Revenue Streams/Token Value Growth

Recent fluctuations on the crypto market (to put it mildly) have pretty much made it clear to almost everyone that ICOs are no longer about money for nothing and crypto for free. Though it’s still possible to raise a substantial amount of money during an ICO (basically, any ICO is selling future usage of its platform), while not giving up any equity (as opposed to the more traditional venture capital/angel investors route), there are several important issues to be addressed before a project team makes a decision of such magnitude.

We should start from the very definition of an ICO (at least, according to Wikipedia), and see where it leads us: an Initial Coin Offering is a type of crowdfunding using cryptocurrencies as a means of raising capital for startup companies. Sometimes also referred to as Token Generation Events (TGEs), ICOs offer investors a quantity of the crowdfunded cryptocurrency in the form of tokens in exchange for fiat money or other established cryptocurrencies.

The first question that has to be answered frankly is how much money the team is looking to raise, and this is not only about questioning the project’s business model. The global crypto market has become incredibly volatile, but that’s only one part of the problem — any given project will be competing against other ICOs happening at the same time. Investors are still willing to invest, but the market is getting saturated, so they have plenty of options to choose among. Another thing to bear in mind — it’s hard convincing non-crypto investors to invest in crypto (their main reasoning goes something like this: “ICOs are actually worse than dot-com stocks in 1999 — at least back then investors owned a piece of a company with a revenue stream,” so the expectations should be reasonable.

Furthermore, the crowdsale mechanism is a tricky animal, as it involves the general rules, the time frame, the number of tokens distributed, the pricing strategy, the mechanism of token distribution, the security of the contract behind the token offering, and the multi-sig wallet mechanisms. The options are numerous, e. g. a team can choose between four basic pricing options (undetermined price, fixed price, gradual decrease or increase of the token price), depending on their goals and growth expectations. Another important decision has to be made depending on the targeted amount: a soft cap, or a hard one?

Once the project is launched (assuming that the ICO was a success), all the minted tokens are essentially promoted to units of currency. When they become available for trading on crypto exchanges, those tokens start acting (more or less) like normal stocks (i.e. they start behaving according to the laws of token economics — tokenomics), which basically means that they can generate value in three ways:

• Dividends
• Token buybacks, and
• Price appreciation.

Some basic economics states that in order for the token value to increase, there has to be more demand for it than the supply. If a project team wants to influence the supply of their token, they can do it in the following ways:

• Setting up a token cap

This method is quite straightforward: a cap is essentially a limit on the amount of available tokens, so as the supply never changes and the demand increases — the token value goes up.

• Token buyback(s)

In order to boost or correct the token value, the project can buy up tokens in circulation and burn them using a smart contract. This can be done continuously or as a one-time thing, but the effect is the same: there is less supply, which in turn increases the value of the token.

• Token creation

Tokens can be mined, or gained in some other way (e.g. airdrops, faucets, etc.) without actually having to be bought.

On the other hand, token demand is based on the utility or functionality of the token. If a decentralized project is able to offer attractive services, many people would be willing to use the token as a means of payment for these services. While there is no mass market adoption for cryptocurrencies yet, most of the trends seem to suggest that cryptomarket is moving out of early adoption into early majority market.

After all these considerations, the key question remains the same: how can we judge if the token will rise in value after the ICO? Simply put — there are no easy answers: the more complex the token economy is (at least in regards to supply and demand), the more time would have to be invested in due diligence. Only then would a prospective investor (or a mere crypto enthusiast) be able to extract the actual value of the services offered and the market potential of the project. And even then the investment won’t be risk-free…