20 May 2019
What makes a token valuable? This is a conversation that doe snot happen as often as it should, particularly considering the drastic failure rate of ICOs and how the tokens even from successful ICOs fail to appreciate in value after the initial release.
The whitepaper, the team and the idea behind the token are used to pull in investors, and might even work to realize some short term profit but long-term investors are sure to start looking a little deeper. The intrinsic value of a token, over a longer period of time, holds itself independent from the speculation market. This means that a token needs to be able to hold it's price without any bullish traders raising the price to stratospheric levels.
Going forward, a key part of the due diligence required on the part of investors will determine the potential value of a coin in a 5-year cycle. A cycle that does not include the speculators and investors that will let the coin reach historic highs in just a few days. This will, in effect, be the supply and demand of tokens on the open market and how they are used.
There are many terms one needs to know when looking at a token economy, one of which is velocity. The velocity of a token is defined as the number of times a token is used. Using an example of a token on a platform that performs $100 million worth of transactions a year and has a total supply of 100 million tokens.
The basic value of a token in the above example is $1, due to there being 100 million tokens and transaction total $100 million dollars. However, if the tokens were spent twice, the value of each token would be $0.50. The more efficient a platform, the higher the velocity of a token. If a token takes three days to move from one person to another, the velocity would be 121.
Applying that velocity to the above example would show that the token's basic worth is less than a cent. Velocity can be extremely, as in a platform where tokens are held for hours, minutes and even seconds. This would render the absolute value of a token approaching 0. So how would the token then gain in value naturally?
The ways in which a token can increase in value according to the above-defined measures would be to increase the transaction value, slow the velocity of the token or incentivize holding a token to reduce the available supply of tokens.
Increasing the value of the transactions would the first step anyone would take as it is the most apparent first step. There is a problem with this though, as a sufficiently high velocity would render almost any transaction value meaningless and the value would still be extremely low. Lowering the velocity would be planning to make the economy less efficient which is not a path many would tread. Incentivizing holding a token is another matter entirely.
That is the best way to increase the value of a token, and the easiest step to do it is to require token ownership to be able to access the platform. This, as opposed to simply using the token to pay for services on the platform, would force people to hold tokens as much as possible. Them once the incentive to hold has become habitual any increase in overall yearly transaction value will lead to greater gains over time.
These ideas will slowly seep into the valuation models used to evaluate ICOs in the future.
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