The best way to kill a bad product is with good advertising, and Bitcoin is the ad to end all ads for blockchain technology. People get tattoos of Bitcoin, not Uber. Thus far, Bitcoin and ICOs are blockchain’s two killer apps. BTC’s over 10x increase in market cap in 2017—and the expectation that it will continue (e.g., noted here last month was a conference panel’s 1-year price target north of $20,000)—will likely turbocharge the influx into these apps of entrepreneurial, software development, and big corporate resources. These resources will slosh into a wide range of infrastructure and domain-based verticals, including media. ICOs, bubble or bust, are a way of monetizing the utility of blockchain software development through tradable tokens used by blockchain protocols and decentralized apps. These tokens have already attracted capital raises by legacy media companies (e.g., Kik) as well as whitepaper wizards (e.g., AdEx), and barring complete regulatory Armageddon, are likely to continue to do so.
As apps, Bitcoin and ICOs are penultimate, however—the promise of there is greater than the there that is there now. In 2017, bitcoin’s rise in value easily outstripped reasonable estimates of the value of the improvements in the technology and supporting infrastructure. Don’t just take my word for it … ask Galaxy Investment Partners, one of the funds early to invest in crypto, whose head put out before Thanksgiving a $10,000 year-end bitcoin price target. As BlockTower Capital, another forward fund manager, puts it, one central thesis for investing in bitcoin is its potential to be, one day, a store of value free from state censorship. That day is not today, which is fine, as investments are about the future. ICOs have raised billions in 2017, but if there’s a utility token on the cusp of capturing the crypto community, much less recruiting to the crypto cause the great unwashed masses still fixated on fiat, I’m not aware of it. Crypto’s “email moment” has yet to arrive.
For years, Warren Buffett avoided tech investments because he said he did not understand the technology well enough—how would you adapt this approach to the inscrutable blockchain? Techwise, blockchain is some tricky trick, different in kind and not just degree. Cryptography, distributed computing, game theory, token economics, and new software programming languages are among the intellectual challenges facing blockchain investors. Applying a strict Buffett rule would keep you from investing in crypto, period, and in fact, Buffett has recommended that investors steer clear.
Of course, Buffett now owns stock in Apple, so the old dog has learned some new tricks; in that vein, what might work for those seeking some “exposure to the cryptocurrency asset class,” in the vernacular of the financial advisor perhaps seeking to cloak what others call rank speculation. Let’s look first at some reasonable approaches, and second, at some paths that may offer more promise than performance.
In tokens we trust … our investment edge. A standard critique of ICOs is that they look to raise money for projects that could not garner much if any angel or early-stage VC funding. It comes down to the token, which is the most likely source of an investor’s “variant perception,” as termed by another legendary investor, Michael Steinhardt. Traditional angels and VCs likely lack an edge in valuing tokens, and may actually have biases that are baggage when trying to do so. Token economics and token valuation are linked, and we know at least this much: token value rises with greater demand for the resource provisioned by the token, and falls with higher token velocity (shorter holding periods). Principles of token valuation are still being uncovered, but the mindset of a model, even if incomplete, helps discipline the due diligence done on the project-meisters.
For utility tokens, which have made up most token sales in 2017, assess the case for whether the tokens are essential to providing either a completely new product or service or an existing product or service at higher quality and/or lower cost.
· Fourth, the allocation of value among the tokenized protocol and apps running on the protocol is likely to vary among different blockchains.
Here are a few other observations on token economics and valuation, with a slant to media blockchain applications.
Let’s close with two coin cautions, about data mining as an investment tool, and the investor skills needed for the new world of token investment.
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