ICO Analysis: TenX/PAY

TenX/PAY: Upcoming Coin Auction Analysis
Although I had intended to dive right into preparing my next coin valuation report (which is NOT about TenX or PAY), I find myself taking a slight detour here.

A couple of days ago I received an email from a reader who asked that I take a look at the TenX coin and its upcoming ICO (initial coin offering). After skimming the white-paper I was intrigued and spent some time thinking about it - which leads me to this report. Considering the fact that the coin auction is so near (and that I have reached some tentative conclusions) I figured I would bump TenX to the front of my queue and share my analysis now.

DISCLAIMER: The following is my personal take on TenX and the PAY coin which they will be offering in a few weeks. I hope you find it interesting and/or useful. If I get anything materially wrong, I trust that people will let me know to correct me (and which I’d be happy to acknowledge). As it stands, these are just my views and thought processes. All the info I used in this report is accessible either via the TenX website or through the references in my footnotes. You should always do your own work and reach your own conclusions.

TenX:What is it?

TenX is a technology (and business) that seeks to enable users to spend their cryptocurrencies at POS (point-of-sale) locations that accept credit & debit cards (i.e., MasterCard, Visa and others).

The use case is basically as follows:
(note that I’m probably off with regard to precise details, but the gist of it ought to be ok for our purposes):

Bob has 1 ETH currently worth $350 in his TenX ETH wallet (which he can access on his phone) and has a physical TenX card that looks exactly like a credit/debit card. It’s linked to his TenX account.

Bob goes shopping for some new shoes at Harry’s Shoe Store and finds a pair he likes that cost $175. As payment for the shoes, Harry accepts several forms of payment: cash, Visa/MasterCard credit cards, or Visa/MasterCard debit cards. But Bob wants to pay for the shoes using the ETH in his wallet.

So Bob whips out his TenX card and swipes it through Harry’s credit card reader. Even though it’s not a standard Visa or MasterCard card, it’s compatible with the reader. The transaction goes through, he gets a printed receipt saying he paid $175 from Harry and he’s done. He looks at the TenX ETH wallet on his phone and sees that the balance is now 0.50 ETH.

So what exactly just happened?

When Bob swiped his TenX card, it transmitted his account number through the Visa/MasterCard system and synched up with TenX’s network. The TenX network then looked at where ETH was trading relative to US$ (via its own trading platform) and figured out that to pay $175, he would need to spend 0.5 ETH – so it deducted 0.5 ETH from Bob’s ETH wallet. This is why he had only 0.5 ETH left when he checked after the transaction.

But Harry needs to be paid – so TenX takes that 0.5 ETH, and trades it for $175 – the purchase price of the shoes. It then transfers that $175 into Harry’s Visa/MasterCard accounts… less the usual credit card surcharges (predominantly what are called interchange fees). In case you didn’t know, when you buy something from a store on a credit card or debit (in the U.S.), the merchant actually doesn’t get the full purchase price you pay. He might get only 98% of the purchase price, with the rest going to pay the companies involved in the card network (Visa, MasterCard, banks, etc.). For the purposes of this paper, let’s assume that all card processing charges are 2% of the transaction price (and the merchant foots that bill by receiving less in terms of revenues).

Seems like a neat transaction, right? Bob was able to quickly and simply use his ETH to buy something in a shop, and the process was just like swiping a credit/debit card.

The promise of TenX is that it may enable users to spend their Cryptocoins (not just ETH, but presumably dozens if not hundreds of other coins) just this easily at any of the bazillion shops in the world that accept Visa/MC/etc. If Bob didn’t want an actual physical TenX card, then no problem – they have a solution to do the whole thing just by holding up his phone and swapping some scans.[1]

How does TenX make money?

Remember that 2% surcharge that goes to the card processing companies (Visa/MC/Banks)? Well, TenX has negotiated a deal with those companies to let TenX keep part of that, or 0.5% of the total transaction value.

In Bob’s case, that would be 0.5% of $175, or $0.875 that goes to TenX.[2]

So how does a COIN and an Initial Coin Offering come into this?

TenX is looking to raise money to build out their systems/network/business. That’s what the auction is about - they sell coins (which they call PAY coins) in exchange for investors to give them ETH. They will then use the ETH to fund their business plan.

What’s PAY? A Cryptocoin like BitCoin or ETH?

As I understand it, not really. While in some ways it may technically be called a cryptocoin (depending on your definition), it’s not really a blockchain asset. It’s basically just a share of stock in the Company (with no voting rights). The main difference (legal and regulatory issues aside) between the PAY token and a share of stock lies in how its economic value is defined.

