How To Value A Token
[TL; DR]
There are several crypto tokens in the market. While they are smart, you should not invest at all.
It would be best to conduct a token valuation to identify the best token worthy of your investment.
Before investing, you should consider price appreciation, buyback, and dividends to know the token's value.
Sometimes, as an investor, you are likely to face some challenges when identifying the values of a token.
Some of these challenges include the short history of a token, the success rate, and the interdependence of crypto projects.
Market size, supply, and demand influence the value of tokens in the crypto market.
Keywords: Token, Cryptocurrency, value, investor, investment, market, enthusiasts, buybacks, dividends.
[Full Article]
Most investors or crypto enthusiasts tend to identify the various tokens on the blockchain and faring. Before making investments or diving into a market, you tend to carry out background searches on the best among your options.
For instance, in cryptocurrency, you have a million dollars that you are willing to invest and acquire a single or two tokens. Since there are hundreds of crypto tokens on the blockchain network, you are confused about the best option.
As a crypto holder and expert, you tend to look for your digital assets and constantly seek their worth. To identify your holdings' worth, you will need to conduct a token valuation.
Cryptocurrency tokens are similar to stocks in valuation. There are several tokens on the blockchain with varying values. Knowing the value of your crypto tokens gives you the economic structure of your digital asset.
Image: Benzinga
To know the value of your tokens, you should consider these three sources.
Price Appreciation
The first source or criteria to determine the value of a token is price appreciation, and price appreciation applies to all tokens and is driven by adoption.
The principle of price appreciation is that the entire economic value is based on speculations and assumptions. The result is then divided among the total number of token holders.
In price appreciation, the more the holders of the tokens, the higher the price will continue to increase.
Buyback
Crypto tokens are volatile and associated with inflation, and these volatilities can lead to enormous losses for holders. To ensure your investments and assets are safe, you should consider tokens that their developers and stakeholders engage in buybacks.
Buybacks in crypto are when outstanding shareholders and firms re-buy the shares that have previously been sold out. Firms buy back shares to raise the value of other “idle” shares; buyback is also done to attract investors and show them profitable propositions.
For a token that supports buyback, the growth and stability are once listed for secondary trading. In addition, buyback ensures liquidity surge and promotes long-term growth. Holders and investors have been motivated to HODL the token for long.
For instance, the BNB token allows buyback every quarter, and Binance uses 20% of its profit to buy back BNB tokens. Buybacks in cryptocurrencies are executed via (pre-defined and encoded) smart contracts.
Dividends
The final criteria to consider in identifying the value of a token is knowing if they pay dividends and how it is being paid. Dividends in crypto tokens are similar to the traditional dividends.
If you invest in a token or multiple tokens, you can stake them on blockchain technology. Should you stake and the network makes a profit, you will get rewarded out of the profit.
Some of the crypto tokens that pay dividends to their holders include Ku Coin (KCS), Decred (DCR), Komodo (KMD), FTX, BitMax (BTMX), and a few others.
Challenges Of Token Valuation In Cryptocurrency
To know the value of a token before investing is primarily based on speculation. No regulation is guiding the rise and fall of the crypto market, so you can only predict, not ascertain, how the token will fare in the long run.
Some of the challenges that you are likely to face as an investor or crypto enthusiast when you're making valuations of a digital asset includes;
The Short History of Crypto Tokens
Besides Bitcoin (BTC), launched in 2009, most other tokens are relatively new to the crypto market. Therefore, it is difficult to identify how these tokens have fared over time since they have only spent a few years in the market.
Predictions that will be made will be narrow and mainly based on assumptions. This mostly leads to wrong or misleading valuation for investors.
The Growth/ Success Rate
The success rates of most coins on the blockchain network are not encouraging. Most of these tokens get pumped in their early stages of launch or listing; after a while, they dip and put investors at a loss.
It is challenging to project cash flows and earnings into the future of stagnant coins.
Interdependency
Many blockchain apps and projects are interdependent on others. Some are either launched as a subsidiary of others or a hard fork of an existing blockchain app.
The dependency risk is one challenge that investors face in valuing tokens. For instance, a crypto token built on Ethereum or Bitcoin will be directly or indirectly affected by the market force in Ethereum or Bitcoin. An attack on the "parent" project or a bug in the compiler will automatically affect its layer.
Factors That Influence The Value of Tokens
Image: Medium
In most cases, you can not predict what will happen in the crypto market. However, you can make some guesses, which will come out accurate. As an investor, you should be wary of these factors. They include;
Supply And Demand
Before identifying the value of a token without any computation or arithmetics, you should understand the concept of demand and supply in crypto. For a crypto token to increase in weight, it is expected to be in higher demand than the current supply rate.
Market Size
The market size of a token is essential. Irrespective of how long it was listed, you should know how far the token has gone and its adoption across several locations. Some tokens are concentrated in a particular region but widely accepted there, while some are scattered across several locations but have few investors in all these places.
Conclusion
Knowing the value of a token gives you the necessary knowledge on the best investment choice. There are several tokens on the crypto market, and when you look at the charts and tables, you realise most of them are worth the investment.
However, to make the best decision and be certain of high return on investment, you should consider the criteria, sources, and factors highlighted in this article.
Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
