ICO Analysis: TenX/PAY
TenX/PAY: Upcoming
Coin Auction Analysis
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.
Example:
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
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'.
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'.
Example:
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,
Izzy
Izzy
[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.
Comments
Post a Comment