How the Ethereum Value Affects the Valuation of ICOs

Credits: Coinfeed.com

Introduction

There has been a huge surge of Initial Coin Offerings (ICOs) that has sprung up since the Mid-Late 2017 period. Most of the ICOs have been based on ERC-20 tokens on the Ethereum Network and hence they would typically accept contributions in Ethereum ($ETH). 

Personally, I have participated in a few ICOs during this period of ICO Boom. That is more in a period where the Price of $ETH was "relatively" steady between 250 USD to 350 USD. Many investors would not be blamed if they did their calculations pegging 300 USD to 1 $ETH to assess the upside of a potential ICO.

Recently this week, the price of $ETH has increased tremendously to 700 USD. This is more than twice the value of previously "stable" 300 USD. However, ongoing ICOs are still maintaining their token exchange rates as per previously advertised during the ICO launch. After all, they can't really change the T&Cs half way during their ICO.

1. Company Point of View

ICO Planning

When the company decides to go for an ICO to raise funds, one of the top things the CEO needs to decide is an estimation on how much funds is needed to raise in order for the company to achieve the goals outlined in the white paper and what the is minimum fund to be raised in order to get a "basic" business model working. All estimates should be based on USD for operational efficiency and risk adversity purposes.

Of course, there will be other thought process models which includes incentive/rewards to tokens holders, economics of the tokens, a working and profitable business model, tangible benefits of implementing blockchain application, pre-mined tokens for management and private pre-sale tokens for private investors. 

ICO Post-Mortem

The next step is to make an analysis of the assumed price of $ETH prior to the run up of the ICO launch dates to work out the exchange rate along with already-decided discount models and cast this details in stone before the launch. 

The BIG problem here is when value of $ETH varies during the course of the ICO offering. The company needs to have a solid mitigation plan which I will touch on abit later on in ("3. Recommended ICO Practices")

After the ICO, the company would be sitting on the pile of $ETH. They would already have formulated a decision plan to liquidate part of the $ETH into USD. This is necessary as USD is needed in order to fund the company's operational and running cost. 

They may also possibly keep a small portion in $ETH to hedge against the crypto-market (especially if a huge portion of their business is in the crypto business). This is subjected to the management's risk appetite. Ultimately ICOs are built of a platform on conceiving a product according to most white papers. That has to be their ultimate first priority and not playing investment with funds leftover from the ICOs. 

Or perhaps a typical investor would prefer that the company keep it in $ETH so that the company would have more capital with the price appreciation, hence putting the company in a better position to deliver a product ahead of the committed roadmap or yielding better results compared to market expectations. 

It would be advisable for the company to at least have a standpoint or a framework writeup on this for ICO contributors to assess their contributions. 

2. Investor Point of View

This specific topic is a hot topic especially among short term investors who believed the companies should dynamically change the exchange rate of token based on the price of $ETH when they purchase the ICO token. Some of them may feel short changed by the company compared to others as they would have paid a now-pricier $ETH than one would have contributed on Day 1.

I was considering an unnamed ICO which pegs 1 $ETH with 2500 tokens. And people were calling on its telegram to change the exchange rate to 1 $ETH to 3500 tokens. 

My beliefs: It shouldnt be calculated based on the price of $ETH when an investor exchanges the tokens. It should be pegged accordingly to the average price throughout the ICO or the perceived value of $ETH when RentBerry wants to convert it back to FIAT for operational purposes at the end of the ICO.

From personal POV, I do not believe there is a difference whether it was 300 USD or 700 USD when the unnamed token was purchased. FYI: My first $ETH was purchased since 9 USD (Yes I have been holding) and its not a infinite supply. I didn't have the infinite wisdom nor capital to purchase 100,000 $ETH worth at that point of time. In other words, it is exhaustive and (yes) it can be spent purchasing ICOs or other alt coins and the $ETH needs to be replenished at Market rate with FIAT. So I also cant say I participated in an ICO with that cost price, can I?

But what if I didn't participate in that particular ICO. Will that stop my $ETH value from going up to 700 USD? No, it will not! Market Price is independent of what I do with my Ethereum!  So there is opportunity costs to be factored in as well. There is a certain correlation between Ethereum price and ERC20 tokens. But it is definitely not 100%.

3. Recommended ICO Practices

It is important for companies involved to outline their plans to the investor community during the stage of ICO planning. Risk Mitigation plans should be in place and communicated incase for huge $ETH price differentiation. This will settle the investor's mind and put these assumptions into their "equation".

Another way would be to control the duration of ICOs and hold multiple shorter rounds of ICOs instead with the total circulation supply of tokens already finalised during the initial round of ICO planning. This will ensure that the price doesn't vary severely within that round and the token exchange rates will be varied according to the $ETH price at that point of time along with decreasing discounts to provide early investors with additional incentives. 

Conclusion

The increase of $ETH has caught the ICO investors by surprise and has thrown many of their calculations into a tailspin. I do expect $ETH to continue to increase in value and to be erratic and volatile, as of the nature of a typical cryptocurrency. 

I remember a time when I was staying in Australia. I was converting $AUD back into the base currency in my home country for price comparison sake. That built-in psychological mechanism will happen every time i see a price tag in a connivence store. It was after staying for 2 years when my mentality shifted to drop this automated calculation process.

In the long term running, the market should shift their perception to ultimately value tangible assets in terms of $ETH and not peg it back on $USD. How would the market feel when the price for the bottle of milk is based on 0.1 $ETH as compared to 0.105 $ETH (factoring abit of inflation) 1 year from now. 

This will signal a huge milestone for market receptivity to cryptocurrency.

—@yeesypeasy

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