A Quick Look at Evaluating Crypto Token Offerings

Initial Coin Offerings (ICOs) walk among us. They and their token friends might sit beside many of us as we ponder our finances, looking over equities and bonds in the hope that our diligence will yield the perfect mixture of assets for now and later in life.

For some of us, they are part of a grand ambition to fasten a lasso and pull the future toward us a little faster, a way of opening technology up and making its gains more widely shareable while stakeholders ride the crypto J-curve all the way up to the moon.

They are part of a dream, tokens bearing the promise of a better tomorrow if only we play our cards right today.

For others of us, they’re a nightmare. ICOs are complex and volatile things, subject to the whims of markets that can swing with the strength of youth and the endurance of old age.

Legal definitions can’t be agreed upon, governments move slowly and all have different views on cryptocurrency, China can’t quite decide how to feel about crypto assets, hackers seem to pounce with impunity, and tax implications are as predictable as they are now untested. ICOs are the very definition of risk, of hubris, of tulip fever.

We can’t even evaluate these token offerings properly–do the same metrics used for traditional companies apply here? Something new? And what would those be?


We are left only with questions in pondering the emergence of ICOs:

How can we evaluate these crypto projects?

How do I recognize a capable team with a good idea?

How can we tell the gambles from the shambles? What indicates quality?

Which ones are worth my time and money?

And a hundred others.

It may be true that Bitcoin is more than merely money or an incremental advance in technology, that it is in fact mainly a “cultural paradigm shift” as this Coindesk article asserts, but the fact remains that most people invest for return, much less so for the psychic reward of bettering oneself or the world. That’s even truer for high-risk assets.

And while it would certainly be smarter to do so, most of the interested parties won’t start learning about the blockchain by beginning with the original Bitcoin white paper.

There is now a great glut of interest among investors and a paucity of guidance. This is a recipe for making poor decisions and even poorer returns. Only a few analytical tools now exist, such as Chris Burniske’s crypto J-curve.

The crypto J-curve is here to make a point about timing: Considering where a crypto project is in its lifetime is important.

Depending on timing, the current utility value (CUV) may be higher or lower than the more speculative discounted expected utility value (DEUV) shown in the graph.

As a token is used more for utility purposes, its more speculative DEUV goes down– in the beginning, the value is all expected and later both grow as the network grows. Valuable as it is, this isn’t enough.

Today’s pervasive lack of information is a problem. Some of this is due to complexity and the passage of time–there just hasn’t been much time for historical data to be analyzed yet, on the one hand, and there’s still no firm understanding of how to look at these new assets on the other.

That’s why discussions weighing good versus bad are needed. This is exactly the time to discuss reasonable indicators of quality for token offerings, since more and more money is being sunk into these projects by more and more people.

It is critical that bad deals and bad faith actors be weeded out (something governmental institutions will begin doing).

Hype and ignorance prevail, with unawareness making even sophisticated individuals fly blind. Investing without doing much (or any) due diligence and meaningful research is all too common. The following remark by Stefano Bernardi bears this out:

This post seems to have changed the perception of the [Filecoin] token sale for people, which must mean that they did not know the facts presented in the post. This in [sic] interesting because those facts were just hiding in plain sight on the token sale documents. In turn, this means that people are very prone to the hype machine but not many have the time to actually go read and ponder about specific token sales.

Anyone interested in the mainstreaming of related technology or the furtherance of blockchain adoption should make every effort to see that junk ICOs don’t make it. Negligence or fraud on the part of a few projects will tar the reputation of all and leave a thick residue that won’t be washed out easily.


Simple Metrics for Studying Token Offerings

There’s a fierce need for intelligent discussion of how these tokens should be evaluated. With that in mind, here are a few simple suggestions to start with as a kind of initial screen before even delving into the technical details.

What’s the vision?

Begin with the white paper. There should be a clear explanation for why this crypto project is needed, plus why having a token offering is the right way forward.

There should be a roadmap that seems plausible, even likely in some sense, for how the project will develop. It should be obvious a lot of thought went into this project. Various use cases should be laid out. Social proof should be all over the place online. Credibility should be very apparent.

What are the key assumptions that will make or break this project in its early stages? What predictions are being relied upon?

Looking backward, assuming it goes sideways somehow later, how did this project fail?

What about the team?

Know who’s involved in the project before investing anything. This should be fairly stringent. Token holders have a need for what we might call KYT–Know Your Team.

This obviously sounds like the Know Your Customer (KYC) rules that banks must follow, which it is. Know who the key players are for this team, where the project is located or the company is incorporated, and whose laws apply to it.

Does the team appear stable and able to work cooperatively together? How will the team members be compensated both now and later?

Every core team should make a very real effort to share relevant information that conveys its ability to actually do what the white paper and branding documents promise.

If the team discloses little information or expects investors to simply take its word for how things will happen, run.

What’s the business plan?

Here is where many try to apply traditional business valuation tools and see how coins compare to companies. There should be some kind of go-to-market strategy laid out, plus an explanation of the total addressable market and how the crypto project plans to become active in this area.

Think about a “crypto P/E ratio” that replaces earnings with utility:


What’s the market like? What’s the competition like? How do people solve this problem or meet this need already–how is this crypto solution better than that?

Stephen Gandel writes about the network-to-value transaction ratio (NVT) in this Bloomberg article. This is the closest thing to a standard metric at the moment.

Don’t linger on market capitalization. Given that many coins have been lost on the Bitcoin blockchain, knowing what the market cap is right now won’t really help much. Tim Swanson, for example, says as many as 25% of existing bitcoins are lost forever due to misplaced or erased private keys.

Don’t linger on total transaction volume. It’s hard to distinguish speculative transaction volume from less speculative transactions.

What are the incentives?

Incentives are basically the whole show when talking about human behavior. What are the incentives for the concerned parties–the founding team, the pre-sale token buyers (if there’s a pre-sale), buyers in the token sale, and various stakeholders over time?

How will the selling of tokens actually happen? What are investors’ rights?

How does the team envision network effects playing a role? What are the thoughts about the maturity of the network over time? As Michael Karnjanaprakorn explains, how a token appreciates over time should be very clear.

That entails a pretty comprehensive understanding of the supply and distribution of tokens, as well as a timeline for likely major events.

A worthy project will not attempt to obscure these details.

A Starting Framework

There’s a reason framework has “work” in it. There’s more to do.

These are only a few suggestions on how to frame the question of where to begin with evaluating ICOs and tokens as assets, and only one man’s opinion. As with stocks, public information is enough to make decisions a lot of the time. Most people don’t read closely or think carefully; those who do stand to gain a great deal.

The investing world has barely tapped into crypto assets, so there will be a lot of demand for metrics and tools to better understand how these instruments operate in years to come. Having some kind of framework to start with will be an immensely useful tool.

This much seems certain; beyond that, certainty edges into speculation and the animal spirits start to gather.

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