A maths formula from the 1990s can help investors make smart bets on the exploding ICO market

  • The initial coin offering market is off to a red-hot start in 2018, according to new data from Autonomous NEXT.
  • RBC analyst Mitch Steves outlines a way to value the network of ICOs in a note to clients.

Bitcoin may be down nearly 50% from its all-time high set in December, but the market for initial coin offerings (ICOs) is still humming along.

Unnamed 3Autonomous NEXT

ICOs allow companies to raise funds by issuing their own token. They have allowed companies spanning industries from gaming to finance to raise millions of dollars in a matter of seconds.

Still, compared to more established markets pin-pointing good investment decisions in the ICO space isn’t as clear cut, according to RBC analyst Mitch Steves.

“In the stock market, we value companies based on a wide variety of metrics that range from sales valuations, book valuations, earnings valuations and cash flow valuations,” he said.

None of these things exist for crypto.

In a note to clients, Steves said investors could use so-called Metcalfe’s Law to value the network of a given token in the market, which is known for its fair share of fraud and froth.

“Fast fundraising with minimal regulations has allowed several unsavoury individuals to profit off ICOs,” Steves wrote.

Still, many see a big opportunity in the ICO market. At least 170 crypto funds have opened shop to capitalise on such opportunities, according to financial technology analytics provider Autonomous NEXT.

“Many real projects are solving real problems and are successfully leveraging blockchain technology to address challenges that have so far been unsolvable,” said Simon Yu, the chief executive of blockchain tech company StormX. “Remain vigilant.”

Screenshot bi.slack.com 2018.02.16 15 43 03RBC

Metcalfe’s Law was formulated in the earliest days of the internet to examine the power of network effects. The law, which suggests the value of a telecommunications network is equal to the square of the number of users connected in the system, can be used in three ways to value an ICO’s network, according to Steves. From the note:

“The first is the most common which would require taking the total value of the cryptocurrency and dividing by kN^2 (where N represents users). The second application could take the same formula and apply this where N represents number of transactions per second. Finally, the third, would take N such that N represents the number of active nodes in the network.”

New data from Autonomous NEXT shows more than $US1.8 billion has been raised via the cryptocurrency-based fundraising mechanism since the beginning of the year. That’s more than one-fourth of the amount raised in 2017.

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