Pricing a CryptoCurrency: Game Credits

CRYPTOCURRENCY: GameCredits

DESCRIPTION OF BLOCKCHAIN APPLICATION: GameCredits is a cryptocurrency based on a gaming gateway built on the Blockchain. It aims to make in-game payments seamless, easy and secure. The main advantages include player anonymity, easy integration with games, more deposit options for local as well as international games and the security and immutability advantages of the Blockchain.

MAIN USE-CASE: Using Blockchain to disrupt the In-Game Payment Market.

TOTAL DEMAND: According to market researcher Newzoo, the global game revenues are expected to grow to USD 128.5 billion. This is almost entirely through user spending on games, and not advertising revenue.

TOTAL SUPPLY: 84 million GameCredits.

RISK FACTOR: A lot of risks exist in this project.

*Regulatory Risk: Low, as closed application of credits suggests productive use of cryptocurrency. International transfers may get some regulatory attention.

**Utility Risk: Low, as there does exists a strong use-case based on the core advantage of the Blockchain technology, i.e. decentralized and hence cost effective.

**Platform Risk: Medium, as the Blockchain itself does not seem risky. However, adoption by gaming companies and integration with different systems might be a challenge. Along with the interoperability issue, scalability might be a concern as gaming involves small but frequent micro-payments. Also some gaming companies might prefer private Blockchain solutions to keep their users sticky and to build customer loyalty.

**Execution Risk: Medium to High, as though GameCredits has a strong team of technology and business people from the Gaming Industry. However, it will have to face powerful incumbents to gain market-share. Competitors like Apply Pay, Visa etc. have established a very strong foothold in the payment space. Getting market-share from these companies will be tough. Price competitiveness would be a major factor to get market share.

Based on the above, the Risk Factor for this startup can be (0.67+2*0.67+2*0.33+2*0)/7 = 0.38

POTENTIAL MARKET SHARE WHICH CAN BE CAPTURED: 5% due to distributed Gaming Industry.

TARGET PRICE FOR LBRY CREDITS: 128.5*5%*0.38/0.084 = USD 29.07

(*I do not have any GameCredits. This is purely my estimate for this cryptocurrency and I arrive at it using a very simplistic approach.)

Pricing a CryptoCurrency: LBRY Credits

CRYPTOCURRENCY: LBRYCredits

DESCRIPTION OF BLOCKCHAIN APPLICATION: LBRY is a content sharing platform built on a native Blockchain. It aims to connect content creators to content consumers directly and payments will flow from the latter to the former through LBRY Credits. I like this cryptocurrency as it is based on a solid use-case.

MAIN USE-CASE: Using Blockchain to disrupt the Paid-Content Market.

TOTAL DEMAND: The Paid Content Market in 2017 is estimated to be USD 180 bn (source: article byJuniper Research). This includes digital content like videos, music, games, articles etc. LBRY intends to target this market and capture this value. Owing to strong incumbents and being conservative, we can say that LBRY might be able to gather upto 10% of this value in due course. Also we can ignore growth of this space to be extra conservative and get a as-is-where-is value.

TOTAL SUPPLY: 1 bn. LBRY Credits will be available at the end of 20 years of the project.

RISK FACTOR: A lot of risks exist in this project.

Regulatory Risk: Low, as closed application of credits suggests productive use of cryptocurrency.

Utility Risk: Low, as there does exists a strong use-case based on the core advantage of the Blockchain technology, i.e. decentralized and hence cost effective.

Platform Risk: Medium, as the Blockchain itself does not seem risky. However, certain features like an ongoing public action of domain names on the LBRY network is a risky one for content publishers.

Execution Risk: Medium to High, as though LBRY has a strong team, it will have to face powerful incumbents to gain market-share. Competitors like Netflix, Spotify, Youtube, iTunes etc. have established a very string foothold built on strong content and excellent customer experience. Getting market-share from these companies will be tough. However, small content creators might find it useful to go with the LBRY project in return for more control over the returns on their content. Slowly, this trend could pick up and spread.

Based on the above, the Risk Factor for this startup can be (0.67+0.67+0.33+0)/4 = 0.41

TARGET PRICE FOR LBRY CREDITS: 180*10%*0.41/1 = USD 7.51*

(*I do not have any LBRY Credits. This is purely my estimate for this cryptocurrency and I arrive at it using a very simplistic approach.)

