Crypto Asset Valuation

Description

By Alex Shelkovnikov and Ramon Recuero:

"After deciding that you believe in a cryptocurrency you still need to know how to assign a proper numerical value to it. It’s also useful to benchmark the asset against other cryptocurrencies and crypto assets (tokens).

The most popular site for this,

• CoinMarketCap, uses total market cap as a benchmark.

• Onchainfx goes a step further as it accounts for the total future supply.

• https://coinmetrics.io/nvt/#assets=btc Network Value to Transactions Ratio] popularized by Nic Carter, Chris Burniske and Willy Woo is another interesting approach. You divide the network value by the number of transactions. The lower it is the cheaper the asset.

These methods reflect the current price but they don’t explain the fundamental value behind these assets." (https://blog.ycombinator.com/the-decentralized-future-series-a-new-age-of-investing/)

Discussion

By Alex Shelkovnikov and Ramon Recuero:

"In order to make estimations about the future value of an asset, the key is to consider the velocity of money. Velocity is basically the number of times the same token changes hands in a specific timeframe. Applied to the equation of exchange where MV=PQ, one can see that the velocity of money is inversely proportional to the price of an asset. However, there is a floor as to how low this velocity can go without collapsing to zero. There seems to be a sweet spot for velocity. This is a complex topic and the current approach to use the Quantity Theory of Money may prove to be incorrect13. Many factors can affect different elements of this equation. For example, in a world of interoperable networks with low friction exchange capability, crypto assets (especially utility tokens) could be seen through the lens of working capital where one doesn’t need to store a large number of tokens to facilitate the utility function of a blockchain protocol. Therefore higher token velocity and potentially lower network value of utility protocols than currently assumed. Governance models could also influence velocity15. This is an evolving field and new valuation approaches are appearing quickly suggesting both clarification of definitions and alternatives such as a two-asset model with endogenous velocity." (https://blog.ycombinator.com/the-decentralized-future-series-a-new-age-of-investing/)