Less than 10 years ago, there were only a handful of Crypto currencies to choose from. Today this number has grown to over 20’000 with new Crypto projects launching daily. How to decide which project to invest in? This publication provides some guidance on often overlooked principles when investing in Web3 Projects and breaks down Token Economics (“Tokenomics”) for the general investor.
Valuation, Market Capitalisation and Fully Diluted Market Cap
After evaluating the general project use case, its team and road map, it is vital to analyse mathematical valuations of the project in focus. A project can have the best team, use case and working product but if valuations are unrealistic, it will likely fight an uphill battle from the start.
The most basic metric is the Fully Diluted Market Capitalisation which is simply the total amount of tokens multiplied by the token price. If there are a total of one hundred million tokens issued at a token price of USD 1 then Fully Diluted Market Cap is USD 100 Million. The difference to the general Market Cap is in the Circulating Supply of Tokens, so if only ten million tokens are currently in circulation, then the Market Capitalisation would be USD 10 Million.
Market Cap Peer Group Comparison
Having an idea about the Market Capitalisation allows for a rough estimation of maximum profitability by comparing the project to an established competitor. When investing into a GameFi project for example, one might want to compare against market leaders such as Axie Infinity, Sandbox or Decentraland. Market Capitalisations of these leaders at the time of writing this research varied around USD 1.5 to 1.7 billion. If the valuation of the project to invest in already stands at USD 100 million, this would leave about a 15x potential to reach Unicorn status and compete with these Sector leaders. Being aware of the high failure rate of Crypto currencies, there should be a very good reason of why to invest at such high valuations, especially if the project is still in its Seed stage and one might be better off passing on the opportunity.
Token Unlock, Vesting Schedules and Seed Vs Listing Price Ratio
One of the most important factors to be aware of is the circulating supply at listing and when new tokens come into circulation. This can create strong selling pressure, potentially causing steep price declines. It is even more critical if there is a large price increase between the Seed Investor price and the listing price. Looking at a real-world example of a Move2Earn project that launched in Q2 2022, named RunTogether illustrates this. Disclaimer: iBLOXX is not affiliated with RunTogether and this was a randomly selected project to be analysed.
RunTogether has sold 60 million of a total of 250 million Tokens in its Public Round at USD 0.01 while listing the Token at USD 0.1, a significant price increase. In the short-term, this might satisfy Seed Investors as they are sitting on large unrealised gains. However, the steep price increase from Seed to Listing Price along with a large circulating supply of over twenty percent, creates significant selling pressure which is difficult to absorb if the token has not yet established enough liquidity. After initially reaching a high price of over USD 0.8 in the first few minutes of listing, the price kept selling off, losing over ninety percent in the next few days.
The transparency of Blockchain technology allows for a detailed analysis of trading behaviour after the token was listed. Breaking down trading volume into Buying and Selling and further splitting up selling volume between market participants who bought in the open market and those who had tokens before the listing, provides further insight. The project was well supported by a large community represented by over USD 18 million in Buying Volume in the first week. Unfortunately, selling volume was just as much and market participants who did not buy the token in the open market sold off over 8.2 Mio USD, exhibiting significant selling pressure on the Token price.
Having a good understanding of possible token circulation is vital. The simulation below shows two examples where 10% and 20% of the early Seed investor wallets were randomly removed from selling. To reiterate, those were investors that had received tokens ahead of listing and did not buy any tokens on the Pancakeswap Exchange. The impact on the token price is quite dramatic as can be seen in the simulation chart. Instead of a price of approximately USD 0.1, the
token would be trading between USD 2 to USD 5. Of course, this is a hypothetical assumption as nobody can predict the future and a higher price will always motivate investors to take profits, therefore creating selling pressure so what is the catch? The benefit of well-structured token release schedule allows a project the necessary time to develop a liquid market and is vital for the longevity of any Web3 project. From an investors point-of-view, being able to correctly interpret Tokenomics and Token release schedules provides an edge and should be part of any investment due diligence process.
About
Domenik Maier is the CEO of iBLOXX, a Dubai based Algorithmic Trading Firm which provides Market Making Services for Token issuers and incubates early-stage Crypto projects. He holds a degree in International Asset Management from the University of Liechtenstein and has almost two decades of experience in the Financial Markets. Before founding iBLOXX, Domenik was Vice President at one of the World’s largest Banks.
