Cash Crop — Evaluating Produce
**Disclaimer — This is not investment advice! The below is a discussion about what gives a token value, and how $FARM is fundamentally different than the majority of all other tokens. DYOR and invest responsibly**
A few weeks ago I wrote this article about what gives $FARM its value. Spoiler: Cash Flow! By pre-reading this, you can tangibly see that Harvest Finance generates profits off depositor’s funds and a portion of those profits are distributed to those staked into the $FARM Profit Share. Now compare that to the majority of tokens or cryptocurrencies that exists. What gives them their value?
“Well token X will be the one that leads the data revolution where all information will flow through their oracles and they will be the kings of data aggregation and transmission…” OK so all profits made by this incredible data monopoly will be shared with its users? “Well no… but if a lot of people use the system the coin will be popular. Number go up!”
Sadly that is they typical crypto argument holders articulate why their token has “value”. They list a whole slew of things the platform or system can do, but not how that translates to the token holder benefitting. “You need the token to use the system, and if the system gets popular…” So if the token shoots up to $100 each from $1.00, it now costs me 100X more to use that system? Or will platform users just now use 1/100th of that token?… The truth is, if you really apply tough analysis to a large percentage of crypto tokens, their value is propped up and inflated by smoke and mirror tactics and/or rewards systems that just hand you more empty value tokens.
“But I sell those rewards often and realize that profit…” So then you are okay selling hyper inflated items to other people as long as you get your end? Sounds morally questionable and the supposed “value” is more about not being the last person holding after a pump. Also what happens if you buy at price Y and the market crashes below that. Are your “rewards”, which are crashing too, covering that loss?
“What is this token price going to?”, “MCAP is low, this has so much room to grow!” with price predictions flying left and right, Coin Gecko ranking analysis done versus competitor coins, the tribal “our project is better than theirs so easy 4x from here!” is of the most broken things about the crypto ecosystem and one I think the masses need to reconsider before the next inevitable crypto winter. So how does one properly assess the value of a token? The rule of thumb that's easy to remember: If the token you hold isn't connected to cash flow, its value is probably zero.
Thankfully you found Harvest Finance and $FARM, but still the question remains, if $FARM is so different how do we properly place value on it? If we want the mainstream and institutional money to come flowing in, a good place to start might be how fiat investors value cash paying assets.
When considering income producing assets like music royalties, an industry standard valuation is 4x the average annual income. If a royalty is expected to pay $1000 a year in then the resale valuation of that royalty would be $4000. With a project such as Harvest Finance being only 8 weeks old, it makes determining the average annual income a bit more wide in range so you will have to bear with a little napkin math here. On observation, the Profit Share APYs have been ranging anywhere from 100% to 300% on average. For the sake of being conservative we will use a 100% APY, and a FARM price of $80 (one of the market lows, current price as of publication is $188):
A 100% APY (Daily) * $80 spits out over $135 in profit a year. Using the music royalty comparison of 4x the annual royalty, $FARM in theory could support a conservative value of $540.
The issue with the above is the Profit Share and the liquidity pools are granted emission rewards which boosts the APY of the pools. While we do use the more conservative 100% in a range that often exceeds 300%, we should try and consider other approaches to valuation such as Price to Earnings Ratio (P/E). Pulling up the front page of Harvest.Finance we can see some excellent statistics displayed:
The ‘Annual Profits to Farmers’ shows us an annual extrapolation of the last profit distribution that was performed and builds in no expectation of further growth. Multiplying this number by 30% shows you how much of the total is flowing specifically to those staking $FARM in the Profit Share, $25,482,805. Now we take that number and divide it by the current supply (~238,126) which gives you an annual return of $107 per FARM. Plug it into an easy P/E calculator and you get 1.76. But before I proceed, lets cut off some of the fully diluted supply arguments, and crunch the numbers based on a max supply of 690,420. (25,482,805 / 690,420 = $36.90) That updated number per $FARM gets us a P/E of 5.09. What does that mean?
Well lets go back to those mainstream investors and institutional money and see what a good P/E average is: 15. Anything below this number means there is still exceptional value for buyers relative to its profits. And consider some of the most valued dividends have a P/E up to 30 and their return percentages of 7–10% annually are dwarfed by percentages yield farming has to offer. Okay, so lets cut through all these numbers. For $FARM to receive a “fair” P/E valuation of 15, using all of the above figures and assumptions, $FARM supports a valuation of $553, which is very similar to the music royalties example!
Stay humble farmers
Lets take a pause here because throwing around numbers like this causes frenzies that result in FOMO/FUD, neither which are healthy for the ecosystem. What I really want from readers to take away from this article is asking the questions ‘Can you apply the same principles above to the other tokens you currently hold?’ ‘Do they actually have value for the holder? Or are you just riding the speculative wave of promises that don't really mean anything for the holder?’ There are many examples of ghost chains from the 2017 ICO craze that literally do nothing other than give its holders more tokens, but if the chains are empty of applications and users, how can they have any real value? Harvest Finance is currently in its 8th week of existence, providing ease of use, efficiency and tangible value to its users whether or not they utilize the $FARM token. Being that it is still so early in its life, predicting its value is extremely difficult. The upside is, it actually has real value to predict, and Harvest Finance is delivering fresh produce the mainstream demands.
· Join the 👩🌾 revolution at Harvest.Finance
· Follow project updates 📰 on Twitter
· Chat with other farmers on the Official Discord 🤝
· Build your 🧠 at the official Wiki
· More project info at Medium 📜