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How To Successfully Value Crypto Tokens

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Published on Jan 8, 2020

Want to learn more about WAX? http://www.wax.io

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How are tokens valued? Do we value them the same way we value stocks?
Now the first thing you are going to say is absolutely not. Stocks are valued based on discounted cash flows. How much revenue they generate, how much profit they make and those revenues. That is what matters when it comes to valuing the stock but I can tell you that's not really true. Amazon did not make a profit for almost 20 years. Zero, and guess what? It was valued more than zero.
Now, tokens don’t have cash flows with the exceptions of some DeFi applications, but there are other metrics we can track things like blockchain usage, the transaction count, the operation count. The thing is if you look at blocktivity.info, which tracks operations and for WAX, transactions, you will see that the top five blockchains as measured by operations are not the top five market cap tokens.
What about other metrics? How about the value of the community? No, not really. If you look at the biggest Telegram communities, you will see that some highly valued tokens have relatively high numbers of Telegram members but it is not consistent across the board. What about a metric that is near and dear to my heart? The amount of effort that a blockchain team puts into software development. Well, to debunk that one all you have to do is look at litecoin. Essentially no new development in over a year but it's still a top 10 token by market cap. Thing is we all want to believe that metrics and effort and even cash flows correspond to token prices and stock prices but they don't, at least not directly and rarely in the short term.
So now you are thinking if stocks are not valued based on cash flows and tokens are not valued based on usage metrics, then how are these things valued? Well there is one thing that matters more than anything else does when it comes to token and stock prices - and that’s the outlook. What do people expect to happen in the future, and how has their outlook changed? You will know when people's outlook changes. These other things, the metrics, whether they be revenues, transactions, product development work, they matter but they are actually insignificant in the short term compared to people's outlook. By the way, outlook has a name when it comes to stocks it is called ‘The Multiple.’ The multiple is a number you multiply the revenues of the company by or the profit by to figure out the value of the company or its market cap. So let’s say your company has 10 million in annual revenues, your stock trades at a 10x revenue multiple then your company is worth 10 million times ten, a hundred million dollars. It has a 100 million dollar market cap. Now tokens do not have multiples yet because they do not have revenues or profits, but people do have an outlook, good or bad, about the tokens they hold.
Let us examine what happens when there has been a change in the outlook for a token and for that, I would like to look at Ethereum. So in January 2018, Ether was priced at $1300. Today it is worth $150. That's a 90% drop. The market cap of Ethereum has gone from $130 billion in January 2018 to 16 billion dollars today at the end of 2019. Wow. What has been going on with Ethereum’s metrics during that time? Well since January 2018, about 2 years ago, Ethereum network has gone through a ton of software development. It’s had the Constantinople hard fork, the St. Petersburg hard fork, the Istanbul fork and now Ethereum 2.0 of the beacon chain which is shifting Ethereum from a proof of work to proof of stake chain. These are all positive developments. How about Ethereum accounts? While there were 18 million accounts or addresses in January 2018, there are over 80 million today and at the end of 2019. dApps, that number is way up. There about 800 dApps in January 2018, Ethereum now has about 2800 dApps two years later. Transactions, those have declined. They have gone from about a million a day in January 2018 to about 750,000 a day here in December 2019. It is a drop but not catastrophic. The bottom line is Ethereum is much better, more robust, a better software platform than it was two years ago. DeFi by the was not even a factor then. Now, Ethereum is the DeFi leader but it has dropped 90% in value and that makes no sense right? You might be thinking well this must be a phenomenon of a blockchain in crypto. This would not happen with well-run stock market right. Well actually, it does happen with stocks, in fact, we see this phenomenon time and time again in the world of publicly traded stocks.

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