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Chainlink: What’s a fair price?

Posted: 17 July 2020 7:20 pm
News

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Is the trendiest coin of the year bubbling, bursting or just beginning?


Update 8/8/2020: LINK prices of more than $1,000 may not be as unrealistic as this article originally implied.


Chainlink is doing well right now. It's one of very few cryptocurrencies to consistently strike new all time highs over the last few years. It surpassed its 2018 performance in 2019, and now, at the time of writing, it's up about 265% against Bitcoin and 365% against the greenback in the year to date.

Usually what goes up must come down, but right now LINK is defying gravity.

Depending on who you ask, Chainlink's price is either grossly inflated or it's only just getting started and has lots more room to grow. And funnily enough, those are the only two options. Everyone seems to agree that it will either keep going to the moon or that it will crash and burn. No one seems to be of the opinion that it's sensibly priced right where it currently is, which is quite telling in its own way.

Reason for the season

There are at least two factors that have clearly correlated with Chainlink's recent rise. One was China's Blockchain Service Network's integration of Chainlink oracles. LINK prices rose 15% as it spun up 135 new Chainlink nodes.

Another is the equally stunning rise of DeFi tokens lately, such Synthetix. These DeFi projects depend on oracles for their data, and Chainlink is often their go-to. The total value locked in DeFi has skyrocketed from $1 billion to $2 billion in the last few months, according to DeFi Pulse, which closely correlates with Chainlink's equally stunning price rise.

It makes sense. The nature of the technology is such that good oracles are a prerequisite for safe DeFi projects and wider blockchain adoption. Chainlink is the best known provider in that area by a large margin. It's reasonable for its prices to run on ahead of blockchain's overall maturity and DeFi growth. At the same time, the number of active LINK addresses and other on-chain activity metrics is hitting all time highs, which some are pointing at as a factor to justify the rise.

On the other hand, all of these positive factors come with a flipside.

Firstly, spinning up a node on Chainlink isn't a huge commitment. On the contrary, Chainlink's current incentive system means node operators are getting paid much better from the Chainlink ecosystem fund than they are from actually providing a service. More node operators means more LINK sellers.

Also, while various LINK on-chain metrics are hitting all time highs, that also includes the number of transfers to exchanges.

Plus, Chainlink's $2.8 billion+ market cap now exceeds the total amount of money locked in all Ethereum DeFi projects, which suggests we may have pushed past a "rational" valuation based on that factor some time ago. If there's more value stored in data sources than there is in everything using those data sources, we've probably departed from common sense somewhere.

Or maybe not? Some people conceptualise Chainlink as an insurance policy of sorts, in which case the sum insured by a policy (LINK value) should naturally be pretty close to the value of what the policy covers (funds in DeFi).

"Anything over $25 I think is not unreasonable to assume," said Framework Venture co-founder and professional LINK punter Michael Anderson. "I don't think that's an unreasonable approximation because the way I see it, Chainlink is the insurance policy, the security model for providing robust, reliable data feeds..."

We can see some clear reasons for the rise, but if we assume those factors are behind the rise they can equally be interpreted as a sign that prices are about to fall again.

From a strictly pragmatic perspective, it's difficult to escape the conclusion that LINK is either overpriced, or that speculators are already pricing in a lot of expected growth.

But at the end of the day, what's happening to Chainlink probably has more to do with sentiment than practicality.

Sentimental value

It's safe to say most people can probably agree that a fair price for LINK is somewhere between US$0.07 and $1,032.12.

Meet the bulls: LINK price target $1,032.12

The upper bound there is a number recently repeated by one of the many, many people shilling Chainlink on Twitter.

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Source

They also said $81,000, but with Chainlink's 1 billion total supply limit that would give LINK a market cap of $81 trillion – equivalent to roughly a quarter of the planet's total wealth – so we'll just ignore that. The "$1,032.12" figure is also just a random number that was pulled out of thin air in an effort to pump the coin with meme power a couple of years ago. It's very slightly more realistic, but still equally meaningless.

These kinds of wildly hypothetical price targets have been seen in many other cryptocurrencies, most notably XRP where you can still find a steadily shrinking group of people buying the coins Ripple dumps on them, and sharing aspirational myths about how XRP will make them rich someday.

