What Token Should I Invest In? A Guide to Token Utility, Usage, and Value.
With so many different cryptocurrencies and token projects, it can be difficult to discern real token value from potential “investments” built to steal your hard earned cash. As investors and consumers in this newly established space, we’re frequently left with more questions than answers… and the answers that we do receive just lead to more questions!
In the mind of an investor there’s always a bottom line:
Does this investment make me money?
And to prospect that final understanding, there are a few different parameters that we as investors can specifically evaluate to assist in the ultimate decision. Luckily for us, investing in cryptocurrency isn’t all that different from traditional, higher volatility investment strategies employed by venture capitalists. There’s no need to rebuild the wheel because a lot of these understandings have already been employed and tested for us.
We can break up our investment strategy and how we evaluate the legitimacy of a token project into three parent categories.
- Key differentiators
- The team behind the project
- Market size
It’s really that simple
In anything high volatility (read cryptocurrency) there are a lot of dynamic variables. The implication here is that not much data can be extrapolated from those variables, so our best bet is to locate the few static pieces of data we actually do have access to and in turn, attempt to minimize the risk that we’re taking on. And that begins with identifying the things that undeniably differentiate the project from others.
A very poignant but simple example exists inside of the relationship between Ethereum and Bitcoin. The knee-jerk reaction is “How are they even comparable? They don’t have much in common. One is a currency and the other is a platform built to enable smart-contracts.” But in that dialogue is where the value lies. Ethereum established itself as the number two marketcap token project by differentiating itself from and not attempting to compete with Bitcoin.
When you look at a currency or token project as an investor you need to specifically evaluate what role the token has, what features the token has and what purpose the token has, and then compare that against current market solutions. In this chart below William Mougayar does an excellent job of illustrating the flow of his valuation process.
If we were to evaluate the role, purpose and value of Ether in-context of the Ethereum platform and then against Bitcoin it becomes readily apparent that it has a legitimate and differentiated use case. Now, besides these specific indicators and guidelines, another key differentiator that holds weight is the team.
Let’s do a quick thought experiment:
Someone proposes a token system that regulates all of the energy on Earth through some quantum flux capacitor dodecahedronic oscillating system.
Who do you trust to deliver the product?
a) Bill Gates and Elon Musk with the full power of their companies and network behind them.
b) A team of kids straight out of college with no work experience.
Though this is a bit of an exaggerated example, the point stands. Despite the inherently high chance that the project will fail because of its insane goal, it’s still less likely to fail when headed by a team with an established network and demonstrated history of success in business.
This idea can easily be ported to cryptocurrency. Is the team building the token project one that’s experienced? Have they built a business before? Where did they go to school? Who’s advising the project? Are they business people trying to build a highly technical concept with no previously established programmers on the team? And so on and so forth. This type of understanding can be postured against and with other important static evaluation variables like the things that differentiate the project and the risks associated with it to deliver a clearer picture of the investment process.
Finally, the thing that you need to evaluate in your cryptocurrency investment strategy is the size of the market. This strategy manifests in broadly evaluating the size of all of cryptocurrency and then taking a more granular lense and looking at the different sizes of the more specific token sectors. Looking at the overall value of the market shows you the rate at which the total ecosystem is growing (or shrinking) and can then assist in identifying previous and upcoming trends. And then, that type of understanding can in the more specific areas inside of cryptocurrency by asking questions like: Are utility tokens slowing down in overall growth in respect to the totality of cryptocurrency? How about security tokens?
And there are many many more numbers or data points that can be pulled from the trends! It’s up to your creativity to identify those.
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