How to find out if your token will be worth anything, really

At least one person working on your whitepaper needs to understand this

In my last post, A Non-Boring Guide to the Most Important Thing for Token Value, I illustrated a metaphor for token velocity. I included no graphs or formulas, because when I presented those at a meetup, my audience looked bored. After some quiet meditation, I realized that actually, the formulas for token velocity are interesting and it is my audience who is wrong.

Price & Velocity Forumla

Intuitively, it’s not terribly difficult. The token price is based on how much money is being driven into the token, and how long it stays there.

What confuses people is the last point — How long it stays there?

We’re comfortable thinking of a company’s success in terms of revenues and profits. If lots of people are buying the token, doesn’t that mean the token is a success?

Utility tokens are NOT tied to company profits. They need to be tied by design. If they aren’t, the company may go to the moon but you’ll be watching it from the ground.

This is the reason that a simple “payment token” is not enough. If your buyers are purchasing your token from the marketplace, exchanging it for your product, and you sell it back to the next customers on the market — The token price will trend towards almost zero. In the formula above, the “Token velocity annually” will be a very large number, which will make the right side of the equation approach zero.

What is this model good for?

Chris Burniske, the king of crypto asset valuations, explains the purpose of modeling this formula.

His last point is what nails it: “Justify certain asset prices.” If we can plug reasonable values into the formulas above, we can see if the token sale price is reasonable, and what it might take to be worth twice its ICO sale price.

We might model like this:

  • What is the longest we imagine our real customers will hold our token? The shortest?
  • What is the minimum amount of revenue we expect? The maximum?
  • How many customers will we have? How much will we charge for our services?

When we plug these numbers into the formula, we’ll see the range of prices we can expect to see in the underlying fundamental value of the token. This is the value without speculation. To quote Chris Burniske again,

This has to be our goal — actual utility value. Speculation is not a feature. You can’t include it in your model as a growth factor.

Conclusion

I am an economist, and as such, I believe in models that never reflect the real world.

The price of most tokens on Coin Market Cap are driven primarily by speculation and hype. Most well-known, “successful” coins are 10–100x in price compared to their current value as my formula above lays out. This tells us that smart marketers are a better investment than smart economists. For now.

My next articles will focus on several token designs that marketers and economists both like. I begrudgingly accept that not everyone wants to study economic models of velocity, and have collected some elegant tricks that land you right in that SWEET SPOT.

Follow me on Twitter.

If you just want to pay someone else to do all this thinking for you, you can.

Head of Community Development with UMA