Remember when I said that 0.5% (or 87.5 cents) of Bob’s transactions goes to TenX? Well, that wasn’t entirely accurate. It’s actually designed to be evenly distributed amongst all the holders of the PAY tokens.

TenX management and pre-ICO investors currently own 100% of all PAY tokens, so if Bob did that transaction right now, they would get all of that 87.5 cents. But if YOU own half of all the PAY tokens, then you get half of that  - $0.4375 which will be distributed to you in the form ETH (at $350 per ETH, that means you would receive a distribution of .00125 ETH).  

To raise funds, TenX is offering (up to) 51% of all PAY tokens that will ever exist to the participants in the upcoming auction. The price they’re asking is 1/350th of an ETH for each PAY token, which assuming they sell hit their ‘sell cap’ of 200,000 ETH (and you assume 1 ETH = $350) means they’re selling a maximum of 70 million tokens for $1 each. That 70 million represents 51% means the grand total of all PAY tokens outstanding is just short of 140 million.  Therefore, at $1 a token, the implied value (at this ‘round’ of financing) of ALL the PAY tokens is roughly $140 million. Remember that number – we’ll be coming back to it.

So What might PAY tokens be worth?

Here’s where we come to the heart of the valuation part. We’re going to view it from the perspective of how much a PAY token would be worth, relative to what you paid for it at the ICO ($1). We can do this by estimating a valuation for ALL of the PAY tokens at some future point, and divide that by 140 million.  This will give us the value per token. If for instance the future value is $1.4 billion for all the tokens, then each token you bought at the ICO for $1 would be worth $10.

Forecast/Valuation Walkthrough

When I first looked at this, I thought the right approach was to see how big the credit/debit card transaction processing market is and might be. With a little digging[3] I discovered that U.S. debit purchase volumes in 2016 were about $2.5 trillion. If you include credit cards, that number goes to nearly $6 trillion.

Let's use really rough numbers (and I could be off by factors, but for this exercise it’s ok) and say global volumes are 3x the U.S. volume – so $18 trillion. But this was in 2016 – let’s think about 2020. That $18 trillion could grow at a CAGR of 5% to $21 trillion! Wow!

If TenX garners 0.1% of that volume (just one in 1000 ‘swipes’), that would be $21 billion in annual TenX transactions. At 0.5% in fees, that would be annual earnings of $105 million. Since this is annual ‘earnings’, let’s use a stock-market type multiple (considering the presumed growth) of a modest 15x. That means all 100% of the PAY coins would be worth 15x $105 million = $1.575 billion. Versus the initial valuation of $140 million, that’s over 11x higher! And what it they get 1% of all transactions??!? Then it would be 10x that or a total return of 110x!! If we also use a higher multiple than 15 then the number goes up further.

But not so fast.

Let’s think about this again, but a little differently.

Does it really make sense to approach this from the perspective of all current credit/debit transactions? When dealing with numbers this big, it’s tempting to do so then assume what seem like ‘easy’ target penetration levels (what’s 0.1% after all between friends?). But this can be as misleading as it is enticing.

The question to ask is: who are the people that will actually be performing these TenX transactions? Answer: people who own Cryptocoins – no one else.

As of right now, let’s assume that the total value of all Cryptos is $100 billion – that’s BTC, ETH, XRP, and everything else (even the ones of which I am ‘not a fan’).[4] Let’s also take another step back and think about valuing PAY tokens relative to just investing in, say, ETH or XRP.

Now we can run some better numbers.

Let’s assume that the value of all Cryptos goes up 10x in the next 3 years. Whether you think that’s high or low, stay with me. It actually doesn’t matter as we are looking at our PAY valuation relative to Cryptos in general. Doing this though, we now have a base 10x return level to which we can compare PAY token projected returns. Said another way, in a future where all other Cryptos have gone up 10x, then if our estimate for PAY tokens isn’t at least $10 (or 10x the ICO valuation) you’d be better off just buying other coins.

So in our example, all Cryptos are worth 10 x $100 billion or $1 trillion.

Now: of that $1 trillion – how much will be earmarked as ‘investment funds’ versus funds that people will want to spend ‘buying stuff’?

If you’ve got $100,000 in XRP, and 3 years from now it’s worth $1,000,000, are you really going to spend it all on purchases then? After all, it may keep going up. You don’t want to be like the guy who paid 10,000 bitcoins for a pizza several years ago (making it I think the most expensive pizza in human history). So you will likely have at least some reluctance to totally cash out. Let’s say that on average, 35% of the total gets spent, with an annual velocity of spend of 1x/year. I think that’s being generous.

