By Jori Falkstedt, CEO Verifer.io, Fastest growing market leader in AML, PEP, KYC and compliance verification industry.
While last year almost all of the investors who invested in cryptocurrencies and different tokens made great profits, this year’s investment has been considerably more challenging. As speculative price increases are decreased by thousands of new ICOs and the flow of new money to the market has slowed down in proportion to the total, it is now more important to Invest in real future success stories. When talking about investing in tokens, an investor should take into account even more things than in the usual investment methods. The evolution of the price formation of a token also has other variables than just the success of a business and its growth. I would like to open these variables in order to make it easier for investors and new start-ups to understand how the price of a token will live in the future and what are the variables that affect it.
The evolution of the price formation
By far the most important of these variables is the logic how the company will use their tokens, and in especially how they restore them back to the market. Of the utmost importance is that the real need of a token is tied to as close as possible to the business.
The growth of a company must directly affect the value of the token at least in the same proportion as the company grows, preferably even more. This is often resolved so that the product that a company sells can only be purchased with tokens, so it can be sure that the token’s needs follow the growth of the company. However, there is one thing that is absolutely crucial to the development of the price of a token even if the product and the success of a company are strictly tied to the tokens. Ultimately important thing is that where do customers buy the tokens they need and how do company return them back to the circulation.
If you go through even the largest and most promising companies with token prices that are already high, you may notice that some of these companies have not paid enough attention to this issue and it is expected that all tokens will never be needed, though the total number of tokens in relation to the company’s expected turnover may be small.
I recall a situation where the same tokens are quickly circulating from the buyer to the vendor and back to the new buyer as a token loop.
How the token loop works and how to avoid and recognise it
Here is the most common example of the creation of a token loop and which makes the tokens practically worthless. Company A is really successful and they are even expected to grow fastly in the near future. Company A sells a product that thousands of people are willing to buy on a daily basis and sales goes well. Company A has a platform where their clients can easily buy their products. In order for customers to not need to buy tokens only from the stock exchange, the company has created an opportunity to buy tokens on its website with all major crytocurrencies.
NICE ISN´T IT?
This is a good example, where tokens of a few thousand dollars are enough to turn millions of dollars into turnover and investors’ tokens are virtually worthless.
Customer X buys 100 tokens from company A`s website and pays tokens with Ethereum. Customer X buys a product from company A and pays 100 tokens. Now Company A have ETH + same tokens as they had before the deal. Company A sell the same tokens again to the next client.
There are many different versions of such similar situations, but the end result is always the same.So, How to avoid this kind of situations?
There are a few good ways that prevent this kind of situation from happening and ensure investor value gains,but still the company does not have to abandon any of the services it offers.
If the company has reserved some tokens from ICO, they are only sold to the customer once and tokens are kept on platform. After client buys the product with same tokens those are Air dropped to another investors who still keep their tokens.
All tokens which came to the company from its ICO investors or clients who bought these from an exchange, can be traded on the exchange, but sales methods need to be well explained to investors already at the ICO stage. There may be minimum prices that change over time or another similar system that will feed the price increase rather than lower it.
One way is to simply burn all the tokens coming from investors. That causes a natural price growth as the number of tokens decrease. In this case, the sale of services will continue in other currencies after the availability of the own tokens is over. This also means that the company has to handle ICO funding like a loan that needs to be repaid as the company does not receive revenue as long as the token is enough on the market.
Fortunately, many ICOs have found ways to connect their tokens to their business in other ways for example that tokens are not needed for the product itself, but it requires tokens to use it. In this case too, however, special attention should be paid to how tokens will be returned to the market.