Cryptocurrencies and tokens: A crazy world with opportunities, risks and many dangers.
Thousands of people, drifted by the hype of extreme gains, make the mistake of buying a digital asset at the very peak or near its potential peak. Many times even without understanding how cryptocurrencies work or the huge differences between a real cryptocurrency, a company driven one and a token.
Especially with the recent “DeFi” and “meme” craze, the situation became more dangerous than ever.
What makes tokens and premined assets so dangerous ?
Countless new useless tokens are launched every year without any use case than making their founder’s rich. In such “assets” there is no distribution of the asset in its creation phase. There is no mining process as it happens with real cryptocurrencies like Bitcoin, BitcoinZ, Monero or Digibyte.
For tokens or 100% premined company driven projects like ADA, XRP, BNB etc the whole supply was allocated in their founders’ wallets. Such projects cancel the very basic principles of the original cryptocurrency idea that Bitcoin introduced and only a handful of pure coins honored and advanced in a creative way.
The cryptocurrency idea was about fighting Central Authorities, like Central Banks, by providing alternative decentralized networks where people don’t need to trust a central authority anymore.
Everyone was supposed to be able to participate in the network (mining process) and receive a meaningful reward for keeping the network safe.
With the classic Proof of Work model there is real decentralization in every level :
1) The Network, because there can be theoretically unlimited nodes and miners, especially for projects that offer ASIC resistant algorithms, like BitcoinZ or Monero, enabling simple PCs to mine.
2) The Governance, because there is no company, no owner of the network, no founder that takes decision deciding for everyone without everyone. The network is controlled only by its Community.
3) Most importantly, the coin distribution, since the new coins are created with the mining procedure and are distributed according to each participant’s work. There are no coins that are arbitrarilly allocated to any founder’s address. This is what zero premine means.
Company driven projects that cancel the above, are not truly Decentralized and act as Central Authorities, something that the original cryptocurrency idea was supposed to fight.
The situation becomes even more dangerous from the extreme power that these projects tend to gain.
By allocating the whole supply to its pocket, the founder is able to make free marketing with the right connections, bribing every important “influencer”, youtuber, exchange owners with some small percentages of this supply and buying bot-followers for all the social media profiles of the project.
The result ?
All these build a superb image and a huge hype around the project leading to an insane overvaluation for an “asset” that can hardly be considered as a real cryptocurrency.
The worse part of the above is that this recipe in the hands of the right people is so effective that they never stop repeating it. Especially with the “DeFi”/tokenized assets being so easy to be launched, this story takes place again and again with new names, logos and victims that are willing to pay a hefty price in order to buy a ticket to the dream of being the next millionaire.
Most founders sell with all the aforementioned trickes literally thin air to the buyers before jumping to their next new “project”. Many times the tokens that a buyer is buying can end up having smaller value than the cost that is required for transferring them, due to the fact that tokens don’t even have their own independent network and always depend on other motherchains (like ETH’s) paying high gas fees for moving them to another address.
Where this scheme leads
The aforementioned situation disgraces the cryptocurrency idea as the few truly Decentralized, Community driven and real crypto coins are not easily spotted in this noisy and overcrowded world.
Cryptocurrencies that are completely immune to scam exits since there is no founder owning any coins “magically” like it happens with tokens and company driven projects..
Cryptocurrencies without fake bot-followers but with Communities of real people who work hard for building new technology and expanding their ecosystems.
Cryptocurrencies that have immutable parameter like fixed max supply and fair rules, offering top use cases: Alternative decentralized network for borderless free transactions, optional privacy or digital store of value that acts as a true hedge against inflation.
This creates the oxymoron of having assets that are super undervalued and are mostly unknown while overvalued tokens with extremely narrow potential are attracting more buyers, drifting them to invest in bubbles that sooner or later will burst.
What is the “Valuation Index” and why it is used ?
The Valuation Index is a way to count how overvalued or how undervalued is an asset in comparison with other assets.
In order to make this comparison between different digital assets is important to realize what is the “circulating supply” of a token or coin. It is a the number of its available “copies” in the market. There are projects with very different supply numbers ranging from a few million up to many trillion. A simple example :
Someone checking the price of Shiba Inu on 11-February-2022 might think: “$0.00003094 omg what a cheap price!”
But with the second glance, understanding that this “asset” has almost 550 Trillion copies (549,063,278,876,302 SHIB available in market!), someone can easily realize that it is among the most insanely overvalued tokens!
On the other hand, BitcoinZ for example has a price of just $0.0006321 but with a supply of less than 11 Billion of coins in circulation. Which means that actually Shiba is about 2600x more expensive (!).
This is why the Valuation Index is so important. Due to the fact that besides the classic comparison of the different features and fundamentals for each project, we can compare their current valuations with a transparent mathematical way: by taking into consideration two objective criteria their price and their circulating supply. These two numbers give the capitalization for each asset when they are multiplied.
In order to make a Valuation Index comparison we have to calculate each asset’s price with an equal circulating supply. Bitcoin’s circulating supply is the most widely used one in such cases. In the next table we can see for example the prices which each asset would have if its circulating supply was like Bitcoin’s one (about 18.9 million coins) based on the capitalizations that they had on the day of the comparison (13-January-2022).