How to value tokens the Warren Buffett way?

ICOs are currently one of the best ways to make money, but as investors we have to invest wisely, meaning invest in those ICO tokens that are undervalued. But how do we value tokens?

Valuation of other forms of investments

For other forms of investments the valuation is much easier:

When investing in established companies we know that our investment buys us rights to the company and thus to the future profit, assets and dividends. Thus, we can value the company looking at the following criteria:

  • Revenue
  • Profit
  • Assets
  • Future expectations:
  • Business model
  • Team
  • Product
  • Market

Revenue, profit are visible in the financial reports, and assets are easily valued. So the only difficult things to evaluate are the future expectations, that have to take account of business model, team, product and market.

When investing in startups, we most likely will not be able to look at revenue, profit or assets, as they are either small or non-existent. Instead, the only things we can look at are future expectations based on:

  • Business model
  • Team
  • Product or Prototype
  • Market
  • Marketing plan
  • Financial plan

As we do not get to evaluate revenue and assets, we focus on the financial and marketing plan to see if the startup founders have a good plan to reach significant amount of revenue and profit.

When investing in currency, we should look at:

  • Current price level of the country
  • Economic growth
  • Interest rate
  • Debt level of the country
  • Fiscal and monetary policy of the country

So for example, when I arrived in Brazil in 2014 the price level was very high. So I knew that either the economy must be booming or the Brazilian currency, the Real, must be overvalued. And as I could see the economy was not booming, I started to bet against the Real and indeed it went down by 30% soon after.

When investing in tokens, some investors would value ICO startups as “normal” startups and thus use the same criteria:

  • Business model
  • Team
  • Product or Prototype
  • Market
  • Marketing plan
  • Financial plan

However, marketing and financial plan are generally not available. Also, this neglects that in an ICO we do not participate in the company. Instead we are just getting a token, that if we are lucky we can use to get future services. So the company could be worth a lot, but at the same time the token could be worth nothing. Thus all of the above investment criteria are useless.

So how can we assess the token value?

Value investing vs. hype investing

To value tokens we could either look at the hype or at the Warren Buffett way of investing, which is called “value investing”. “Hype investing” means we listen to what the majority of investors think about a certain token. This can work in the the short term, as even a bad token can rise in value if many investors think it is worth a lot, but in the long terms the value of the token we reflect its “real value”

On the other hand, value investing, looks beyond the hype and at the “real value”. This investment approach does not let us benefit from hypes in the market in the short term, but in the long term is the approach which will succeed as it values the investment at its “real” value.

Determining “real value” of different kinds of tokens

The valuation of the “real value “of a token is different depending on what kind of token it is:

  • Platform token
  • Investment token
  • Security token
  • Utility token

In an investment token the invested money in the ICO is used to buy assets or make investments in which the ICO investor would have rights to. Thus the value of the token depends on the value of the investments and the assets.

As the most common form of tokens are utility tokens, we will analysis the valuation of these in more detail.

Currently investors seem to think that when they participate in ICOs the own part of the company. But this is not the case. The investors do not get the right to company, revenue or assets, only the right to the future utility offered.

This means it is not the company that needs to be valued but only the future utility. So looking at the business model, team, product, or market has little use because these factor are related to the value of the company.

So we need to know what exact utility we get and in what quantity for holding one token. The problem is that this information is rarely available! This is because ICOs mention in the whitepaper, that the token can be used to purchase a certain service or product, but do not specify what exact service or product and especially not what quantity an investors gets for holding one token. Investing in such a utility token is like going to a shop giving the shop owner 1000 USD and letting the shop owner decide what and how much he is going to give you for the 1000 USD.

If on the other hand the ICO mentions exactly what we got for one token, then we can estimate the value. For example, an ads marketplace might tell us that for 1 token we will be able to purchase a certain ad marketing space, for example get 5000 impression of the ad. In that case I can estimate how much 5000 impression would be worth in terms of USD and this would also be the value of the token.

However, we have to figure in that there that the product would actually be built and that we could actually use our tokens. For that reason, we would likely value the tokens several times lower than the USD value of the utility.

The problem is that even the utility that we get for one token in most cases is not specified, so we cannot value. In that case we have to assume that the real value of the token is 0.

In conclusion:

  1. We need to look beyond hype and at the “real value” of tokens.
  2. We cannot base the valuation of a utility token on the value of the company, unless we get shares in the company.
  3. To value the utility we need to see how much service or product we get for one utility token.
  4. If ICO does not specify how much product or services we get for one token, the value can be assumed as 0.

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