Mosaic theory involves collecting information from different sources, public and private, to calculate the value of security. Applying the mosaic theory is as much art as it is science. An analyst gleans as many pieces of information as possible, determines if they tell a story that makes sense, and decides whether to recommend a trade.
Before We Start
The big thing to keep in mind when approaching the valuation topic is that nobody really has a solid understanding of this yet — it’s like trying to figure out that Apple would be worth $1T from 1994. There is no equivalent George Soros or Warren Buffet with proven track records for crypto. The closest we have, as I wrote about earlier, are moonshot thinkers and primarily venture capitalists like Tim Draper that are making a big bet on the future.
It’s all being figured out and debated by the token-economists. The market is discovering itself, too. The proof-of-stake (PoS) coins have tangible market caps but can’t be compared to proof-of-work (PoW) coins securing their value with mining — so it’s all still being considered by amateurs as well as the more institutional side with hedge funds and venture capital trying to find value bets. In reality, no such thing can exist yet as we don’t have a baseline to measure across the asset class.
This doesn’t mean that any analysis is useless, but it should be taken with the caveat that things could change quickly. It’s also important to stay up to date on new analysis and valuation techniques and be ready to throw away your previous assumptions. With that said, I’ll share my take on a multi-faceted approach and will do my best to keep it updated as our understanding changes.
The Team and Culture
A strong founding team is critical to the success of any business. In tech, generally people look for at least one technical founder and a co-founder with expertise in the industry they’re tackling. Without technical expertise and strong developers it’s practically hopeless. The easiest way to find out about the founding team is to look at their LinkedIn profiles. Ask the following questions:
- Is there at least one technical founder?
- Do the founders have a track record of success?
- Do the founders have experience in their vertical?
It’s okay if the team doesn’t have experience in blockchain. It’s unlikely most people do considering how new the industry is. As one blockchain entrepreneur said, “one year working in the blockchain sector full time is same as four years experience in more traditional sectors.” More importantly, do they know about their vertical?
For example, if a founder is launching a startup to disrupt the supply chain network in coffee, do they have experience in either the coffee or supply chain world? If not, they better have a cofounder who is (an advisor is not enough)!
You’ll often see “advisors” — sometimes dozens — listed on the team section of a project’s website. This can be deceptive and falsely paint the picture that the company is somehow big and has a lot of credibility. Anybody can be an advisor, and any company can list an advisor, so generally I take it with a grain of salt. However, it is worth noting when the advisors are competent. This requires you to do some digging.
For example, at first glance John McAffee is a prominent investor and advisor, and while he has a well-known name, his track record is less than impressive. McAffee invented the McAffee Antivirus software years ago (his only notable achievement) and has since been jumping from country to country running from the police under suspicion of murder — not to mention his less than serious antics on Twitter.
Compare him to someone like Naval Ravikant, who is the founder of Angellist, Coinlist, and has a slew of successful investments including Twitter and Uber. A simple ten minute search for both McAffee and Ravikant online will give you a pretty good idea of the vast difference in their professional and success.
Second, you should look at what people are saying about working there. Is the CEO described as focused, driven, or are they never meeting their deadlines and never in the office? Is the work environment productive, healthy? I recommend checking Glassdoor to get opinions and reports from people working there. You can set up Google Alerts for that company name to see what news is being reported about them on a daily basis.
Of course you can make the argument that many entrepreneurs didn’t have any industry experience and have been successful. Mark Zuckerberg being an obvious example. However, Zuckerberg had amongst other things a tight-knit market (Harvard students) where he could test his product, and was later able to learn from the mistakes of Myspace and Friendster. Keep in mind that the Mosaic approach takes several factors into account, which is the beauty of it. The “science” is the measurement of your criteria, but how you weigh the importance of some factors versus other factors is the “art” of it.
