Token Value & Investing

Pat Ackerman
6 min readJan 10, 2021


Many people are drawn to investing in cryptocurrency for the price action. Crypto twitter (CT) is littered with people drawing lines on charts, showing 2x–10x portfolio increases, and predicting which coin is about to “break out.” Too many investors are investing without understanding what they own and why it has value.

Most crypto investors are allocating funds based on twitter sentiment, promises of the project roadmap, or technical analysis. I am seeing very few people actually trying to help investors figure out the fundamentals or what drives the price. Many projects are so new that you need some level of speculation to help get them off the ground.

First and foremost, price is arbitrary and value is fundamental. Each market, store, and person can set a price, and the individual investor or consumer can decide to pay it. The value is based on what can be done with what is received.

What is a Token’s Fundamental Value

To understand the fundamental value of any token or cryptocurrency, it is best calculated using Metcalfe’s law (square of the number of connected users of the system). A Token’s price is a representation of the network users that have been built. Let’s start with some technology company examples and then move across the real examples in crypto to demonstrate this relationship.

Dr. Metcalf himself gives the first example. In the video Metcalfe’s Law After 40 Years of Ethernet, he demonstrates how Facebook’s user growth was a spot on predictor of its revenue. Starting at the ~13 minute mark, he shares how he uses an S curve (sigmoid function) to fit adoption of Facebook’s monthly average users. He then applies Metcalfe’s law on revenue as a substitute for value getting an almost perfect fit. This applies to much of the technology businesses such as Apple, Google, and others. Their revenues are a predictable function of the network of people using their devices or services.

Bitcoin has the same properties as demonstrated by Timothy Peterson from Cane Island Digital Research. He wrote a paper in 2017 entitled “Metcalfe’s Law as a Model for Bitcoin’s Value.” Using Bitcoin wallets, the number of Bitcoin created, and Bitcoin’s price, he demonstrated that Metcalfe Law’s value is the best predictor of price over time. Here is a recently published visual from Cane Island Digital Research. This is your value proposition for investing in Bitcoin.

Bitcoin Price and Metcalfe Value

This relationship of users and price is what gives any cryptocurrency value. Price may be higher or lower than the current value as price is arbitrary. Over time though, price will find its value because of free market mechanisms.

Token’s Utility and Supply Matter

For security and utility tokens, what token allows you to do (utility) and the overall supply of the token do matter in price. Both utility and supply work in concert to create what I call token efficiency. Token efficiency is the slope of the relationship between user growth and token price.

Having a low supply, good reasons to hold the token, and high user growth creates an explosion of token price. Having a high supply, not many reasons to own, and low user growth creates little to no price action. Remember, as articulated in Designing Tokenomics for Customer Loyalty and Holder Value, price action is the value you want to create for customers to create loyalty.

Striking the balance between supply and incentives to own the token is the essence of Tokenomics. Incorrectly designing tokenomics creates risks for either new or existing customers (which defeats the whole reason of having a token) and benefits are missed. The middle line aligns the token to user growth which creates optimal value for new and existing customers and company shareholders.

Token Investing

The essence of deciding to invest in a token boils down to 4 parts.

  1. Adoption curve of the project
  2. User growth projections
  3. Existing or upcoming token efficiency (Utility and Supply)
  4. Potential risks of the project

The earlier you are in the project, the larger the potential value. The higher the network potential, the larger the potential returns. The better the token efficiency, the more potential value that can be created for shareholders and investors. Once you understand the potential value that can be created, you consider risks that may cause value to be suppressed. This should be the investing guide for deciding to which projects to allocate funds. Let’s look at a couple examples of how this plays out.

Celsius Network and Voyager Digital are 2 up-and-coming companies with huge potential for investors. They both have native tokens with different properties which makes them interesting comparisons. Let’s run through our investing framework to show how it works.

  1. They both are on the low end of the adoption curve of a big shift to digital currencies. Celsius has a 1 year advantage to Voyager and this shows in current AUM and users.
  2. Celsius ended 2020 with ~100k active users and Voyager ~50k and both are growing at 20% month over month, likely accelerating in the first part of 2021.
  3. Token efficiency. Comparing both companies to 40k users, CEL had a token efficiency of roughly 30% with an R2 of 70%, VGX had a token efficiency of 25% and an R2 of 67%. Pretty similar even though one is a security token and one is a utility token.

Then Celsius hit critical mass and enough constrained supply by token holders that its efficiency went much higher to 80% and an R2 of 95%. Voyager has an upcoming announcement of their loyalty program that depending on utility has the potential to do the same.

Lastly, looking at supply CEL has about 695M total supply with the float somewhere between 230M to 300M. VGX has a supply of 222M moving to 300M after the new token swap. Because most float is roughly inline, they are quite comparable.

The more people holding the coin (reducing supply), creates what I call the magnifying effect. As the supply reduces with long term holders you essentially go from pulling user growth through a doorway to pulling it through a pinhole. For example, adding 10k new users to a platform with 100M floating supply has a much different price impact than with 10M floating supply. This can create an explosion of holder value which then drives more people to be interested in the project.

4. Lastly, you need to look at risks. Celsius and Voyager both have risks given the potential for regulation clarity of crypto. As an investor, it is critical to look at the leadership teams, the steps taken by the companies to be regulatory compliant, and how they treat their customers.

Conclusion — Part 2

Tokens have fundamental value for investing. It is user growth represented by Metcalfe’s Law. When looking at tokens to evaluate, look closely at the Tokenomics of utility and supply. There are 3,500+ cryptocurrencies today. Some have this value and some do not. Use the above investment guide when deciding to allocate funds for investment.

Disclosure: I am a current VGX token holder. This is not financial advice. This article is for informational purposes only. Do your own research or seek out the professional advice from a financial advisor.



Pat Ackerman