When it comes to the rapidly evolving blockchain space, the majority of both media and public attention remains focused on bitcoin. The virtual currency has evolved from being a little-known technical novelty into a popular investment as rapidly as its price climbed late last year.
While enthusiasm levels have since cooled — along with the bitcoin price — there remains strong interest in blockchain projects and what they might mean for the future of the world of business. Investors are still looking for opportunities and seeking rapid capital gains.
The latest area to capture investor attention has been the growing array of alternative (alt) coins or tokens appearing on the market. Like bitcoin, these tokens can be bought and traded in a similar fashion to shares.
Investors have the option of trying to make short-term gains or holding them in the anticipation of strong growth over time, and most are created to support an underlying blockchain-based business model.
With new ones being launched almost every day in what are dubbed Initial Coin Offerings (ICOs), understanding which are legitimate and which should be avoided has become a complex and ever-changing task. Investors need to know how to carefully evaluate new tokens to determine their intrinsic worth.
To make the situation even more complicated, tokens are sometimes created and released even when they are not actually required as part of a project’s functioning. They are simply seen by those behind the project as a way of raising capital.
Finding real value
For this reason, to understand the real value of a token, it is important to focus not on the cryptocurrency itself but on the project that it supports. If that project is not addressing a real-world need, it’s unlikely the token supporting it will retain its value.
Examples of potential blockchain-based projects include those creating new processes or services that could potentially streamline existing business processes. This might provide the ability to accurately track goods throughout a supply chain or rapidly process complex transactions such as mortgages.
One Australian start-up working on a project is Queensland-based Civic Ledger. This firm is using blockchain technologies to transform a range of business processes in the public sector. Interestingly, this company is building its structure and going to market without the distraction of using a token.
Such projects serve to highlight the important distinction between the cryptocurrency side of blockchains and the ways in which the technology is being put to work in other areas. Understanding this distinction is a vital part of assessing the real value of any project.
Another important element prospective investors should examine before purchasing tokens is how the projects underpinning them are being organised and governed. While the concept of the blockchain is one of a distributed community, having strong guidance and decision-making remains critical.
The projects that flourish will be those with a dedicated, focused team at the helm. The best projects will also have in place mechanisms for taking feedback from token owners (investors) in the same way a publicly listed company listens to its shareholders.
In many instances, the mechanism used to establish strong governance is through the establishment of a non-profit foundation that steers things such as technical development and promotion. If the project is of sufficient size, the foundation can be run by a team of salaried staff.
Token sales can provide the funds for this as well as funding the IT team needed to build the project’s technology. Each investor’s influence in the foundation’s decision-making process can be tied to the number of tokens they own.
Many observers have been quick to dismiss cryptocurrencies generally, and bitcoin in particular, as a bubble that will burst and disappear.
However, it must be recognised that the underlying blockchain technology is being used to solve to a myriad of real-world problems beyond the financial sector.
Blockchain technology has the potential to reshape entire industries and is undoubtedly here to stay.
There will continue to be new tokens launched onto the market at a rapid rate, but gyrations in their values should not distract people from the many potentially powerful blockchain projects to which they are linked.
Many projects will simply disappear over time; however, those which tap into real-world demand with a model that makes sense will succeed. For investors, the key challenge is figuring out into which category each falls.
Nathan Spataro is the chief executive of SecureVote.