But how much of those purchases (in terms of aggregate dollar value) are going to be spent via Visa/MC payment systems?

Most of that 35% (or $350 billion) of purchases will be on big-ticket items – cars, houses, etc. Things you don’t pay for on a credit card. That’s just the way the math works – large numbers skew the average higher. You could of course pay for a house with a credit card in theory, but no seller of a house wants to give a 2% fee to VisaMC when you can just wire the money directly. So let’s say that 80% of all purchases will not be Visa/MC type purchases (meaning 20% may be).

Now our annual TenX volumes are 20% x $350 billion = $70 billion, or 7% of our theoretical forecast total crypto valuations.

But there’s more.

Think about how concentrated most of the crypto wealth at that stage will be. That $70 billion of possible credit/card purchases is not evenly distributed as $10 worth of Cryptos to each person on the planet. It’s instead going to be far more skewed.

Most Visa/MC type purchases are of a relatively low $ amount (think buying groceries versus buying a house). But if you happen to be a crypto ‘whale’ and have $10 million worth of ETH, are you really going to spend 7% or $700,000 a year on groceries and other things that you’d run through the Visa/MC network? Highly unlikely.

I think a very reasonable factor to reduce that $70 billion by is 5, so 70 / 5 = $14 billion – or a far more meager 1.4% of the total global crypto value.

SO – now we have a new estimate for total annual transactions run through the TenX network in 3 years’ time (where Cryptos in general have gone up ten-fold, and assuming TenX gets 100% of this business): $14 billion. Annual transaction fees of 0.5% on that amount come to $70 million. If we apply our same 15x multiple, then all the PAY coins would be worth $1.05 billion[5] - or 7.5x our initial valuation of $140 million.

But remember, we would have earned 10x just by being invested in the average cryptocoin – so the PAY token in our example underperforms the growth in Cryptos in general by 25%. If our investment in a particular cryptocoin did ‘better than average’ for the asset class as a whole, then the PAY token valuation underperforms by even more.

But wait – there’s more that needs to be considered.

I think it's likely that if you are a registered PAY token holder, each of those distributions they send you will be reportable at the very least as personal taxable income. Now this isn’t a problem with regard to valuing all the coins with stock-market-type multiples (as stock distributions and share sales are taxable), but you need to consider how this might compare to your tax burden of just investing in Cryptos (earnings, versus capital gains, versus other considerations[6]).

You might be saying ‘Hey Izzy, but a 15x multiple is too low! This thing could grow be seen to have enormous growth potential. It should be a 30x multiple!” Well, yes, in that case your return versus Cryptos in general would be (before tax consideration) about 1.5 times. But remember – this assumes that TenX gets 100% of all these purchase transactions, and I don’t think that is likely for reasons I’ll explain in a moment.

Numbers Above Aside... there could be even bigger inherent problems in the strategy

First philosophically:  one of the appeals of blockchain technologies (to me at least) is the prospect that it enables people to be free of the financial system constraints[7] that banks, credit card companies, etc. have imposed on participants of modern economies. While TenX makes sense from the perspective of the credit card companies, it seems to me like a thinly veiled attempt for them to ‘hedge their bets’ in a potentially coming ‘crypto world’ and defend their 2% skim off all transactions. Isn’t one of the points of blockchain to enable people to transfer money (whether for purchase or otherwise) without any fees (outside of that required to support verifications)? That they are advertising TenX with the slogan ‘Join the Revolution’ – as though there were something somehow liberating about enabling banks to continue their payment processing oligopoly - is ridiculous to me and frankly I think smacks more of disingenuous marketing than honest Esprit de Corp.

But more so, from a practical perspective: I see competitive adoption issues of the TenX platform that I don’t think will resolve easily (if at all). After all, if Cryptos do go up in value significantly, won’t even merchants want to be increasingly paid in the coins themselves (rather than having it converted to fiat currency)? Wouldn’t the merchants want to not pay the 2% fees to the credit card companies and banks if they could just accept the coins directly? And won’t there be more and more technologies enabling merchants to do just that? 'First mover advantage' only holds if the second, third and fourth movers don't offer a service that's better and cheaper with little in the way of switching costs.

I'm sure there will be dozens of smarter, cooler and less expensive ways to process POS cryptocoin transactions away from TenX.

