A simple SOTP valuation framework for utility tokens

Fiat Minimalist
May 26 · 5 min read

This article describes a simple framework for approaching the valuation of the MCO token using a sum-of-the-parts-(of utility). For those unfamiliar, the MCO token is the native token that allows one to derive benefits from its ecosystem, and at a glance can be summed up in this single screenshot. By locking up a certain number of MCO tokens, one can enjoy certain benefits (much like a country club membership). Some folks in the community have helpfully categorized this as crypto-capital: capital that is locked up and its opportunity cost forgone in order to derive benefits from a crypto-economy. I’ll be using crypto-capital in the rest of this article.

Gotta catch em all

MCO currently trades at ~$5/MCO. To illustrate, a user who’ interested in the benefits of the Indigo card, would lock up 500 MCO and would be able to enjoy the benefits namely the (1) LoungeKey airport lounge access, (2) Spotify and Netflix 100% cashback etc.

How should we go about determining the fair value of the MCO token?

While stocks derive its fair value through a discounted cashflow analysis, similarly, the framework used here would be for utility tokens to derive its fair value through a discounted sum of utility (the present value of the utility the marginal user expects to derive), deflated by a risk factor adjusting for the fact that such utility stream may be removed at an uncertain point of time in the future, and that its subject to the whims of the company (unlike cashflows which is legally enforceable and forms the basis for equity). This risk factor may fluctuate depending on the market’s perception of the company’s credibility & economic ability to continue with these perks. This may conceptually be similar to the liquidity discount applied to private shares.

The total utility stream of MCO can be unbundled into each singular benefit and to ascribe a monthly fee to each — an estimated monetary value one thinks the market in aggregate would pay for. For e.g., for the Indigo card:

  1. LoungeKey airport access: $10/month
  2. Spotify/Netflix 100% cashback: $25/month (close to but slightly lower than the USD-fiat value due to its near-cash like property)
  3. 3% cashback: This depends on what the average monthly spend is, and what the average traditional credit card is already offering. 3% is slightly more competitive than the average cashback card but for valuation purposes would ascribe a $10/month value to it.
  4. Metal card “street cred”: Lots of consumers would want a metal card just because they want to have the ability to own one (typically only reserved for high net-worth clients) and show peers they own one. I ascribe a value of $3/month to this highly intangible but important social benefit.
  5. CRO airdrops: Holding 500 MCO entitles one to ~$250/month of CRO (with an unknown future value). As CRO prices are likely to drop over time as supply inflates rapidly in the first few years, Iestimate a $50/month value.

Note: One may feel free to debate the value of each of these, and we should, because services have a different implied monetary value to everyone (e.g. maybe you are no fun in parties and you hate music and therefore don’t care for Spotify). What’s important is not what the utility means to you — it should be the value the market in aggregate would pay for it.

That sums up the majority of MCO’s utility, and by sum-of-the-parts we end up with $98/month (~$1200 per year) in total utility, we then deflate this with a risk factor (say 30%+), so we come up with $800 per year. We juxtapose this with the cost of locking up 500 MCO (currently $2500), which implies a 30%+ return-on-crypto-capital. This is not the definition of “yield” we’re used to in traditional cash-flow based investments, but we can reason that the average user derives goods/services that is valued at $800 on the open market, if one were to obtain these as services separately. Note: There are certain nuances in this SOTP model, as not every user derive utility from each individual service

What is MCO fair value? It depends on the opportunity cost of capital of MCO’s customer base, on aggregate. What would someone do with $2500 in crypto-capital instead of locking it up in MCO? One might be tempted to imply a ~5–15% “WACC” as per traditional markets, except that the average MCO community member has an extremely high opportunity cost, just by being crypto investors. Other cryptoassets similarly compete for our capital, including high expected returns for bitcoin and the like.

If the average perceived opportunity cost is at least 30%+ per year (expected CAGR of the entire crypto market, as a whole), then the 500 MCO Indigo card should be valued at:

$800 ÷ 30% = ~$2700 per Indigo Card

~$2700 ÷ 500 MCO = ~$5.50 per MCO token.

We need to repeat the same exercise for all the other cards in the product line-up. The Ruby card delivers the best value since you lock up 10x less MCOs, but only receive 3x less utility. Quick math tell us the Ruby card implies a ~$15–20 per MCO token.

In the long-run, MCO’s fair value should tend towards the valuation implied by the marginal token buyer, which is in this case the Ruby card with the most bang for buck.

Adoption of MCO or the sheer number of users will not impact MCO’s price in the long-run, as marginal users will liquidate MCO as long as its above its perceived fair value. However as we get step-function changes in MCO’s adoption curve, it would lead to massive short-term volatility in its price. This will lead to great trading opportunities in satoshi terms. I’ve noticed massive spikes in price, likely due to retail users submitting market orders either on Binance or directly in-app, instead of via limit orders.

TLDR: In it’s current form and function, I think MCO’s fair value is $15–20.

MCO trades at $5.50 today

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