Exploration of Encryption Asset Valuation Models

Cryptocurrency has become one of the most dynamic and promising sectors in the fintech field. With a large influx of institutional capital, how to reasonably assess the value of encryption projects has become a key issue. Traditional financial assets have mature valuation systems, such as discounted cash flow models and price-to-earnings ratio valuation methods.

There are various types of encryption projects, including public chains, exchange platform tokens, decentralized finance projects, and meme coins, each with its own characteristics, economic models, and token functions. It is necessary to explore valuation models suitable for each track.

1. Public Chain: Metcalfe’s Law

Law Analysis

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

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

This law is widely recognized in the value prediction of internet companies. An independent study on the value of Facebook and Tencent shows that over a statistical period of 10 years, the value of these companies exhibits characteristics of Metcalfe’s law in relation to their number of users.

Ethereum instance

Metcalfe’s Law also applies 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 essentially conforms to the formula of Metcalfe’s Law. However, the market value of the Ethereum network is proportional to the users’ N^(1.43), with a constant K value of 3000. The calculation formula is as follows:

V = 3000 * N^1.43

Statistical data shows that there is indeed a certain correlation between the Metcalfe’s Law valuation method and the market value trend of Ethereum.

Limitation Analysis

The Metcalfe’s law has limitations when applied to emerging public chains. In the early stages of public chain development, the user base is relatively small, making it less suitable for valuation based on this law, such as early Solana and Tron.

In addition, Metcalfe’s Law cannot reflect the impact of the staking rate on token prices, the long-term effects of gas fee burns under the EIP1559 mechanism, and the potential game theory of public chain ecosystems based on Security Ratio on TVS, among other factors.

2. Trading Platform Tokens: Profit Buyback & Burn Model

Model Analysis

Centralized exchange platform tokens are similar to equity tokens and are related to the exchange’s revenue, public chain ecological development, and the exchange’s market share. Platform tokens generally have a buyback and burn mechanism, and may also have a gas fee burning mechanism in the public chain.

The valuation of platform tokens needs to consider the overall income situation of the platform, discount future cash flows to estimate the intrinsic value of the platform tokens, and also take into account the token destruction mechanism, measuring changes in its scarcity. The simplified profit buyback & destruction model valuation calculation method is as follows:

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

Case Analysis

The platform token of a well-known exchange is the most classic case. Since its inception in 2017, the token has received widespread praise from investors. Its empowerment method has gone through two stages:

Phase One: Profit Buyback (2017-2020) Phase 2: Automatic Burn + Real-time Burn Mechanism (2021 to Present)

The automatic destruction mechanism calculates the amount to be destroyed based on the token price and the number of public chain blocks per quarter, according to a formula. In addition, there is a real-time destruction mechanism where 10% of each block reward will be destroyed.

Limitation Analysis

When applying this valuation method in practice, it is important to closely monitor changes in the exchange’s market share. For example, if an exchange’s market share continues to decline, even if its current profitability is acceptable, future profit expectations may be affected, thereby reducing the valuation of the platform token.

The changes in regulatory policies significantly affect the valuation of trading platform tokens, and the uncertainty of policies may lead to changes in market expectations for platform tokens.

3. Decentralized Finance Projects: Token Cash Flow Discounting Valuation Method

The core logic of using the token cash flow discount valuation method in decentralized finance projects lies in predicting the future cash flows that the token can generate and discounting them to their current value at a certain discount rate.

This valuation method determines the current value of the token based on the expected future earnings of the decentralized finance protocol.

Case Analysis

Taking a certain decentralized trading platform as an example, suppose that in 2024 the platform’s revenue is $98.9 million, with an annual growth rate of 10%, a discount rate of 15%, a forecasting period of 5 years, a perpetual growth rate of 3%, and a FCF conversion rate of 90%.

After calculation, the total DCF valuation of the platform is approximately $1.002 billion, which is close to its current market value of $1.16 billion. Of course, this valuation is based on an annual growth rate of 10% over the next 5 years, and the actual situation may vary.

Limitation Analysis

The valuation of decentralized finance protocols mainly faces the following challenges:

1. Governance tokens generally do not capture the protocol’s revenue value.
2. Future cash flow forecasting is extremely difficult.
3. The determination of the discount rate is complex.
4. Some projects adopt a profit buyback and destruction mechanism, which may not be suitable for cash flow discount valuation methods.

4. Bitcoin: A Comprehensive Consideration of Multiple Valuation Methods

mining cost valuation method

According to statistics, in the past five years, the time when the price of Bitcoin was below the mining cost of mainstream mining rigs accounted for only about 10%, which fully demonstrates the important role of mining costs in supporting Bitcoin prices.

Therefore, the cost of Bitcoin mining can be seen as the lower limit of Bitcoin’s price. Historically, when the price is below the mining cost of mainstream mining machines, it often presents a great investment opportunity.

gold substitute model

Bitcoin is often regarded as “digital gold,” capable of replacing part of gold’s “store of value” function. Currently, Bitcoin’s market value accounts for 7.3% of gold’s market value. If this ratio increases to 10%, 15%, 33%, and 100%, the price of Bitcoin would reach $92,523, $138,784, $305,325, and $925,226, respectively.

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

Summary

This article aims to explore the valuation models of encryption projects to promote the robust development of valuable projects within the industry while attracting more institutional investors to allocate cryptocurrency assets.

Especially during market downturns, we must look for projects with long-term value using the strictest standards and the simplest logic. With a reasonable valuation model, we hope to identify potential stocks in the encryption field during a bear market, just like capturing Google and Apple during the “dot-com bubble burst” in 2000.