The Math Behind OctoWallet

OctoWallet is now launching its funding campaign in String Funding. Can this be a good investment opportunity?

Business operation is not an easy task. Running a business means you are dealing with transactions everyday. Transactions are not only the money transfer, more fundamentally, they are about risks and rewards. Transaction means one party is transiting his own assets, rights or resources to counterpart in exchange of rewards or considerations in any kind.

OctoWallet is one of the innumerable Small and Medium size Enterprises. Since OctoWallet Pre-Sale Event is not primarily designed for investors, nevertheless, such transactions between issuer and backers can be treated as an ‘investment behaviour’. This article is to analyse risks involved in this event and to suggest the best strategy should be taken as an investor.

OctoWallet

What is OctoWallet?

OctoWallet claims it’s the First Australian Hardware Wallet which is compatible to mobile phones. It’s true random number generator, enterprise-level Multipoint Control Unit (MCU) and temper-proof mechanism excels its security and reliability. As the final product has not been officially launched, OctoWallet released a working prototype demonstration video on its YouTube channel. We can see the working prototype works properly with a Android smartphone.

Although OctoWallet is in its prototype stage, we can see the product is well-designed, equipping with generous colourful screen, user can confirm transaction details, such as recipient address and mining fee, more easily comparing to those shown by mainstream hardware wallets.

What is OctoWallet Pre-Sale Event?

Unlike other hardware wallet manufacturers, OctoWallet aims to pre-sale its product through a special Pre-Sale Event. The Pre-Sale Event is held on a blockchian crowdfunding platform, String Funding, which allows users and backers and investors to purchase the OCT tokens using Australian dollar and Ethereum. OCT tokens can be used to purchase OctoWallet device after the wallet is available to be purchased on its website.

After the end of Pre-Sale Event, the OCT tokens will be listed and traded on exchange platform, String Exchange.

It looks it’s not as simple as buying a hardware wallet in Amazon, right? Because the benefit behind this well-designed campaign is tremendous.

Risk Analysis of OctoWallet

Since business operations carries various risk. The correspondent rewards should compensate the risk assumed.

The Risk Premium Approach is one of good tools for formulating capital market expectations when you are making investment decisions.

Risk Premium Approach states that investors would avoid purchasing assets offering inadequate expected compensation for priced risk until the asset price reached the point at which compensated the risk undertaking.

(source)

Return rewards risks that is regarding to inflation, default, illiquidity, maturity, tax, in addition to risk-free rate.

Inflation risk is the risk that you loss your purchasing power of your investment proceeds receiving in the future. For OctoWallet Pre-Sale, the time horizon of 2 months is relatively short, the inflation risk premium required can be as low as 0.5% (annual CPI 2.0%). Nominal risk-free rate (inflation risk inclusive) is annual 3.25% according to current Australian Treasury Bond yield.

Maturity risk is derived from the fix-income securities in which the underlying asset has maturity date. For OctoWallet, the maturity risk is the change of product launch date at which the OCT token can be redeemed. Once the product is launched, the OCT token can be ‘executed’ and barter for a physical product. Since the working prototype is already demonstrated, and the expected launch date of OctoWallet product is December 2018, the time (3 month) is sufficient for the team to polish the final product. The maturity risk could be minor, we are estimating the premium of annual 12.5%, justified as maturity risk of medium to high risk investments.

Tax premium is applicable to certain jurisdictions, which is out of scope in this article.

The main risks for OctoWallet Pre-Sale Token Offering to investors are illiquidity risk and default risk. These two risk premiums are relatively hard to be estimated given that there is no comparable target investments in the market.

Illiquidity risk is the risk that investor trade his investment below its fair value if it needs to be converted to cash quickly. However, String Exchange will list OCT tokens and therefore there is a marketplace for OCT tokens. The global liquidity of OCT tokens will be concentrated on single platform and the high transactions volume will ensure the liquidity.

Default risk is the possibility that the debt (token) issuer failed to deliver its promise. OctoWallet team is composited by experienced software and hardware developers, although the team has no well-advertised track record. Nevertheless, we can see the working prototype and the product progress is regularly announced on social medias and String Funding platform, I would say the team carries low default risk.

The risk required would be 3.25% + 12.5% + (illiquidity & default risk premium)

The Hypothesis Return of OctoWallet

Now OctoWallet token is selling at $0.7/token. Official information states that each OctoWallet SILO will be selling at $159 or 139 OCT (~$99). Assuming OctoWallet only delivers its product through its official channel, not through retailers, the best price in the market will be the lower of $159 and 139*$X; $X is market price of OCT token. We can also see the ‘nominal’ price of OCT token set by OctoWallet team is $1, I speculate this means that any token unsold in Pre-Sale Event will be listed at $1 on String Exchange. So, the price will likely jump to $1 just after the end of Pre-Sale due to scarcity. The hypothesis return is ($1 — $0.7)/$0.7 = 42.86% in two months assuming the demand of OctoWallet is popular and highly demanded.

Recalling the annual risk premium required is 3.25% + 12.5% + (illiquidity & default risk premium), the justified illiquidity and default risk premium is as high as 41.28% in two months!

(source)

The Wise Strategy

41.28% risk premium is extremely high which unlikely present in traditional capital market. Near 43% return indicates that the risk assumed by the investors/backers/contributors is well rewarded.

Bottom line:

#1 Worst Case scenario: sell the token at $0.7 (Lowest available price in the market) after it is listed.

#2 Normal Case scenario: The wallet is popular, the token price jump to $1 face value and earn 43% return.

#3 Best Case scenario: The wallet is extremely popular, the token holders are speculating the price. The wallet can be sold higher than $159 (TREZOR and Ledger) or $1.14/token, earning more than 62.9% return.

Limitation and Disclaimer

This article has not discussed the regulation risk and market risk of blockchain industry. Those two risk is industrial systematic risk which cannot be diversified. The opinion involved in this article should not be considered as investment advise. Please consider your personal circumstances before you make decisions. Capital at risks.