FCoin — Liquidity Begets Liquidity, Until It Doesn’t
FT, the native token of a new exchange, FCoin (www.fcoin.com) has recently caught our attention. FT has a very peculiar token design which can be read about here.
This design has created an incentive mechanism to encourage wash-trading, with market participants deploying trading bots on the FCoin exchange for the sole purpose of generating volume, and hence contributing trading fees in order to get compensated back via FT tokens daily. This creates a self-reinforcing spiral where the revenue-pool grows as the trading volume grows, which creates more demand for FT.
The price of FT has skyrocketed from $0.01 at the Token Generation Event (ICO) to $1.05 currently with a market cap of $550mm+.
We see risk of a significant correction with current prices trading rich to our Fair Value estimate.
We estimate Fair Value (FV) of FT in 2 steps:
1. Calculating the Present Value of FT assuming all FT have been issued, after which the ‘Trans-Fee Mining’ (“TFM“) program will come to an end. Wash-trading would then stop as it would not yield users more FT, at which point the benefit of holding FT would mainly be to receive dividends from exchange revenue coming from real, organic activity. By the design of the revenue distribution mechanism, FT holders are entitled to a cumulative dividend representing 80% of the exchange transaction fees.
Let’s make an aggressive assumption — assume that the FCoin exchange will have grown to become one of the world’s largest exchanges by the time the TFM program has ended. Currently, leading exchanges such as OKEx, Huobi, Binance and Bitfinex average 1bn USD in daily turnover. As the transaction fees differ from exchange to exchange, we use a median of 5 basis points (0.05%) as an estimate, taking into account any and all discounts/points/rebates available to market participants. Hence, the total transaction fees per day generated by FCoin would average 500k USD, 80% of which will be distributed to 10bn FTs (the max circulating supply cap).
We can calculate the annualized return by holding 1 FT at that point as:
This is the ‘Terminal Value’.
OKB (OKEx native token) which shares a similar revenue distribution mechanism as FT, trades with an implied market yield of 7–10%. If we assume a similar yield for FT, the discounted Terminal Value of FT is:
2. Calculating the equivalent value of 1 FT in the future when the TFM program ends vs. 1 FT today.
Given the current TFM program and the current revenue distribution mechanism, assume:
-The number of current circulating FT is n
-The cap on the total number of circulating FT is N
n is 527mm as of Jun 14, 2018, and N is 10bn according to the FT white paper. If we hold x FT now, and we reinvest all distributed revenues into FT until the TFM program ends, we arrive at:
So 1 FT today is equivalent to 3.32 FT at TFM-termination. FV of 1 FT today is therefore:
The FV is calculated given assumptions on the following:
i. The platform revenue after the ‘Trans-Fee Mining’ program ends
ii. The market implied yield used to calculate the Discounted Terminal Value
iii. The revenue distribution mechanism does not change
iv. Investors can reinvest all earnings into FT at the same price at which the FT was mined.
We see $0.57 as an aggressive estimate of FV, given our aggressive assumptions. Should we instead use 150mm as our input assumption for daily exchange volume upon TFM-termination (which is what the average Top 10–20 exchanges turn over), FV would be $0.0855.
FT currently trades on FCoin.com at $1.05.
Disclosure: We do not carry a position, long or short, in FT.
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