A Powerful Tool for Valuing Tokens and Cryptoassets

Blockchains, with their tokens and cryptoassets, are micro-economies.

What’s cool about that is it’s possible to analyze these micro-economies to determine the value of a given token or cryptoasset today and in the future.

Several people in the blockchain universe with financial analysis backgrounds and skills are building early frameworks to value these tokens and opensourcing them.

And startups, or established businesses that want to add a token to their business model, such as a project called PROPS from YouNow to decentralize video applications, are using these early frameworks to figure out the right economic model for their particular token offering.

Things are moving fast.

My interest is to use and contribute to these valuation frameworks to invest in blockchain-driven businesses and social initiatives. I’m also interested in taking the complexity out of these frameworks, moving the complexity to the background, so that more and more people can participate in these micro-economies.

Fundamentally, blockchain applications and their tokens are for everyone. They’re digital communities with digital money and, most importantly, a level playing field. They thrive on network effects, smart governance, and the principle that anyone can participate and therefore value is distributed among all participants.

You may or may not care about blockchain technology and its micro-economics, thinking it’s boring, arcane, or over your head.

But what I’m pretty sure you do care about is having more options, more wealth, and more freedom for yourself and the people you care about. That’s what this blockchain and cryptomoney thing is all about.

In order to participate in these micro-economies we need a framework, a valuation framework, to guide us. And it’s emerging right now.

A conceptual framework is like a map. It’s a frame of reference that defines the most important things in a system so you can evaluate and achieve a desired outcome. Specifically, a valuation framework, and the mathematical model that emerges from it, is a way to value an asset relative to the other components in the system.

What does a valuation framework for blockchain tokens and cryptoassets looks like?

Chris Burniske of Placeholder Capital, one pioneer of this type of framework, starts with the premise that each blockchain project, given its relatively closed economy, can be valued, as a starting point, with what’s called the equation of exchange.

The equation of exchange looks at the relationship of four factors in an economy.

The four factors are an economy’s money supply (M), the frequency with which a unit of that money is spent in a period of time, which is referred to as velocity (V), the average price (P) of the products and services in that economy, and, finally, the quantity (Q) of transactions.

The idea is that these four factors, given how one influences another, can serve as the skeletal framework for valuing a blockchain based micro-economy.

The equation of exchange is written this way:


If that’s true – if MV=PQ is in fact a good way to value a blockchain’s token economy and individual tokens – the exercise one needs to go through is to determine the values for each variable, what the “M” monetary supply is, what the “V” velocity of the money is, and so on. In many cases, you need to make assumptions about what’s driving the calculation (e.g., what the “P” price will be for an available resource) for each variable.

Taking advantage of the equation of exchange is not a trivial exercise. And it’s not the only aspect of a valuation framework. It’s the core. But the point is that using a valuation framework is very doable and it’s well worth the effort. It’s a very powerful tool.

“Quality inputs, quality outputs” is what it comes down to. Let’s take advantage of the equation of exchange, and a broader valuation framework, to identify, use, and support the best blockchain projects and communities out there.

Use Open-Source Research and Frameworks for Your Token Investments

First you realize how much potential there is in blockchains and tokens.

Then you buy some Bitcoin and Ether and maybe some Ripple or Monero. Next, you follow someone you trust, or who at least looks like they know what they’re doing, into an ICO.

You’re more convinced than ever that a decentralized Internet with digital currencies and assets not only makes sense but is very likely to happen. You’re committed to the next step.

Naturally, you want to know what makes one project and token valuable over another. But how do you know?

What indicates that a token, a cryptocurrency or, more broadly, a cryptoasset has long-term value?

If you know where to look, the research and analysis for tokens, and what’s being called “cryptoeconomics” and “cryptofinance,” is starting to emerge. These emerging disciplines allow you to evaluate a particular token beyond any excitement and noise surrounding it.

And luckily, in the spirit of open source, much of this research is being freely offered so you and I can make smarter investments. For example, Smith + Crown, a research group in Portland, Oregon, is providing excellent research and analysis on “Bitcoin, blockchain technology, digital currency and cryptofinance.”

If you want in-depth research on these topics and more it’s there for you to consume. This includes a full breakdown on the what, where, and when of upcoming ICOs, token sales, and crowd offerings.

Yesterday, Smith + Crown posted a detailed report on Aigang’s fast approaching mid-November token sale. Aigang is using smart contracts to provide “fully automated insurance products.” Specifically, they want to provide insurance for internet-connected or Internet-of-Things (IoT) devices.

This research on Aigang and its ICO, written by Weston Anderson, is illuminating and gives you a much better feel for why fully automated insurance products would be useful. It’s also a great starting point to assess whether the people and technology behind it give you confidence.

Ideally, you would be able to take great research like this and plug it into some kind of overall framework, one that allows you to evaluate a token over time and, more importantly, see patterns for all available tokens.

Fortunately, these “valuation frameworks” for tokens are also being developed by people like Chris Burniske of Placeholder Capital and Spencer Bogart of Blockchain Capital, in which key questions are asked like

  • Does this token actually have a reason for using a decentralized blockchain?
  • How big and active is the open source developer community contributing to it?
  • Does the token do a great job of giving access to, and facilitating use of, the digital asset it represents (e.g., Ether as access to smart contracts)?
  • What’s the token’s ”velocity” or, in other words, the frequency it’s used within a given period of time?

See Chris Burniske and Jack Tatar’s book “CryptoAssets: The Innovative Investor’s Guide to Bitcoin and Beyond” for a deep dive into these and other framework-related questions.

I think it’s easy to see how these type of questions, and the algorithms they suggest, are exteremely powerful when unified in a reliable framework for evaluating and valuing tokens. It essentially becomes a dynamic dashboard for choosing and investing in tokens and cryptoassets (or reallocating these investments) as they mature over time.

So if you combine the rich, timely research described at the beginning of the post with the right valuation framework, you’re in business.