ICO valuation – What the blockchain industry should know
In this article, we will discuss a few ICO valuation methods to clear some common tokenomics-related doubts in the blockchain industry.
With Initial Coin Offerings (ICO), we are seeing the birth of a new phenomenon that has seized the digital industry and is transforming the way start-ups fundraise for business capital. Businesses and new ventures are moving away from initial public offerings (IPO), crowdfunding, or seeking the support and involvement of venture capitalists. However, with many ICOs failing, it is difficult to determine whether a token is a worthwhile investment. Tokenomics is an essential component of an ICO. Crypto token valuations are problematic. If you’re wondering how ICO valuation work, there is no common approach for performing ICO valuation. But in this article, we will discuss a few ICO valuation methods to clear some common tokenomics-related doubts in the blockchain industry.
Crypto token and ICO valuation
The value of cryptocurrencies have changed significantly, especially throughout most of 2018 and into 2019. During this time, Bitcoin was significantly lower than its all-time highs, making the period a “Crypto Winter”. Also at this time, valuations have gone up significantly. Furthermore, crypto tokens and virtual currency, as well as their marketplaces, remain in their early stages.
Valuations might fluctuate greatly from one trade to the next on a daily basis. Prices’ veracity may be called into question due to reservations about certain exchanges or frauds. These considerations make valuing cryptocurrency and ICO difficult. Nonetheless, proper digital asset valuation is vital for a number of reasons, especially income taxes, inheritance, and gift tax considerations.
What is the initial coin offering (ICO)?
A cryptocurrency and blockchain initial coin offering (ICO) is a sort of fundraising event. The ICO may be thought of as a cryptocurrency-based initial public offering (IPO). However, the two fundraising efforts differ significantly. An ICO is typically used by startups to raise funds. The important benefit of ICOs is the elimination of the need for financial middlemen in the capital-raising procedure and establish direct links between the firm and investors. Furthermore, both sides’ interests are linked.
Types of ICO
Before you decide on doing an initial coin offering, it’s important to identify the different types of ICO that you can do. Once you figure out which is the most suitable type of ICO for you, then you can proceed with the steps into the ICO. The types of ICOs are as follow:
- Private ICO – Only a small number of investors may participate in private initial coin offerings. Private ICOs are often limited to authorized investors such as financial institutions and financially elevated individuals, with a minimum investment amount determined by the firm.
- Public ICO – Public initial coin offerings are aimed toward the wider populace. Because practically anybody can become a shareholder in a capital raise, it is a democratized type of investment. Due to regulatory issues, however, private ICOs are becoming a more realistic alternative than public ones.
Steps to take for an ICO
An initial coin offering is a complicated procedure that involves a thorough understanding of technology, business, and the law. The primary concept behind ICOs is to use the decentralized nature of blockchain technology to secure funding in ways that coincide with the interests of multiple stakeholders. Following is a list of the steps in an ICO:
- Create investment target – Each initial coin offering begins with a company’s goal of raising funds. The firm determines the target audience for its fundraising effort and publishes details about the business or project for possible investors.
- Token creation – The next step in an ICO is making tokens. In the blockchain, the crypto tokens are basically interpretations of an asset or a service. Crypto tokens are all the same and can be traded. They shouldn’t be confused with cryptocurrencies, since tokens are just changes to cryptocurrencies that already exist. Most of the time, the tokens don’t give you a share of a company. Instead, most of the tokens give the people who own them access to a product or service that the company makes.
- Promotional campaigns – A corporation often launches a marketing campaign concurrently to entice potential investors. To reach the broadest investor base, it should be noted that the campaigns are frequently run online. The advertising of initial coin offerings is now prohibited on a number of sizable internet platforms, including Facebook and Google.
- Initial offering – The tokens are made available to investors after they have been created. There may be numerous rounds to the offering. The firm may then utilize the funds raised from the ICO to provide a new good or service, and investors can either anticipate using their token purchases to have access to these goods and services now, or they can wait for the value of their tokens to increase.
Features of Initial Coin Offering
There are some things that an initial coin offering provides. Here are some features of an ICO to consider:
- Involvement in a venture, a Decentralized Autonomous Organization (DAO), or a trade.
- Prior to sale, the majority of ICOs require the production of a certain amount of coins or tokens.
- The founders of the economy, initiative, or DAO generally set the ICO pricing.
- Coin ICOs often provide economic involvement, whereas token ICOs offer ownership rights or profits to a project or DAO.
- Owning tokens may not always grant the investor the choice to legislate upon its course of development or DAO, with the investor’s rights buried inside the architecture of the initial coin offering. However, the investor will normally have involvement throughout the project’s lifecycle.
- As an incentive, initial coin offerings may have numerous phases of fundraising, with crypto tokens on offer growing in value until the launch date. An early investor is likely to have bigger benefits encoded inside their tokens.
- Initial coin offerings end when the coins or tokens may be traded on the open market.
ICO rules and regulations you should know
Recent capital-raising procedures have been significantly impacted by the emergence of Initial Coin Offering. However, the arrival of the new fundraising model in finance caught regulatory agencies everywhere off guard.
Different nations take different approaches to the regulation of initial coin offerings. Along with the United States and Canada, several European nations are developing special legislation to control the operation of ICOs. In addition, ICO regulations have already been established in a number of nations, including Hong Kong, Australia, United Arab Emirates (UAE), and New Zealand. However, ICOs are not permitted in China and South Korea.
