Encryption Asset Valuation Model Exploration

Encryption assets have become an important part of the fintech sector. With the continuous influx of institutional funds, how to reasonably value encryption projects has become a key issue. Traditional financial assets have mature valuation systems, such as discounted cash flow models and price-to-earnings valuation methods.

The types of encryption projects are diverse, including public chains, exchange platform tokens, DeFi projects, and meme coins, each having different characteristics, economic models, and token functionalities. Therefore, it is necessary to explore valuation models suitable for each sub-field.

Public Chain Valuation: Metcalfe’s Law

The core content of Metcalfe’s Law is that the value of a network is proportional to the square of the number of nodes. The expression is:

V = K * N² (V is the network value, N is the number of effective nodes, K is a constant)

This law is widely recognized in the valuation predictions of internet companies. Research shows that the value of social network companies such as Facebook and Tencent exhibits characteristics of Metcalfe’s Law in relation to the number of users.

The example of Ethereum indicates that this law is also applicable to the valuation of blockchain public chain projects. Research has found that the market value of Ethereum has a logarithmic linear relationship with daily active users, which basically conforms to Metcalfe’s Law. The specific calculation formula is:

V = 3000 * N^1.43

Statistical data shows that this valuation method has a certain correlation with the actual market value trend of Ethereum.

However, Metcalfe’s Law has limitations when applied to emerging public chains. For early public chain projects with a smaller user base, such as Solana and Tron, the applicability of this law is limited. Furthermore, it cannot reflect factors such as staking rates, burning mechanisms, and the total value game based on security ratios in the ecosystem that influence token prices.

Valuation of Exchange Platform Tokens: Profit Buyback and Burn Model

The platform tokens of centralized exchanges are similar to equity certificates, and their value is closely related to the exchange’s revenue, the development of the public chain ecosystem, and market share. These tokens usually have a buyback and burn mechanism, and some also incorporate a fee-burning mechanism within the public chain.

The valuation of platform tokens needs to consider the overall income of the platform and the token destruction mechanism. A simplified valuation method for profit buyback and destruction model can be expressed as:

Platform token value growth rate = K * trading volume growth rate * supply destruction rate (K is a constant)

Taking the token of a well-known trading platform as an example, its empowerment method has evolved from profit buyback to automatic destruction with real-time burning. Assuming the trading volume growth rate of the platform is 40% in 2024, and the token supply destruction rate is 3.5%, taking the constant K as 10, then:

Token value growth rate = 10 * 40% * 3.5% = 14%

This means that according to this data, the token is expected to rise by 14% in 2024 compared to 2023.

However, when applying this valuation method in practice, it is essential to closely monitor changes in the market share of exchanges and the impact of regulatory policies, as these factors may significantly affect the valuation of platform tokens.

DeFi Project Valuation: Token Cash Flow Discounting Method

DeFi projects can adopt the token cash flow discount valuation method ( DCF ). Its core logic is to predict the cash flows generated by the token in the future and discount them to present value at a specific discount rate. The calculation formula is:

DCF = Σ(FCFt / (1+r)^t) + TV / (1+r)^n

Where FCFt is the free cash flow in year t, r is the discount rate, n is the forecast period, and TV is the terminal value.

Taking a certain DeFi project as an example, suppose the revenue in 2024 is 98.9 million, with an annual growth rate of 10%, a discount rate of 15%, a forecast period of 5 years, a perpetual growth rate of 3%, and a FCF conversion rate of 90%. Calculating this, the total DCF valuation of the project is approximately 1.002 billion, which is close to its current market value of 1.16 billion.

However, the valuation of DeFi protocols faces multiple challenges: governance tokens often fail to fully capture the revenue value of the protocol; forecasting future cash flows is difficult; determining the discount rate is complex; the profit buyback and burn mechanisms adopted by certain projects may affect the applicability of valuation methods.

Bitcoin Valuation: A Comprehensive Consideration of Multiple Approaches

The valuation of Bitcoin can be comprehensively considered using various methods. The mining cost valuation method regards the cost of Bitcoin mining as price support. Statistics show that over the past five years, the time Bitcoin’s price was below the mainstream mining machine’s mining cost accounted for only about 10%.

Another perspective is to view Bitcoin as “digital gold” and value it based on its function as an alternative store of value to gold. Currently, Bitcoin’s market capitalization accounts for 7.3% of gold’s market capitalization. If this ratio increases to 10%, 15%, 33%, or 100%, the corresponding price of Bitcoin would reach $92,523, $138,784, $305,325, or $925,226.

However, Bitcoin and gold still have significant differences in physical properties, market perception, and application scenarios. When applying this model, it is necessary to fully consider how these factors impact the actual value of Bitcoin.

Conclusion

Establishing a reasonable encryption project valuation model is crucial for promoting the robust development of valuable projects within the industry, and it also helps attract more institutional investors to allocate encryption assets. Especially during market downturns, we need to use strict standards and fundamental logic to identify projects with long-term value. Through a reasonable valuation model, we hope to discover potential stocks in the encryption field during a bear market, just like seizing Google and Apple during the collapse of the internet bubble in 2000.