ICO Valuation — Adding Layers

One should not fully rely on the same economic forces that drive the price of stocks and bonds in traditional markets to drive cryptocurrency and token valuation in digital asset markets for the following reasons:

  1. Deregulation vs. Regulation — Traditional markets are regulated and protect consumers against market manipulation and insider trading. Within the cryptocurrency space, such legislation does not exist and therefore increases the risk for consumers. Therefore, one must put forth additional due diligence in the cryptocurrency markets to understand the true value of a potential coin or token.
  2. Small Sample Size — The cryptocurrency space is (on aggregate) still very new. Nearly any sort of technical analysis is likely to be riddled with errors due to not having a statistically significant sample size to base prediction upon.
  3. Decentralization — Since tokens do not tie directly to any one institution or governing body, they are free to cross international lines and thereby grow or shrink in valuation based on an multitude of reasons.

Adding Layers to ICO Valuation

The Man Behind the Curtain — Most people will tell you to make sure the team issuing the ICO has a “good track record” and are publicly known so that you can confidently invest without feeling the pang of insecurity. This is partially rubbish. Nearly no on has a track record in the cryptocurrency or ICO space and to rely solely on their prior successes as some sort of investment compass is an outdated valuation relic which works moderately well in traditional markets, but not at well with crypto. Even the inventor of Bitcoin is masked in secrecy(though some may argue). Also, there have been several successful tokens and ICOs out there which have private dev teams who solely interact with the public (Internet) via a handle. This is inherent to the technology and should not be a devaluing factor to the project as a whole.

So what should you do?

Imagine that investing in an ICO is like giving money to your second cousin twice removed that you almost never see in exchange for a handwritten, non-legally binding IOU. The IOU says something like this, “sometime in the future I may or may not do that thing we discussed that one time and your money may or may not be returned.”

You may laugh, but you need to understand that your “investment” is almost always in a dream and almost never in a tangible product. Which brings us direction to our next layer

Dream < Prototype < Product — The vast majority of ICOs happen and the dev team only has a dream to be sold to investors. Let’s say this represents 97% of the market. 2% of the time, you’ll find a group with a prototype which allows potential investors to play around with the UI and obtain an overall feel for the end product. This loosely shows that they have a product vision and likely can make a concrete road-map towards an MVP (minimum viable product). Then we come to the rare 1% which I call llamacorns in honor of Etherum’s founder Vitalik Buterin. This group has a fully functional product which is already built into the blockchain and a road-map which outlines improvements and features. The ICO is therefore a way to fund something tangible and well-defined with respect to the product.

Does it Fill a Gap? Today, in a Year, or in a Decade — You’ll need to put on your thinking cap for this one. “Experts” are going to fill your head with garbage and some random celebrity on Twitter will try to stir up some hype. Just like any new product, you need to understand the scope of work needed to bring it to market. Then you should evaluate whether or not the market has a need for the product and in what frame of time. Keep in mind that even something in the Dream phase can still make a lasting impact given time and resources.

The Risk

Truth is, this is still the wild west and you are on your own for better or worse. Just this year, we’ve seen several major Blackhat hacks followed by a group who nobly stepped in to recuse and return funds to at-risk parties. We’ve seen the SEC press charges against fraudulent ICOs. The list goes on.

Remember… Ethereum itself is still in Beta.

Happy hunting.