Web3 and Crypto Valuation

With a market valuation of USD 2.25 billion in 2023, the global Web 3.0 market is projected to expand at a CAGR of 49.3% between 2024 and 2030. Furthermore, the deployment of 5G and 6G technologies, in addition to the rapid development of digital assets like cryptocurrencies, is projected to fuel the expansion further.?

As this space evolves, understanding the valuation of crypto is an important input for investors, developers, and businesses alike. Traditional financial metrics often fall short in their application to these novel assets, which calls for new ways to understand value and potential.

This article explores the web3 and crypto valuation models and their importance in today’s finance landscape.

What is Web3?

Web3 represents an internet upgrade from centralized platforms to a decentralized network built on blockchain technology. At its core, Web3 uses blockchain technology. This tech allows for decentralized applications, or dApps, which run on a network of computers instead of a single server.?

In Web3, you own your data and digital assets. Tokens or cryptocurrencies often represent this ownership. These aren't just random internet points - they have real value and can be traded.

Let's compare it to Web2. In Web2, companies like Facebook or Google control your data. In Web3, you're in charge. This shift is huge for industries like finance, media, and supply chains.

Blockchain, for instance, gives media companies direct revenue streams without needing mediators; in finance, it brings more efficient and transparent transactions; and in supply chain management, it guarantees traceability and lowers fraud.

Understanding Crypto Assets

The term "Crypto asset" refers to digital assets that facilitate monetary transactions through cryptography. Cryptography encrypts (secures) monetary transactions, validates asset transfers, and facilitates the production of new units. Since crypto does not use centralized institutions like banks to process transactions, it is called DeFi, or decentralized finance.

Crypto assets are any digital assets that can only be exchanged using blockchain technology. This includes digital coins, tokens, and monetary systems like Ripple, Ethereum, and Bitcoin. A public ledger records crypto assets in DeFi.

Traditional Valuation Methods vs. Crypto Valuation

In traditional valuation, we look at earnings, profits, and how interest rates or tax laws might affect a company's value. It's pretty straightforward — if a company makes more money, its stock usually increases.

But crypto is a lot different. When trying to figure out the value of Bitcoin or Ethereum, you’re not looking at quarterly reports or profit margins. Instead, you're considering factors like:

1. Market confidence and adoption: How many people are using this crypto? Are big companies starting to accept it?
2. Liquidity: Is it easy to buy or sell this crypto without affecting its price?
3. Supply and demand: Is there a limited supply, like with Bitcoin? Or can more be created, like with some altcoins?
4. Market sentiment: What's the demand around crypto? Are people excited about it or skeptical?
5. Regulatory landscape: What are governments saying about crypto? Are they embracing it or trying to restrict it?

This is why crypto prices might fluctuate around while the stock market stays relatively stable, or vice versa.?

Now, this doesn't mean crypto and traditional markets are completely disconnected. When the economy's doing well — like high GDP growth and low unemployment — people might feel more confident about investing in riskier assets like crypto.?

Crypto Valuation Methods

Valuing different types of crypto assets requires understanding their unique features and the broader market dynamics. Here's a simplified breakdown:

• Market Approach: The value of a crypto token often depends on its liquidity and maturity. For instance, a newly launched token might not have a clear price due to a lack of liquidity, while a well-established token could have a price constantly updated through trading against fiat currencies.
• Income Approach: This approach looks at the potential cash flows a token could generate for its holder, which is particularly useful for making investment decisions in the volatile crypto market. However, this method might only sometimes align with financial reporting or tax requirements, which often prefer values based on market data.
• Cost Approach: When there's no clear market price for a token, the cost approach can be useful. It considers what people in the token's network are willing to pay for goods or services using the token, compared to what those goods or services would cost in fiat currency. This gives an indirect value of the token.
• Quality Theory of Money: Similar to how fiat currency works within a country, utility tokens are the only accepted 'currency' within their specific networks. The value of these tokens can be analyzed through the lens of the Quantity Theory of Money, suggesting that if the number of tokens and their velocity remain constant, the price level within the network is tied directly to the supply of tokens.

Web3 Valuation Metrics

When valuing Web3 projects, there are some unique metrics to consider.?

• For DeFi platforms, Total Value Locked (TVL) shows how much crypto users trust you. Active wallets give a pulse on user engagement.
• For Layer 1 and Layer 2 solutions, developer activity -More developers usually means more innovation. You must also look at integrations and transaction volumes.
• In the P2E gaming world, active player count and per-user transaction volume are crucial, and guild partnerships can also be essential.

Use Eqvista’s Expertise for Your Business Valuation

New initiatives, technologies, and ways to value cryptocurrencies are always emerging, and the market evolves at an incredible rate. Anyone looking to invest, grow, or start a business in the Web3 market must also be adaptive and constantly learning.

Eqvista's valuation services are helpful for people looking for professional advice in this challenging sector. At Eqvista, we integrate our conventional knowledge of finance with our state-of-the-art understanding of emerging technologies. Our valuation approach uses market expertise and cutting-edge data analytics to evaluate businesses thoroughly.

To learn more about how expert valuation services can help you, contact Eqvista today for a consultation.