Sometimes you really have to wonder how that's legal, which is exactly what some of the biggest LINK bears have started wondering aloud about Chainlink.

"[Chainlink] resembles the sale of XRP by Ripple, where the company has maintained continuous fundraising mode since its establishment. Apart from the constant pressure on the supply side as a result of the continuous increase in LINK in circulation, a risk to this model is that sooner or later, regulators will take a closer look at these activities, classifying LINK as a security," a newly published report suggests.

Meet the bears: LINK price target $0.07

The $0.07 Chainlink price prediction and "LINK as a security" theory comes from a firm called Zeus Capital, whose Twitter account is suspended at the time of writing, and whose website was only created in December 2019 according to a Whois lookup. The report's authors are anonymous and the Zeus website doesn't disclose any staff.

Regardless, today Zeus published a paper full of raunchy allegations about Chainlink's finances and tokenomics, titled "The Chainlink Fraud Exposed: An investigative report into why Chainlink is the Crypto's Wirecard".

It predicts a fair price of $0.07 for LINK based on factors such as the project's tokenomics, likely token velocity and addressable market.

The paper highlights issues such as emerging competition, the enormous amount of LINK sell pressure waiting in the wings at any time and the unsustainability of Chainlink's oracle subsidies, all of which raise question marks around Chainlink's long term prospects and short term price action.

While you'll have to form your own opinion on the merits of the report, it's reasonable to say that while it might make some valid points, those points are at serious risk of getting buried under a mountain of weird nitpicks.

On page 16 the report complains about more LINK holders these days being speculators rather than true believers, right before presenting a chart which says the exact opposite.

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Page 16

Then on page 17 it considers the fact that most LINK buyers are currently in profit, then concludes that it's a bad thing because it means they're likely to sell. Needless to say, the report would be equally critical if most LINK holders were in the red.

On page 18 it considers Chainlink social media activity: "relatively flat" it sniffs while looking at a graph which clearly shows social media activity rising and falling with LINK prices.

It then individually trash talks the Chainlink team members and turns bizarre criticisms (apparently the Chainlink CMO isn't active enough on Medium?) into big red flags. The report whines about Chainlink's GitHub activity being made up of many small changes rather than a few big changes, and generally never misses a chance to throw a jab at Chainlink, no matter how tenuous or petty it is.

In short, it's very weird. The comprehensive Zeus Capital report, which contains chapters with titles like "Why Chainlink is worthless: Empirical evidence", reads like the diary entry of a jilted lover rather than an investigative report. It's blowing such an incredible amount of smoke that it's difficult to imagine there's any fire under it.

Zeus' $0.07 LINK price target is much more likely to be achieved than $1,032.12, but it still appears to be primarily yet another attempt at yanking around market sentiment to turn a profit.

But maybe that's just the name of the game now. LINK is trading largely on FOMO now, bolstered by a community that's happy to do anything it can to pump its bags. FUD is just the other side of the same coin.

Opinion: Pricing it in

Whether intentional or not, LINK is running on FOMO now and that's where it's currently deriving most of its value. A perfectly fair price for LINK is whatever you pay for it.

While that may not instill a lot of confidence, it's worth noting that the best way of measuring pure, unbridled sentiment is with technical analysis, and in that context basically every chart you can draw will currently paint a bullish picture – right up until it doesn't.

It's also worth noting that the power of make-believe can take a cryptocurrency much further than where LINK currently sits. A $25 per token price tag would give Chainlink a market cap around what XRP currently is, which isn't too difficult to imagine on the whole.

Still, the risk of becoming a bagholder is real.

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Whether you go long, short or stay on the sidelines at this crucial price juncture, it's important to note that you may be able to improve your odds by either shilling the coin or spreading FUD as best suits your position (this is not financial advice), because that's probably one of the main factors driving markets now. If you're planning to start shilling ChainLink to friends and family, consider starting each sentence with the phrase "this is not a pyramid scheme" to help put their minds at ease.

Note: Wishful thinking may not be suitable for everyone's financial situation, the difference between gambling and trading is having a plan, "YOLO" isn't a plan.



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Disclosure: The author holds ETH, BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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