An approach to pre-sale network valuation.

This article aims to give a brief overview on assessing ICOs using their social media profiles as an aspect of fundamental analysis. In simple terms value can be measured according to what people believe something is worth. This is related to subjective theories of value where value is not inherently intrinsic or based on the labour needed to produce something, but rather determined by the importance an individual places on an item or service. For example most people agree that pricing a Modernist painting is more qualitative than quantitative. Similarly tokens released during an ICO have limited utility as a store of value or medium of exchange, so adoption is mainly about acquiring an asset based on the company's perceived value proposition and future potential. One popular quantitative method for determining value in this class is Metcalfe’s law. The law was put forward in the 1980s by Robert Metcalfe, who proposed;

The value of a network is proportional to the square of the number of users on the network (n²).

Since then it has become an important formula for valuing social media networks like Facebook and Tencent and studying various connected technologies. Recent studies have also shown it is an accurate measure when deriving formulas for valuing large caps like Bitcoin, Ethereum and Dash, giving accurate predictions on price correlation against network usage. For ICOs, however, we have limited data about transaction activity or number of active participants, so we have to speculate based on comparable projects and other indicators. A good way to do this is by looking at social media presence. From looking at social media we can hope to get an idea on the amount of potential business partnerships and merchants, the engagement of the developer community and the breadth of the prospective user base. It can also provide insights into the health of a company by visualising exposure to market sentiment during volatility. Once tokens have been released, however, a more accurate method should be based on gathering data from sources like etherscan.io, blockchain.info or coinmetrics.io.

To begin with, the number of followers on social media does not correlate with ROI, although having a large presence makes adoption more likely. The above table shows top performing ICOs with their ROI and Twitter follower count (note Spectrecoin). Secondly, engagement on a network is not a guarantee of future growth or company value, with competition and fungibility making loyalty almost obsolete.

For a specific example we’ll look at Mainframe as an upcoming ICO with a successful social media campaign, but at risk of over-reaching. Mainframe describes itself as the web3 communications layer, using a decentralised network for censorship-resistant message routing. It currently has 5,800 followers on twitter and around 23,870 members on their community Telegram channel. The company is in the middle of a public marketing campaign aimed at building their core base by giving away $3M of tokens. While this type of promotion is important, it is possible that they’re over exposing the company to market sentiment. In a bear market this can mean attracting too many unsophisticated investors, making it more susceptible to cascading effects.