One more piece of advice from author and entrepreneur Tim Ferris:
“Have the founders ever had crappy service jobs, like waiting tables or bussing at restaurants? If so, they tend to stay grounded for longer. Less entitlement and megalomania usually means better decisions and better drinking company, as this stuff normally takes quite a few years.”
The value of hidden partnership potential is often overlooked. The addition of one partner can drive significant revenue growth and credibility to a company, and is particularly important amidst blockchain startups that are trying to get their foot off the ground. A partnership can be closely intertwined with employees who leverage their past network and connections to establish a partnership. A good example is the the Lightyear acquisition of Chain which formed Interstellar. Chain was notorious for having Citi, NASDAQ and American Express as clients using its Sequence product.
Tom Jessop was head of Chain before (or maybe at the same time) as Adam Ludwin who is now head of Interstellar. Tom moved to Fidelity where he now heads their Crypto asset division which got a lot of press recently for announcing a custody solution and other potential offerings in 2019. Connecting the dots from NASDAQ to Chain to Stellar to Fidelity offers some potential underlying value not realized yet and a decent chance some of those partnerships/relationships materialize into long term competitive advantage and market gain — in this case for Stellar as the investment.
All crypto projects have their own Telegram and Discord groups where they engage with their users, developers, and investors. These are typically open to the public and you should be able to get access pretty easily. Activity and engagement can be deceptive — just because there are lots of “users” or “followers” on social media or Telegram doesn’t necessarily say much. They could have spent a lot on marketing and paid for people to join, and there are Telegram boosting services that allow you to buy followers.
Rather than measuring the number of users, look at the depth and quality of conversations and interactions. Are the employees/founders keeping people updated? Are they answering questions people have? Or is the group just full of spammy messages and zero content?
I also like to check if the company has a Medium page or an active blog somewhere. While not everyone is going to be posting daily, it’s important to hear the voices of the founder and employees, and their ideas for their product/market. In particular I’m fond of long-form blog posts, detailed technical explanations and use-cases of a particular product, as it shows the company is really thinking and sharing their ideas.
Community engagement can also mean the resources they’re investing into building the community via partnerships. For example, Slovakia based smart-contract platform Decent (DCT) hosted two separate hackathons in Europe where they brought together developers to build on top of their platform. They gave out prizes to the top winners, and I thought this was a great example of community investment and engagement, as the ROI on events is hard to measure but usually beneficial over the long run.
Another example is the training program launched by French blockchain startup Tezos, which raised over $200m USD in their ICO and was one of the largest to-date. They had some political disagreements internally but have since bounced back, full-force, committing to train 1,000 developers to use the Tezos platform. This is a good example of strong community engagement and demonstrates a longer-term view.
The White Paper
There are many white papers that are copy-pastes of the Ethereum white paper. Those are obviously scams. The challenge is that none of these are generally not peer-reviewed, full of technical jargon, and are a pain in the butt to read. For that reason I would take white papers with a grain of salt, just like I wouldn’t focus 100% on a pitch deck for any startup, but rather look holistically at their team, market size, product, ability to execute, etc. The idea, though, has to be at least half-decent. One important question to ask is why does this have to be on the blockchain? Rather than just a database If you have a hard time answering this question, you can search online to see if the company has already answered it, or reach out to them directly.
When a VC firm like a16z or big-name investor backs a company with a cash injection, it’s worth noting. Anybody can go and issue a coin, but when accredited, institutional and non-token fundraising comes into play you can take that as a signal that these investors have done some of the due diligence for you. Security token platform TrustToken, for instance, raised $20m USD from Andreesen Horowitz in 2017. You can check funding rounds on websites like Crunchbase. https://www.crunchbase.com/
Crypto is unprecedented in that there’s lots of money floating around (from ICOs) but not great incentives to get actual work done. Many of the projects have a small team with a few developers that have suddenly raised a lot of money. However, there’s little to no actual governance since regulations are still being framed. There are no deadlines from investors, no real repercussions and no real shareholder action can be taken for mismanagement since tokens are not equity and don’t grant any rights to a company’s earnings or performance. In fact, most of them don’t even have a working product. Compare this to your average startup that has done a Series A and has a CEO and investors pushing them to meet project deadlines.
