You’re Doing it Wrong : How to Value ICO Market Caps, Blockchains and Tokens

Several factors should be considered when assessing blockchain network values, ICO market caps and token prices. Price alone is just a number!

Just because a coin trades for $0.01 doesn’t automatically make it a better deal than one trading for $10. Nor is a $65M ICO raise automatically “high” or “low”. There’s more to these numbers than meets the eye.

Over the past year, I’m excited to see cryptocurrencies going mainstream. Unfortunately, and as a result, a growing number of amateur retail investors and traders have joined the space. These new market participants continue to accept and perpetuate elementary methods of valuing blockchain networks, ICO market caps and pricing of associated tokens.

How DO we value blockchain networks and their associated tokens anyway? If you’d like to take a deep dive into this topic, I highly recommend reading this article titled, "Cryptoasset Valuations" by Chris Burniske. Also, check out his new book, “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond”.

In this article I want to address, at a high level, a common misunderstanding regarding network values and token prices. It’s a simple concept, but it's amazing how many in the crypto space are forgetting this basic idea. Price alone does not determine if a particular token is “cheap” or “expensive”. Value is always subjective and relative so stop expecting every ICO to price its tokens for pennies!

Also, the amount of money a project raises during an ICO or crowdsale, does not necessarily give it a high or low market cap at face value. One must consider many factors including the number of coins minted, total coins in circulation, token economics, token design, token utility, market size and potential, project size and scope, the idea, the team, technology, innovations, risk profile and regulatory environment.

One must fully understand a project and the people involved to understand the value of any associated token being offered by that project. Find out what the money raised in an ICO will be used for, who’s involved, and what are the costs associated with the problem being addressed? What is the utility of the token? For some blockchain projects it can take hours, sometimes days or weeks to truly understand it well enough to assess its value.

If anyone tries to tell you that a “low” cap is some arbitrary number like $30M or less, you should question their understanding of basic math and the complexities of the crypto markets. This elementary way of thinking is like saying $65k is too much for a car without knowing what kind of car we’re talking about. $65k may be expensive for a Honda Civic but a great deal on a Ferrari.

A small team building a single-purpose dApp, raising $100M to tackle a niche use case, may actually have set a high cap. However, a different project raising the same amount, serving a $54 trillion market could be considered to have an appropriate or even small cap, all things considered. A token sold for $4 with a (provable) intrinsic value (perhaps even asset-backed), with 20M coins in circulation would give that project a $80M network value. The question then goes back to understanding the size and scope of the project to understand whether this network value makes sense.

Note: I refer to the term “network value” as the number of coins in circulation multiplied by the coin spot price trading on liquid exchanges. Some call this the “market cap”, but I feel the term network value makes more sense.

In the end, one must consider many different variables when understanding a token price, a network value or pre/post ICO cap. A price with no context or without a FULL understanding of the project, is just a number.

This being said, I recognized irrational factors are at play in the crypto market, including a fair dose of FOMO (fear of missing out). The dynamics of a thinly traded crypto market and unsophisticated retail investors, has allowed many tokens sold, or trading in the $0.01 — $1 range, to out-perform those in the $1 to $10 range, regardless of their true merits. Ryan Selkis (TwoBitIdiot) points this out in the Blockchain Insider Podcast #30. However, this dynamic is not sustainable long-term. As the crypto and ICO market matures, and more sophisticated investors jump in, these irrational behaviors and elementary notions regarding token price, network values and ICO caps will subside.

Accurately valuing crypto assets, utility tokens, and ICO market caps is certainly a nascent science, but don’t fall for the trap of assessing prices at face value. With crypto assets, always Do Your Own Research (#DYOR) and look at the big picture. Be sure to consider all factors that may affect the price of a particular token and it’s long term potential.

If you have any questions about token pricing and network values feel free to reach out to me on Twitter or Telegram (ryancharleston). I’ve been involved in the crypto space as an entrepreneur, investor, enthusiast, crypto trader, researcher, and digital marketer since 2012. I’ve also participated in many ICOs over the past year and love to talk about all things blockchain related.

Disclaimer: This article represents my personal opinion, and does not reflect the views of my employer, Sweetbridge, or it's related entities. I am not a professional financial advisor, and the content herein is presented for conversational purposes only and should not be taken as investment advice.