How to Value Crypto Assets
One of the most exciting and intimidating parts of the new world of decentralization and tokens is trying to figure out what something is really worth.
The models for the “traditional” world are fairly well established, ranging from P/E ratios to multiples on revenue, etc.
In crypto, however, it’s not clear.
You know my contention that the world fundamentally changed on January 3, 2009 with the release of the Bitcoin blockchain.
Prior to that date, a blockchain could have existed in theory, but in practice, it requires
- a huge global network of connected individuals
- relatively fast speeds connecting those people
- fast computers to process transactions
It’s tough to think that the entire history of the world was one way…until about 8 years ago when it took a turn, yet that is what I contend.
Now, we have that infrastructure. But that’s really only one part of it.Yet, the innovation that is Bitcoin (and the
The innovation that is Bitcoin (and the follow-on innovations) are more than just the technologies that make them possible.
In an excellent article “Nobody Understands Bitcoin (And That’s OK),” Jameson Lopp (who I also follow on Twitter) offers this simple list of why Bitcoin is difficult to understand.
I will even add a #5…an element of faith, which for many in Western society, at least, is something that is foreign these days (or at least not omnipresent, I would argue).
Unlike previous technologies (and even the commercial Internet is like this), decentralization changes the entire way that people interact with each other at global scale. We have never been here before.
We have had some sort of decentralization, but that is probably going back to the earliest tribes roaming around with no actual chief to run things.
So, yes, a huge cultural paradigm shift.
Which brings us to valuation…
Ok, so we have an entirely new set of technologies, evolving business models, AND an entirely new cultural paradigm that they are going to enable and now we have to figure out “how do we value it all?”
I don’t know any more than you do, but I suspect that this is precisely one of the reasons that BTC and ETH (being the two most prominent) have such huge volatility swings.
The fact is NONE of us REALLY know how to value these things.
As you can see from this chart (which I think is both accurate and funny) most of us “know nothing.”
Which, in my mind, at least, explains why a pronouncement by Jamie Dimon, Mark Cuban, or the People’s Bank of China can put everything into such a tailspin so quickly.
Still, there are some really admirable efforts seeking to fill the void.
In my mind (and since I’m not at the top of the aforementioned curve, take it for what it’s worth), the first thing you need to do is really dive deep into not just how token value is created conceptually (that’s fairly straightforward usually as it’s supply/demand), but understanding how the creators of the network intentionally designed the token to stimulate a circular economy.
That’s not easy and I will admit that I am still trying to get my head around all of it.
The Godfather of Tokenomics is probably William Mougayar, so I would start with his classic post.
Then, I would jump over to Nick Tomaino’s post on token value.
Finally, I would look the monetary and fiscal policy sections of Avtar Sehra’s post(excerpted from the awesome whitepaper on Economics of Initial Coin Offerings). For me, at least, that helped bring it home. Still, I probably need to read it a few more times if I am being honest myself because, after all “holy shit, I know nothing.”
And then, I would go for dessert…which is Chris Burniske’s Crypto Asset Valuations (which I am still working through) and a post I absolutely loved of his, “the Crypto J-Curve” which helped concretize (is that a word) for me where we are in the cycle of going mainstream.
You see, Chris argues that the value of a token is made up of two components.
- the current utility value” (CUV)
- “discounted expected utility value (DEUV),”
The CUV is, simply, “what can I do with the token right now?”
For most of these tokens, the answer is “not a lot.”
The DEUV is “what do I think I (and others) will be able to do with the token in the future?”
If the answer is “a whole hell of a lot,” then you are willing to pay a premium for that token right now.
There’s definitely a frothiness to the market and I am of the opinion that 90% or more of the tokens in the market will be worthless in the near-term…but those that WIN big will win REALLY, REALLY BIG.
I don’t think I am alone in this belief, which is why (at least for many folks), there is so much passion in the long-term future of decentralization and the “HODL” mentality (aka Hold On for Dear Life), pure speculators notwithstanding.
The challenge for all of us is that this is like the central plot of the first episode of The Matrix. How do we know which is THE ONE? (ok, it’s more than one, but you get what I mean)
That is precisely what people like Chris are trying to figure out.
What I think is particularly valuable is how they are open sourcing it.
I have met Chris once so I won’t swear to this, but I bet he is “putting it out there” with the belief that he’s mostly right, but missing something.
By asking for input and publishing in an open environment, he’s going to get input from other smart folks who will help him refine his models.
And vice versa.
Regardless of his motives (and those of others who so graciously offer their knowledge and insights), I think the key thing for anyone who is serious about this space (which, uh, should be everyone) is to
- understand the technology
- understand the design of token economies
- explore the frontier of how tokens are valued
This, my friends, is living on the edge. It’s intense, to be sure, but fun as all can be.
Thanks for joining me on the ride.