Tokenomics: The Valuation Of Crypto Assets – Transit Protocol
This method is a recent idea and is an extension of the MV=PQ approach. In this model, a token’s price is based on two components whose contributions to the token price evolve over time. The CUV refers to the “current utility value”, which represents value-driven by utility and usage today, and the DEUV refers to the “discounted expected utility value”, which represents value-driven by investment speculation.
A token’s current market value can be modelled and projected using inputs including supply-side drivers, adoption, and market saturation growth rates, token demand, and velocity. Further, CUV and DEUV and their respective dynamic influences on token price can be modelled and estimated. Following the monetary equation of exchange (MV=PQ), the token price equals the projected monetary base (M) in the future divided by the number of coins in circulation in the future; M is calculated as equal to PQ/V, or the value of on-chain transaction volume (or “network GDP”) divided by token velocity.
Over the token project’s development cycle, the CUV and DEUV take turns driving token prices as the projects and the market perceptions of the tokens stabilise and mature. When a token is first launched, DEUV dominates as holders are excited about the technology and expect appreciation of future price. When enthusiasm wanes with inevitable technical roadblocks, the price declines and is driven more by CUV from technical users and early adopters. As the team overcomes challenges, CUV quietly grows as the token becomes more widely adopted. DEUV then catches up as speculation and excitement follow developer interest. Ultimately in the steady-state, CUV should drive token price.
Some adopters of this Crypto J-Curve method have begun to use this as a measurement of the different stages in the life cycle of a crypto asset, from the ideation to the release to the development to the deployment of the project.
Network Value-to-Transaction Ratio (NVT) Methodology
This is an interesting method that was developed quite recently and is an adapted version of the stock valuation method Price-to-Earnings Ratio (P/E Ratio). This valuation ratio compares the network’s value (the market cap) to the network’s daily on-chain transaction volume.
NVT = Network Value / Daily Transaction Volume
NVT may indicate whether a network token is under or overvalued by showing the market cap relative to the network’s transaction volume, which represents the utility that users derive from the network. When the ratio becomes very high, it indicates potential token over-valuation. The model is interesting as it the first that looks at network attributes rather than financial models. The ratio best applies to assets whose on-chain transaction volume closely represents utility to users.
Here are some of the common criticisms of this NVT Model… Transaction volumes tend to follow changes in price. The higher the price, the greater the tendency to store the token and not use them. Thus these two variables have an endogenous and “reflexive” relationship, weakening the indicative power of the ratio. There have been some industry experts who are experimenting with the time frame used to measure daily transaction volume.
Apart from the methods listed above, there have been other approaches that have tried to explore adapted models that use metrics such as EV/EBITDA, P/E, EV/Sales, Carhart four-factor CAPM model (Crypto CAPM), Sharpe’s ration and Black-Scholes Options Theory.
Crypto markets are very new with limited data history pertaining to crypto asset behaviour, returns, and correlations. Many of today’s models are simplistic or limited, whether intrinsically (due to difficulty defining and measuring variables such as velocity and its counterparts, for instance) or extrinsically (due to limited applicability to different types of tokens, as seen with NVT and privacy coins, for instance).
In the future when the markets mature and asset relationships and behaviours are more discoverable, valuation models and ratios should be more predictive and informative. However, because of the very diverse nature of crypto assets, which can have different features, structures, payouts, etc., we may never have metrics and models as universal as the P/E ratio and DCF analysis for public equities.
Published at Mon, 15 Jul 2019 05:55:31 +0000
Bitcoin Pic Of The Moment
By Sharon Hahn Darlin on 2017-12-09 18:16:05
