Use Case + Nothing = 0, Use Case + Token Velocity = 100

If you have been around for a while in the blockchain space, you’ve seen the hype building up around tokenization in crypto circles, especially those concerning dApps and IDO participants. Undoubtedly, we have enough crypto literature at hand that talks in detail about the concept and constituents of tokenization. Also, almost every blockchain protocol has a whitepaper talking about the tokenomics of their native coin in pure supply and demand terms – 

‘As the demand for the token increases in future, so must the price.’ 

Or 

 ‘As the circulation of the token increases, so does its value.’ 

Or

‘A token’s value increases in proportion to the increase in the number of its use cases.’

And so on and so forth. 

All these statements are partially true as their simplistic logic fails to take into account the associated ‘speed’ of the token, i.e., the number of times a token changes hands, which subsequently impacts the token price. 

This concept is called the Velocity of the token.

A token’s velocity is an indicator of the token’s state of liquidity and the overall usage rate. Unfortunately, most crypto enthusiasts seem to be unaware of the existence of such a concept. 

The concept of token velocity is highly underutilized in cryptocurrency valuation. However, the thumb rule goes like this – a coin is inversely proportional to the value of the token i.e., the longer people hold the token for, the higher the price of each token. (Nate Nead, Investment banker and principal at Deal Capital Partners LLC) 

For instance, the token economy for a particular blockchain platform is $500 billion, while the yearly circulation is 10x for every token. This means the collective value of the tokens will be $50 billion. At 100x circulation, the collective worth of the tokens would be $5 billion, and at 500x, $1 billion. 

For this very reason, in all probabilities, the tokens with high velocities and high Transactions Per Second (TPS) have less value. Conversely, cryptocurrencies such as BTC and ETH are valued higher for the in-built friction in the blockchain that prohibits a higher TPS. On the other hand, Litecoin has a TPS of 56, and the price of an individual LTC isn’t anywhere near BTC or ETH price. 

But does this mean that high token velocity is harmful? Is zero velocity a feasible option, then? Before we find answers to these questions, let’s first understand the mathematics involved in the concept of the velocity of a token. 

‘Figuring’ the Token Velocity Concept

Token velocity is the total volume of transactions in USD divided by the token’s market cap. The formula for the velocity of a token is derived from the equation of exchange: 

MV=PT

Where,

M= Money supply

V= Velocity of money

P= Average price level of goods, and

T= The total number of economic transactions

The equation of token velocity is derived as follows: 

MV=PQ

Where,

M= Size of the Asset Base

V= Velocity of the Asset or the number of times the token changes hand every day

P= Price of the digital resource being provisioned, and

Q= Quantity of the digital resource being provisioned. 

By rearranging the equation, we get:

M= PQ/V

This equation clearly brings out that the price of a token is inversely related to its velocity.  

The Three Scenarios: V=0, V=1, 0