, how do you know the value of your token will appreciate soon after the ICO? There are always risks associated with any investment. In fact, a risk-free investment is usually a scam. ICOs that use a bottom-up approach tends to be less risky, especially if their product is launched in an environment that’s ready to adopt crypto products. Unfortunately, it’s very rare to come across such projects.

You might have to spend more time on research to determine the true value of the products or services that are offered in the market, especially if the token economy is complicated, concerning the demand and supply. Before you dump your money in the project, you must, first of all, learn about some of the problems that the product will encounter.

Factors That Affect Cryptocurrency Price

Price volatility is one of the obvious characteristics of cryptocurrency, and this can happen very fast. If you plan to trade in these markets, you have to understand some of the forces behind the prices of the cryptocurrency that you’re interested in.

The factors listed here may or may not affect the price of your currency, but they generally are the factors that affect the price of digital assets. First, you have to know what drives market volatility in this space.

The following are some of the factors that have been put forward by experts in the past:

Exchange Listing

Any currency that’s listed on one of the main exchange platforms will often experience a price surge. This has been evident in the past with most coins, for example when Coinbase added Litecoin to their platform. This happens because listing the coin doesn’t just make it available for a lot of people to buy, but it also is a sign of confidence in the real value of the coin.

Today most exchange platforms have been redesigned and have a friendlier user interface, which makes them easy to handle even for people who don’t have a lot of technical information about the crypto world. Therefore, you should pay attention to the news and expect a price surge the moment any of the major exchanges announce plans to list a cryptocurrency.

Software Upgrades

Bitcoin Cash came about after a Bitcoin fork. A fork, even in the normal tech space, helps improve the network quality. One area where upgrades help most is the speed of conducting transactions. Before the upgrade, you would spend close to half an hour of completing a transaction on Bitcoin. After the upgrade, however, the network was more streamlined, efficient, and the Bitcoin price hit unprecedented levels.

Software upgrades are common in all cryptocurrencies, and they will definitely affect the price. These are some of the things that you should be looking for.

Public Hype

You must be very careful about the online hype about a specific stock. These days, people even use fake tweets to create a buzz around a listing. If you choose to invest in a stock because of the hype around it, make sure you close your trade before the hype cools down.

Wallet Upgrades

One of the things you look into when planning to hold any crypto asset is the wallet. You need a strong digital wallet to assure you of the security of the platform you are trading in. You store cryptocurrency either in a cold storage facility or a safe digital wallet.

Cryptocurrency is basically software, and as a result, you have to ensure you have the right security in place. Any cryptocurrency whose wallet lacks ample security will probably attract very few investors, which means it will not have an attractive price.

A wallet upgrade opens up possibilities, makes the cryptocurrency safer, and with time, the value growth will make it more attractive. Any currency that lacks or has a wallet that’s not secure will definitely have a very low price.

Platform Applications

Bitcoin and Ethereum have been known to host other applications. These applications also have their unique tokens. In case any of the decentralized apps are doing well, the overall price of the network will improve. The value of the token is supposed to be independent of the platform value. However, not many people understand how this works. In fact, the price of one token on the platform can easily influence the price of the hosting platform.

As a trader, you need to pay attention to the apps that are hosted on the platform, especially the ones that show promise and are primed for greatness, because they will eventually affect the overall value of the platform.

Government Regulation

Governments, where applicable, can influence the price of cryptocurrency. Take the case of Venezuela, for example. The government has been arresting those who mine Bitcoin. As a result, this made life difficult for miners, and most had to abandon mining Bitcoin.

However, it’s not just Venezuela that’s affected. In fact, the SEC has been monitoring ICOs and even banned some that were notably suspicious pump and dump schemes. Therefore, it would be useful if you could understand the trends in government regulations regarding cryptocurrency, and stay away from currencies that the governments warn you about.