Here’s just one scenario I can imagine - picture this: a POS payment system sponsored by Crypto-exchanges (who could be the perfect foil to the whole TenX enterprise). Crypto-exchanges could invest in the technology for a ‘coin payment reader’ that links back to their exchange. Let’s call the Crypto-Exchange company sponsor we use in the example 'Crypto-Ex'.


Bob goes into Harry’s Shoe Store. Bob wants to pay for the $175 shoes with ETH, so he holds up his phone to the ‘coin payment reader’ (CPR) at the register. The CPR flashes a QR code that tells Bob’s phone that the store is requesting 0.5 ETH. It comes up with 0.5 ETH as the right number because it is linked back to Crypto-Ex where the current exchange rate is $350/ETH.

Bob then looks back at his phone and taps ‘accept’ to allow the transfer to take place. He then holds his phone BACK up to the CPR, displaying a QR code which the CPR reads and uses to effectively transfer 0.5 ETH from Bob’s wallet to Crypto-Ex. At Crypto-Ex, their systems trade the 0.5 ETH for $175, and take out a 0.25% transaction fee, crediting Harry’s Shoe Store’s account with the proceeds of $174.5625 (as opposed to the $171.50 that a 2% TenX transaction would charge).

That's it. The transaction is done without touching a credit card network and paying their fees.

In short: the actual payment processing that TenX does is (relatively speaking) easy to duplicate on another platform. It (basically) just seems to entail being connected to both the merchant and a trading exchange for conversions. If we still lived in a world where the extant credit/debit-card processing network was the only way to do this, then TenX would make sense. But given the fact that a) even a modest development team could come up with a competing technology that does the same thing outside of their network, and critically, b) they could offer their services for a fraction of the TenX cost to the merchant (who is the one who ultimately decides what payment systems to use) - the sustainability of the TenX business model seems to me rather dubious. They might have some early wins vis-a-vis adoption (ie, when competitors haven't yet launched), but once people get a smell for the money, competing technologies will make the extant credit-card network for these types of payments irrelevant.

The Auction

Needless to say, I don’t think I will personally be participating in the auction. To those who are supporters of TenX and don’t appreciate my analysis, all I can tell you is that it’s not personal - I’m just one guy sharing his opinion when asked. I’m open to other viewpoints and ideas, so feel free to share. Plus, recognize that people are being invited to invest real money (potentially a lot of it) and so those without an agenda should be open to an honest discussion of perceived risks and opportunities. 

Additional Notes

Unlike other coins that I’ve written about (well, one in particular) I see nothing fishy or ‘scammy’ about TenX. On the contrary – they seem to be extremely well organized and appear to have made solid progress on their road-map. That being said, I wanted to mention one more thing that struck me about the whitepaper which in my opinion might be unfairly communicating more credibility than is warranted.

They mention they are backed by some big and well respected names -  like Vitalik Buterin and Fenbushi Capital. Please realize that while this might be amazing, it might also be a non-issue. I’d personally be surprised if Vitalik (and other big names in the crypto world) aren’t approached on a regular basis by start-ups and business ventures that are seeking to let them use his name/face in their marketing materials as an ‘advisor’ to their venture. In exchange for this ‘investment’ of his (i.e., allowing them to use his name, or maybe having a conference call or two) they might grant a substantial stake in the company itself. It could very well be the crypto-version of buying a paid endorsement. From the crypto-celebrity’s perspective, it’s a no-brainer – so long as the venture seems reasonable and legitimate. In exchange for a modest ‘appearance’, he gets a stake in a business model. To the business owners offering him the stake, they probably view it as a quasi-endorsement (or what they hope will be perceived as an endorsement) which is worth the cost.

Finally, if you appreciated this article, feel free to send an email, a ‘follow’ on Twitter, or a share on Facebook.

Best Regards,

[1] The ‘cardless’ feature might work a little differently. I didn’t dig into the mechanics of it as it’s not necessary for this analysis. As I said, the gist of my description ought to suffice.
[2] There’s also a feature where users of TenX will receive 0.1% of their transaction amounts in the form of PAY tokens as a ‘reward’. I don’t focus on this here as I don’t believe it’s material to the overall analysis.
[3] I got my numbers from the free issue of the ‘NIlson Report’ dated May 2017.
[4] I used coinmarketcap.com as a reference. $100 billion might actually be a little low, but not enormously, and round numbers are easier to work with.
[5] I recognize I’m ignoring money earned ‘along the way’ of growth. Especially considering some of the next points, I don’t think it matters all that much.
[6] I’m NOT a tax expert. Do your own homework. I’m just flagging it as being potentially different from generic crypto-investing.
[7] Some would use harsher words than constraints.


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