Investing in a Cryptocurrency

I believe the Blockchain is a truly revolutionary technology which can impact many industries in the future. Crypto-tokens are essentially the store of value of a particular application of the Blockchain. Since the underlying technology is robust and sustainable, the currencies built on it are also the same.

To make an investment in a cryptocurrency, I would recommend the following steps:

1. Check out various currencies and read about the underlying Blockchain applications.

2. Shortlist a currency which has a clear, concise and understandable use-case. The use-case should be around a real world problem, where the application of the Blockchain has the potential to add value.

3. Read about the currency – the total supply, distribution structure, mining rewards, consensus mechanism etc.

4. Checkout the team behind the currency. The team should be a good mix of people having the necessary skills and experience to execute.

5. If all seems fine, go further. Else go back to Step 2.

6. Try to arrive at a fundamental value for the currency. Check out my post on this. If this is difficult to do, check out any comparable currencies and compare their metrics (price and quantity traded) to arrive at a value.

7. If the market value is fairly below the fundamental value calculated above (atleast 30-40%), INVEST!

Invest in CryptoCurrencies. Don't Gamble in Them!

Pricing a CryptoCurrency

Cryptocurrencies have been getting a lot of attention lately. With increasing capitalizations of the major currencies in circulation now (like Bitcoin, Ether, Litecoin etc.), investors are increasingly looking at making these currencies a part of their portfolios. Since retail investors can also invest in these currencies without restriction, understanding how these currencies are valued becomes crucial.

The value/price of a currency is based on the demand for the currency, the supply of the currency and risks associated with the currency.

Demand of the Currency

A cryptocurrency is generally a token which is issued around an operation which happens in the background. The demand for the currency is essentially the value which can be generated through the operation backing it up.

To arrive at this value, we need to start by identifying the major use cases of the currency. The next step is to quantify these use cases with regards to the value for customers they can potentially generate. Taking an example of the Bitcoin, one major use case was that Bitcoins can be used to transfer money abroad at a significantly lower cost and time. To calculate the value of this use case, we can estimate the total amount of money which gets transferred internationally around the world. We can then add a haircut on it to take into account that some countries do not allow Bitcoins and also that only some customers might migrate to this solution. This final value will constitute the demand for the Bitcoin for this use case.

Values for all major uses cases of a currency are calculated and added to arrive at a final value of demand for the currency. A small premium might be given to a generic coin like the Bitcoin which may have a large number of other not-as-big use cases.

Supply of the Currency

Most cryptocurrencies tend to have a limit on their lifetime supply. For example, the Bitcoin has a limited supply quantity of 21 million coins.

The Risk Factor

Now that we have calculated the present demand and potential supply of the currency, we need to assess the risks in the future. Some major risks may include the following:

Regulatory Risk: Currencies like the Bitcoin which target a big and systemically important use case like international money transfers have significant regulatory risk attached to them. Different countries will have different regulations to deal with such coins. These regulations will determine how much of the potential value of the currency can be realized.

Utility Risk: A cryptocurrency is as valuable as the utility of the operation behind it. Use cases which are not sustainable and have a high risk of substitution add utility risk to the cryptocurrency’s value.

Platform Risk: The Blockchain is an evolving technology. Different Blockchains face different challenges and these might affect a currency built on it to achieve its potential value. For example, the Bitcoin Blockchain is facing problems of scalability and security. Hard forks (major changes) are being suggested to counter these problems. This has caused the Bitcoin community to divide and is causing problems in the Blockchain.

Security Risk: Blockchains face security risks both from outside and the inside. Hackers & interested parties may try to attack and alter the working of the Blockchain. Also within a Blockchain, some stakeholders like miners might try to collude and gain control of the Blockchain for their own benefit. The Bitcoin Blockchain has been facing a security issues. Some Bitcoin exchanges got hacked. Also there is a risk of miners colluding as a majority of miners are centralized in China.

Execution Risk: A coin may have a good plan backing it. But can the plan be executed? This is particularly important in the case of Initial Coin Offerings, when most coins raise funding with a prototype or just a whitepaper about them. The team behind the coin issue plays a big role in the assessment of execution risks.

These risks need to be included in the price of a cryptocurrency. A discount factor can be applied to the fundamental value of the currency to account for these risks.

To summarise, the price of a cryptocurrency is the following:

Price of Cryptocurrency = (Demand of Currency / Supply of Currency)*Risk Factor