Finance is not a perfect subject, especially with utility tokens, but it has some rules…
Asset valuation is the process of assessing the value of an asset worth, assets that produce cash flows. Asset valuation is commonly performed prior to the purchase or sale of an asset.
What about tokens? Different types of tokens exist. The two main categories are:
1) Utility Tokens/means of payment à Utility tokens, also called app coins or app tokens, provide users with access to a product or a service. Utility tokens constitute the most common type sold during an ICO. An example of a correct valuation method links the balance between the number of tokens (T) and their turnover for the period (V), along with the price (P) and volume of services (Q) on the platform during that same period.
2) Security Tokens à A security is a broad classification involving any kind of tradable asset. Asset tokens refer to equity investments in real physical underlying assets, company shares, income streams, and entitlement to dividends or interest payments. Financial regulators subject asset tokens to certain rules if they are similar to equities, bonds or derivatives – meaning securities tokens are digital assets that regulations govern. Examples of correct valuation methods are DCF, multiples, …
However, in most cases, valuation is not determined following the traditional rules, but it seems the process of an irrational process based on some promotion and ICO sales techniques:
- a) HYPE, in particular “Fear of Missing out” makes investors transfer funds at record speeds ex. Brave, Decentraland and BitClave;
- b) WHITEPAPER QUALITY, even if not all investors read and understand the project;
- c) BOUNTY, is a discount for early investors; these tokens are often sold-out right after trading has begun, crashing the price of a token;
- d) BURNED TOKENS increase the price volatility;
- e) other token sales techniques.
The role of financial advisors will likely grow in importance. Both in selecting investments and valuing digital tokens. However, history sometimes repeats. Finance has already taught lessons to irrational investors in the past. Caution should be taken because speculative bubbles arise when prices do not reflect fundamentals.
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