Metrics and Valuation Methods for Cryptoassets
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
Crypto Valley Live (ID: cryptovalley)
, Author: Galen Moore, translation: Flash Chan, reprinted with authorization by Odaily.
BTC has become a kind of digital gold. This argument helps explain why BTC is attractive to investors, and how its historical returns and non-correlation make it a sound portfolio component. Still, investors have a long way to go before they can say why $10,000 is a good price, or explain why unusual price swings occur.
This vacuum of understanding can act as a barrier for investors to enter the crypto asset market, but it also presents an opportunity for ambitious analysts to attempt to define new valuation methodologies and identify new fundamentals.
This white paper is prepared for these analysts, and it introduces some concepts and metrics that can help us better understand the valuation of crypto assets. Our overview is not comprehensive – the field of crypto asset analysis is rapidly evolving, with new metrics and methodologies appearing almost weekly, and this is one of the factors that makes the industry so attractive to analysts and professional investors alike.
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Commodity attributes of BTC and ETH
Digital gold BTC
People have noticed the potential use of BTC in global business and digital investment contracts, but in 2019, the sentiment around BTC has become clear, it is "a digital store of wealth that is difficult to seize, freeze or devalue." Investors understand the global demand for the asset, as governments large and small tend to inflate domestic debt during financial crises. With relatively negligible storage and transfer costs, BTC is the gold of the digital age. And the fundamentals behind the price of gold, such as supply demand and macroeconomic indicators, are well understood.
There are a number of reasons for BTC's lack of attractiveness as a gold substitute, chief among them being its short history compared to gold's long-term status as a store of value. An easy way to figure out the value of BTC as digital gold is to calculate its implied value against a certain percentage of demand for gold.
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BTC's long road to gold
Bitcoin divides up the task of governing the money supply and feeds it to computers around the world, and Ethereum does the same in terms of computation. The data and logic behind Ethereum applications are "decentralized," and "decentralized applications," or "DApps," run on Ethereum's protocol, which is a network of connected computers around the world.
ETH itself is a payment currency used to purchase processing power on this network. Those who expect demand for ETH to grow argue that decentralized applications will have an advantage over centralized existing applications. This could happen, for example, if "anti-Facebook sentiment" drives users to seek alternative social networks. In other words, ETH could be the oil of the information economy.
Just as the metric for FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks is subscribers or active users, similar fundamental metrics can be employed by Ethereum and several other rival DApp platforms. Since transactions on these networks are public, this data can be measured in real time. So far, there is little evidence that any Ethereum-based DApps are generating the same level of user demand as Facebook or the other FAANG companies, which means they are still small.
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Growing Demand for Ethereum Data 'Oil'?
Metrics Tracking Demand for Digital Gold
Metcalfe's law
Trading volume
Metcalfe's Law, named after Ethernet cable pioneer Bob Metcalfe, posits that the effect of a network is proportional to the square of the number of participants. In other words, the value of the network to its users grows logarithmically, rather than linearly, with the addition of new users. A typical example is fax machines: two fax machines can form one communication path, four fax machines can create six. Facebook is a good example of this, its revenue growth is indeed proportional to the square of the number of users.
Trading volume
Transaction volume is a measure of BTC usage. In this regard, BTC is often compared to larger payment networks such as Alipay, SWIFT and VISA. However, we are talking about BTC as a store of value, similar to gold. Gold is not used to buy coffee. BTC processes fewer transactions than more established commercial payment methods, but its average transaction value is much higher.
The graph below shows the logarithmic growth in BTC’s daily volume (24-hour on-chain volume multiplied by BTC’s closing price).
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The transaction volume of BTC is billions, but less than tens of billions
BTC holding day is destroyed time
Realized Market Cap
In addition to transaction volume, it is also useful to measure how much wealth is stored in BTC. In the stock market, this is accomplished by "market capitalization," which is the share price multiplied by the number of shares outstanding. The same calculation is often applied to BTC and other cryptoassets, excluding a large number of assets that are lost, inaccessible or excluded from the market — as much as 3.7 million BTC, according to data from crypto asset data company Chainalysis, and crypto asset data company Coin. Analysts at Metrics come up with a metric they call "realized market capitalization."
"Realized market value" refers to the market value of each BTC at the time of the last transaction. Every ownership change causes this number to change. For example, if a user purchased 100,000 BTC on July 1, 2011 and held it all the time, then on July 1, 2011, the realized market value of this BTC asset will be calculated at the BTC price at that time (ie 15.4 USD) for the calculation.
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"Utility Tokens": Valuing Cryptoassets Beyond BTC and ETH
BTC might resemble digital gold, ETH might resemble digital oil, but what about the hundreds of other cryptoassets? Some of these aim to improve on the BTC and ETH models and may be evaluated using some of the same metrics listed above. Others are more like private currencies, such as game tokens, casino chips, or temporary vouchers. Stocks and bonds represent claims on future returns and thus capture changes in the wealth of the issuer well. What is the relationship between a game currency and the income of Chuck's Cheese Restaurant (a chain restaurant that combines American fast food, games and entertainment)?
Some early cryptoasset analysts attempted to answer this question and describe how cryptoassets capture value in decentralized applications. Below are some examples of their work.
Cryptoassets in the form of tokens
A company captures the value that flows through a business by charging more than it costs for a product, decentralized applications may have a similar value flow, but they have no value capture point. It might remove rent-seeking middlemen or reduce counterparty risk, but the cryptoassets used to enforce incentives on such a network may not have cash flows associated with them. Some observers have suggested valuing these so-called “utility tokens” as private currencies, rather than discounted cash flows.
They treat the network of asset holders as a self-contained economy and apply the currency exchange equation expressed as mv = pq. In this equation, m is the supply of money, v is the velocity of money (how often it changes hands), p is the "price level" (measured by the U.S. Consumer Price Index), and q is the rate of new goods and number of servings.
This equation has been part of cryptoasset analysis since the early days, but it was overlooked by many issuers of “utility tokens” during the token funding boom of 2017. They neglect to look carefully at how to capture value in a proprietary currency. In the exchange equation, increased trading activity "v" is a measure of how quickly people get rid of their currency holdings. In other words, high velocity is associated with currency depreciation. A low speed indicates a tendency to hold it. Unlike gold, no one over the age of 15 will be hoarding Chuck & Cheese Tokens.
Crypto assets in the form of work permits
As a case for a more mature understanding of value capture, some investors have suggested utility tokens not as mediums of exchange, but as licenses to work. Asset holders are suppliers of private two-sided markets who must “stake” tokens in order to back payments. Fund managers at crypto-focused venture capital firm Multicoin Capital dubbed the model "work tokens," noting that it supports network usage as a fundamental driver of crypto asset value.
Cryptoassets in the form of governance rights
Based on the notion that crypto assets are a license to work, some investors have proposed a new, more participatory form of investment.
The term "generalized mining" comes from Bitcoin, where "miners" must consume resources in return for transaction verification. Other cryptographic network designs require validators to "stake" assets in order to earn similar returns. These forms of work are how investors actively participate and earn income.
in conclusion
Skeptics point out that speculators are just as likely to be short as long. Participatory models may invite forms of participation that are not intended to increase asset value, not to mention the questionable nature of professional investors other than VCs willing to roll up their sleeves and drive cabs or mine tokens.
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