Difference between IPO and ICO
Initial Public Offering (IPO) raises funding for firms seeking investment and leads to the issuance of stocks of a company’s equity to investors. Crypto firms generate funding in Initial Coin Offering by selling coins or tokens.
The key distinction between Initial Coin Offering and an Initial Public Offering is that investment in an ICO does not guarantee ownership of a project or business. While investors in both circumstances are enthusiastic about the firm or the tokens and invest with the expectation that the asset’s worth will rise over time. Investors in an Initial Coin Offering are simply hoping that a now worthless currency will eventually appreciate in value over its initial cost of purchase.
Advantages of raising money through ICO
The benefits for organizations seeking funding using ICOs include:
In contrast to firms that raise funds through IPOs, the project, economy, or DAO is not always liable for direct taxing.
Investors base their investment decisions on the substance of white papers issued by the fundraising organization, and transactions of coins or tokens are straightforward, including many rounds, with few or no intermediates necessary in the procedure.
Valuation is the analytical process of determining an asset’s current or anticipated worth. There are various valuation approaches; nonetheless, each methodology has the potential to generate a different outcome, and one strategy could be more suited than the other depending on the asset type and organization. While there is no predetermined method of ICO valuation, several business valuation methods can be used to determine the value of tokens launched during Initial Coin Offering.
Understand crypto token economies before their valuation
Token economics is a branch of economics that investigates the economic systems, regulations, and ethicality of tokenized commodities and services manufacturing, sale, and use. To have value, any cryptocurrency must provide an incentive for consumers to keep that token. This, in turn, increases demand for the token, resulting in a price increase. The top 100 paying Tokens have four economic models. These are the models-
- Deflationary Model – In a deflationary token structure, there is a solid limit to the number of tokens that can be made. This acts as a deflationary framework as demand grows but supply doesn’t.
- Inflationary Model – In an economy based on tokens that cause inflation, there is no hard limit on how many tokens can be made. There are different versions of the inflationary token model. For example, some token issuers only make new tokens once a year, others follow a set schedule, and others choose to base supply on market information.
- Duel-Token Model – Two different tokens are used together on a single blockchain in a dual-token economic model. This usually includes both a token that stores value and a token that can be used for something. The goal of this system is to give users a reason to keep the value token so they can get back in the shape of the functionality token that can be employed for exchanges on-chain.
- Asset-backed Model – An issuer, similar to an Asset-Backed Security in traditional financial markets, links the worth of an asset to the token’s assets in an asset-backed token economic model.
Does ICO valuation get influenced by anything?
ICO valuation gets influenced by the number of tokens in supply. Token supply indicates the number of tokens generated and in circulation. Token supply isn’t constant; it can change. Mining, staking, or releasing founders’ tokens can increase the circulating supply. This causes inflation of tokens. Assuming constant market capitalization, more inflation or an increase in the number of tokens in circulation lowers price performance and hence, the value of tokens in an ICO. With the same idea in mind, the Inflation rate also affects a token’s performance.
Why need a valuation model for ICO?
Tokenomics is an essential component of an ICO. Token values are difficult. With so many ICOs failing, there is a lot of doubt about the viability of the investment. ICO is gaining prominence as the organizational design for the future economy. This is supported by the fact that ICO funding outpaced early-stage venture financing in the second half of 2017. We must have shaped our financial understanding to better fit this emerging economic and corporate paradigm.
Method to value ICO
In conventional finance, there are several asset pricing models and valuation procedures that may be used for crypto asset valuation. Let us understand them briefly.
- Discounted cash flow – Because most crypto tokens do not generate direct cash flow, the discounted cash flow (DCF) theory cannot be used to evaluate tokens released in ICO. Tokens such as Binance Coin and Huobi Token, on the other hand, generate cash flows as a result of the token burning feature and can therefore be evaluated using the DCF model.
- Implicit value analysis – When an ICO releases a utility token, the crypto token’s value is determined by the product or service that can be obtained with it. It is calculated by totaling all of the uses or advantages that may be obtained by staking such a token.
- Relative value analysis – Relative value is a method of determining how much something is worth by comparing it to the prices of comparable crypto tokens. It does not provide an absolute value since it only considers what an asset is worth to itself without comparing it to other assets.
- Equation of exchange – The equation of exchange is an economic formula that represents the relationship between money supply (M), money velocity (V), price level (P), and a spending index. It is often used to value crypto tokens such as Bitcoin, Ripple, Filecoin, and others. The equation is expressed in the following formula:
Here, M = The money supply, V = The velocity of money, P x Q = Nominal Gross Domestic Product (GDP)
When valuing crypto assets, we use P x Q to represent the utility (i.e. GDP) generated or demanded using the token. To use the above equation for crypto asset valuation, we must tweak it slightly so that both ends of the equation are evaluated using the same currency.
Taxation rules for ICO
The federal estate taxes system is heavily reliant on valuation. The IRS released Notice 2014-21 in 2014, which gives limited advice on various tax problems relating to certain cryptocurrencies. It is both restricted in extent and direction; it specifically states that convertible virtual money is classified as property rather than money for federal tax purposes. The Notice fails to appropriately address several critical tax concerns, including value. Furthermore, the Notice does not cover all valuable digital items. There have been no particular court rulings concerning cryptocurrency and federal income tax or estate tax concerns.
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Obtaining an ICO valuation is advantageous for your firm for a number of reasons. You can utilize the report to raise funds for your project, DAO, and attract a large number of venture capitalists and investors. Eqvista can help you with your ICO valuation. With a team of highly qualified analysts, you can guarantee the best valuation for your ICO. Contact us today to learn more about our valuation services!