Secondary Token Analysis Bitfinex UNUS SED LEO (LEO) — Target Price $2.24 (50% Upside)
On 6 June 2019, Picolo Research released a Secondary Token Research Report on LEO. View the full report here.
Quality, distinct utility token value driving LEO’s stability with potential price upside
UNUS SED LEO (LEO) is a utility token that will benefit its users across all iFinex platforms. The company, iFinex Inc. (iFinex) started operations in 2012, and till date hosts a portfolio of blockchain and crypto products such as Bitfinex, Ethfinex, Nectar (NEC), and upcoming products Bitfinex Derivatives, eosfinex, iFinex IEO platform, a security token exchange, and more.
The token, LEO, is designed to empower their community of traders seeking to maximise their potential output on iFinex trading platforms. Bitfinex, one of the firm’s largest exchanges, and home to over 120 tokens pairs will contribute to LEO’s token utility immensely.
Report Highlights
Picolo Research conducted a fundamental valuation on LEO, taking into account current developments of the project and the said details in the whitepaper. Here are the highlights of the report.
- Target price of LEO is $2.24, with 50% upside
- Buyback and burn mechanism a differentiating factor
- YTD growth in trading volumes with potential gain in market share going forward
- Potential token utility to be generated across several current and upcoming iFinex platforms
- Sensitivity analysis depicts a limiting downside of $1.15 (bear case) and an upside of $5.79 (bull case)
Thematic Views
LEO buyback and burn mechanism a differentiating factor — LEO tokens have utility values that differentiate them from other exchange tokens (refer to Table 1 for more information). Notably, the buyback mechanism utilises a portion of revenues instead of net profits or spot transaction fees as compared to its peers. This will result in greater buyback amounts as revenues entail a greater proportion of an exchange income, and does not include firm expenses. Our analysts estimate that the higher burn rate using 27% of revenues will generate an additional ~40% value as compared to Binance’s 20% burn rate of just net profits. Furthermore, LEO will be bought back from the open market rather than treasury, which puts upward pressure on the price of the token.
Bitfinex YTD volumes growing steadily at 1.1m daily — From the beginning of the year, Bitfinex’s total daily trading volumes have achieved a linear growth rate of 1.1m a day, denoting that trading volumes are trending upwards. In addition, our analysts also explored Bitfinex’s volumes against its peers and noted that their market share has fallen below the 9% 1-year average level to its current 5% level. However, we expect the volumes to mean revert towards 9% in 2019 given the significant rise of volumes during the past couple of months.
Competitor Analysis
Valuation
Picolo analysts incorporated several parameters and assumptions to analyse the fundamental and relative value of LEO token. We adopted a three-prong approach to the fundamental valuation of LEO to determine the intrinsic value of the token. Those three parameters include:
- Value derived from the token discount, assuming tier 1 discount of 15%
2. Value derived from trading fees for token repurchases and burn
3. The expected value of recoverable assets from Bitfinex Hack and Crypto Capital funds
Several assumptions made by our analysts include an implied monthly growth rate of 7.5%, and a monthly discount factor of 2.8% (40% annualised). In addition, we further assume a recovery rate of 4.5% of distressed assets to derive an intrinsic value of $2.34.
Our relative valuation (RV) using comparable exchanges based on industry Market Value/Volume multiple (MV/Vol), provided a value of $1.94 per token.
Overall, a weightage approach with 75% weight on fundamental, and 25% weight on relative valuation was taken to reduce the sensitivity of exchange volume data on the RV model. An intrinsic value of $2.24 per LEO was derived, representing a 50% upside based on the current price.
Key Risks
- Regulatory uncertainties as New York Attorney General investigations are ongoing
- Bitfinex and Tether businesses are highly correlated, which could impact LEO
- Exchange susceptible to hacks
Conclusion
Picolo Research analysts conclude that LEO is currently undervalued, and poised to outperform market expectations. We affirm a ‘Buy’ rating on LEO with a target price of $2.24, representing a 50% upside potential. The reasons below ascertain our rating.
- Differentiating buyback and burn mechanism of LEO generating an additional 40% value compared to its peers
- Supplementary utility not just on one exchange but from various platforms across iFinex portfolio
- Utility includes distressed assets that might be recoverable in the future
- Stable growth of trading volumes YTD on Bitfinex with potential growth in market share
- Clarity of token value and function will be conducive to the token’s robustness in the future
Not withstanding the above, Picolo acknowledges several risks such as the ongoing legal uncertainties with New York Attorney General and the potential high correlation of LEO with Tether could lead to increased price volatility.
Nevertheless, It is important to note that several factors such as withdrawal/ deposit discounts, derivatives fee discount and lending fee discount have yet to be incorporated into the model as the exact details have yet to be announced. Thus, this implies a further conservatism in our estimated intrinsic value of LEO.
In light of the preceding, we recommend a ‘Buy’ rating on LEO.
Produced by Picolo Research
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