Token valuation metrics II
By: Kacper Wikieł
Tags: Blockchain, Cryptocurrency, Cryptocurrency Investment, Bitcoin, Investing

Here we will look at different ways to actually use a token

Taxonomy

There is alternative approach to investing in tokens that’s not concerned with looking at technical charts. The idea is to imagine multiple use-cases, assign a probability to each of them and discount the risk. My favorite metric is % of gold since bitcoin is millennial and zoomer’s gold.

Bullish metrics in 2011, bearish in 2018

6P of token taxonomy

Jed Grant suggested thefollowing model of token classification:

Purpose

Provenance (single/multiple issuers)

Profusion

Persistence (eg. vouchers are destroyed after use)

Privilege (owning tokens grants rights)

Property (token may represent ownership of another good/asset)

Let’s analyze Bitcoin using the framework above

Bitcoin’s purpose is to incentivize miners to be honest (shorthand answer)

Provenance: Bitcoin has multiple issuers

Profusion (quantity) — the emission schedule for Bitcoin is predictable and known in advance: there will only be 21 million Bitcoins, with reward dropping each 4 years

Persistence: Bitcoin’s blockchain is immutable and bitcoins are not “used” or “redeemed”. They can however be lost with no way of recovery

Privilege: Bitcoin allows for priority inclusion in the next block via a fee mechanism

Property: owning Bitcoin is a claim on Bitcoin itself

Simple empirical fact

Some tokens have value, and their value changes, and people trade on the basis that some tokens will increase in value.

“We can have a pretty good guess at what others think. But building a mental model of what others think others will think is an order of magnitude more challenging, because it requires perspective not only on the underlying — a woman’s beauty — but on others’ prejudices and biases about the other judges!”

“In Nash’s equilibrially ‘correct’ answer, the takeaway is the same as in the beauty contest: you usually win by guessing that others are playing a mix of one to two degrees of the Common Knowledge Game. Some people buy and sell on fundamentals, and some on how they think people will react to them.”

“People always need something to identify with and believe in, and if they decide God is dead and religion is a waste, they join some new movement or ideology.”

And there is now monotheistic religion called Bitcoin Maximalism

4 leveles of bitcoin maximalism — Meher Roy

Crypto-contrarianism stances

Bitcoin as a toy (contrarian: Bitcoin is aproper currency) 2009–2011

Blockchain not Bitcoin (contrarian: Bitcoin is the technology behind blockchain)

New Bitcoin (Ethereum, EOS, etc…)

Embracing a post-Bitcoin maximalist world

What is this grey goose: slowly crawling from zero to a quarter of total market cap.

Question — utility of cryptocurrencies

Hackernews and many developers express disdain for the value of cryptocurrencies (similar criticism is directed towards other over-hyped tech, e.g. IoT, AR/VR, etc.)

The value of the financial world is creative destruction — making resource allocation faster and more efficient, shifting money from unproductive sectors into productive ones.

What’s the goal of a corporate organization? There is lot of different opinions about it — some people think that there are multiple goals that a company should aim to achieve, yet I believe that the only goal of company should be to increase the company value (there is difference between value and price).

Basic rules of investing:

Invest in projects with returns higher than your minimal hurdle rate (with respect to the source of money) Return rate should be calculated based on Discounted Cash Flows The second order and side effects of projects should be taken into consideration Choose the financing structure that maximizes the value of the company If you don’t have enough projects offering a higher rate of return than the minimal hurdle rate then return the money to shareholders (dividend or buyback depending on ownership structure)

The goal is to maximize the value of a company. “Damodaran”

So why am I talking about corporate organization, and not a token? A company is any enterprise effort. This is true of both Google and a local lemonade stand (maybe the lemonade stand is not registered, but model still works)

Both companies own assets producing revenues. Some people don’t like that some companies like Twitter don’t have profitable quarters, but the overall principle of increasing the value of the company is retained.

There are different stakeholders in a company (and also outside) with different needs and wants

shareholders — want price increase

managers — want to increase their personal power and wealth

employees

customers — trying to get best deal

bond holders

society — some companies are very profitable yet their net effect on society may be negative

Modeling ICOs and tokens

Basic model of firm

New model

How to value a “project” that favors DAEU (Decentralized Automous Economical Unit )section and steers away from features of a more regular company?

More on incentive design in this article

MV = PQ metrics

“The Fundamentals are Sound” for cryptocurrencies. Price action doesn’t matter. It’s the technology that matters. As long as you research and understand the technology and whether it has the potential to overcome centralized institutional, business and transactional systems, you won’t lose. The smartest people, all the people who have really done their research on this technology, the people who get it, are not sweating these price moves.

Amazing. Every word of what I just said is wrong.

If you can measure the signals that investors are biologically and socially wired to respond to, and if you can map out the likely behavioral pattern of those responses … then you can predict how markets will respond to new signals.

Ideas for measuring those:

The investors’ attention plays an important role in predicting the movement of the stock market, which has attracted much attention recently [1–4]. The attention is not only a scarce cognitive resource [5] but also the hard currency of cyberspace [6]. In fact, it is hard for most investors, especially retail investors, to access market information in a timely and accurate way. Therefore, most investors like to pay more attention to the attracted information to adjust their investment behavior, leading to the movement of the stock market [7, 8].

Metric combined: