To date there has been little discussion about what really makes a token valuable. Most ICO investors look at the whitepaper, the team and the idea to decide whether a token is worth investing in.
This strategy has worked fairly well to date, and as far as generating short term profits goes, may continue to do so in the immediate future. However, as the market matures, investors are likely to become more discerning and begin to look at the long-term value of a token.
In the long-term, token prices will have to tend toward their intrinsic value – the price the token would trade at without the aid of speculators propping it up. Over time, unless the intrinsic value of an asset is increasing, investors will sell it and move onto another investment.
Going forward, ICO investors will need to think about the dynamics that will determine a token’s value five years into the future, and in the absence of speculators and investors. This will simply come down to the supply and demand created by the users, and by the amount of the token supply tied up in the economy at any moment.
As an example, if a token economy has 100 million coins in circulation, and transactions worth $100 million take place in a given year, what is the token worth? In this case it comes down to the number of times each token is used in a year. If each token is only spent once during the year, each token has to be worth $1 to facilitate $100 million in transactions.
However, if each token is used twice, then the token value only need to be $0.50 (2 x $0.5 x 100 million tokens = $100 million.) The number of times a token is used is the velocity of the token supply.
Now, if a token economy is efficient, velocity will increase. Users will buy tokens when they want to use the platform, and those being paid tokens will sell them as soon as they receive them. If a token takes three days to move from one user to the next, the velocity would be 121.
In the example above, if the velocity was 121, the token would be worth less than one cent. And, if a token economy was really efficient, tokens could be out of circulation for just hours, minutes or even seconds. This could push velocity into the thousands, meaning tokens would require very little value for a large economy to function.
If people are using multiple blockchain platforms, they are not going to want to hold multiple tokens. Some users will be paying and receiving tokens, and may keep a token balance. But the majority will either be buying tokens to use the platform, or receiving tokens which they will sell.
So, what will make a token more valuable? There are really three possibilities:
- increase the total value transacted,
- slow the velocity, or,
- incentivize holding to reduce the token supply.
Increasing the total value being transacted on a platform is a logical goal. After all, the more turnover the platform has, the more it should be worth. However, as the example above illustrated, if velocity is really high, even a high turnover won’t necessarily lead to a high token price.
The second option, slowing the velocity, is a dangerous path to go down, but one that ICO teams will probably be tempted to try. Velocity could be slowed by regulating the amount of time a token takes to go from buyer to seller and back to the next buyer. But, what this really boils down to is purposefully making the token economy inefficient. And that goes against the objective of cryptocurrencies and will make competing platforms more attractive.
The best option to increase a token’s intrinsic value, is to incentivise holding. This can be done in a number of ways. Firstly, token ownership can be required to access a platform rather than as a way to pay for services. Secondly, profits or cashflows could be distributed to token holders. And, finally staking can be incentivised in a number of ways.
For tokens to appreciate over the long term, the total value being transacted on a platform will need to increase, and the circulating supply will need to be reduced by incentivizing holders. The market is still young, but in the future, we are bound to see token valuation models with these two ideas at their core evolve.