Product may be one of the most challenging areas to assess due to the novelty of the industry but one of the most important. Are they seriously working on their products and is anything actually happening? Are they meeting their deadlines? I recommend getting your hands dirty here and checking Github to see the progress of their projects. Youtubers like Datadash and Ivanontech, amongst others, regularly offer Github reviews of individual crypto projects as well as tutorials. You don’t have to be a programmer to do this, but it helps.
Reddit (and other AMAs) are a great resource for some communities like Kin where “investors” get to fling questions directly at the CEO and try to clear up misconceptions, get answers on product/roadmap and use what little power they do have to keep the team honest and accountable
Another method (referred to in classic investment terms as “scuttlebuttting”) is to talk to the company directly to gather info. It makes sense to get first-source information from the horse’s mouth, as it might be quite different than what you read online.
“If you just take a database and shove some hashes in it, that does not an immutable blockchain make! But it does make some good money for consultants.” — Andreas Antonopoulos
The worst case scenario is not being able to sell your coins when you need to, and not being able to cash out. Particularly if you’ve hit a several multiple increase in price and achieved your price target. How important this is will depend on your risk capital, time horizon and personal investment style.
Micro-cap coins that are not listed on any big exchanges that offer almost no liquidity can be risky bets, even if you have a long term horizon. One solution is to simply stick with mid to large-cap coins, or those with at least a couple of well known high-volume exchanges.
There are also instances where projects are delisted from exchanges because they fail to meet criteria for trading volume, so regardless of your time horizon it’s beneficial to keep track of a coin’s performance: usually a delisting is bad news for the project and indicates some deeper issues. If you can’t find liquidity on a crypto exchange, you can also consider looking at bitcoin/crypto dealers who facilitate international trades.
The traditional calculation for market cap = circulating supply x market price. Taking a look at Coinmarketcap today I can see Bitcoin’s price is $5,260 x circulating supply is 17,383,150 BTC = market cap is $96,666,837,347 USD. Theory suggests that the larger market cap, the slower the growth rate.
This can be useful to build a balanced portfolio, gauge upside and assess risk. For example, if I look at the 5th largest market-cap coin right now and think it’s a great buy, I have to ask myself what I think the upside is. Could it go 5x, or 10x? That would mean it’d surpass Bitcoin’s market cap — do I think that’s likely (maybe not)? A large cap coin like Ethereum may be a slower-mover, but more “stable.” A lower or mid cap coin might have more room for growth or volatility, but it also might be riskier.
But hold on a second. The assumption when calculating market cap is that tokens are like stocks, which is a big assumption. In fact, there are several problems with this. First, tokens don’t come with any shareholder rights or with any claim to future cash flows. Second, the supply of stock issuance is fixed, whereas the supply of tokens isn’t fixed, and new coins continue to be issued over a period of months/years.
These emissions of new coins are going to be scheduled differently between coins, so it’s hard to compare the market cap between two accurately — they could be totally off! Lastly, there are lots of illiquid coins and “lost tokens” that are included in estimates of circulating supply which don’t necessarily reflect reality.
Is there a better way to gauge market cap in crypto? Crypto entrepreneur and blogger Nathaniel Whittemore has a few suggestions, although many are experimental at this stage. “Realized Capital” factors into the coins that have not been claimed or have been lost. BCH, for instance, had a market cap of $60b USD, but adjusted for Realized Cap was more like $11b USD (which would rank it quite a bit lower!).
To check out more assessment methods, check out the Honeybadger presentation here. One final tip is to simply rely less on market cap and look at trading volume and liquidity; if the coin is not listed on exchanges and no ones trading it, dock it major points.