Crypto Currency is one unconventional asset class.
Coins or Tokens represent a unit of ownership within a decentralized ledger, and through a smart contract, each ledger represents its own unique form of value.
One ledger can equate to ownership of gold, another can power a network, another can represent ownership of a company.
Scams represents value of ledgers that will never be built, and frauds misrepresent what their ledger’s ownership will equate to.
It’s no wonder the SEC calls crypto currency a Security, the CFTC is calling it a commodity, many in the market believe it’s a currency, and entrepreneurs in the space deem it a utility.
Given the major obscurity surrounding the space, lack of regulatory guidance, and massive amounts of hype and speculation, there are yet widely agreed upon methods to derive valuations on different cryptocurrencies, decentralized applications, or networks in which decentralized applications are built upon.
As a result, in some cases, startups with no products, operating history, and being founded by entrepreneurs with little to no experience have obtained tens of millions of dollars in funding. A protocol in test net and that hasn’t even launched their product yet, has received a market valuation of $4.5billion. Dogecoin, a cryptocurrency with a dog on a coin as its logo, at one point had a $2billion market cap.
If you think this is questionable, they don’t stand the same ground with the billion dollars plus worth of scams pulled by fraudsters. The largest scam to date, $660million for Pincoin Token, taken from over 32,000 investors.
All these valuations, hype, and scams would lead most to deem Crypto as nonsense. A bubble driven by unsophisticated traders, powered by a technology that has yet to impact any meaningful change in the real world, and, as Warren Buffet deemed it, “rat poison squared.”
While somevaluations are driven by unsophisticated traders looking to make a quick trade, there are scams taking place, and valuations, in many cases, should come down in value, the resounding truth is that crypto is NOT a scam. In my opinion, the only people who’d call it rat poison squared are those whose interests are negatively affected by it, or they don’t understand it.
Sophisticated money, top VC’s conducting extensive due diligence, and the world’s largest investment banking firms, banks, and exchanges are moving into crypto and blockchain.
While it’s very easy for the old world to scoff at new technology calling it a fad, when you see OTC trades in 300k blocks of Bitcoin (exceeding a USD worth of $2billion,) when you are directly involved in structuring decentralized ledgers to plug into successful companies with traction and understand the benefits, when you have relationships with 500 + family offices and connect with investors on a daily basis, the last thing you’d deem cryptocurrency as is a fad. Valuing crypto may not be well understood, but it is not a fad.
I like to think if the Crypto Industry were a human, she’d be a two-year-old hyperactive toddler with excessive amounts of energy who acts before thinking. At the same time this toddler is growing exponentially and learning in a week what takes an adult to learn in one year. In order to grow up and sit “at the adult table,” one of the biggest things I believe the crypto community must learn to do is produce reliable methods to value different projects, decentralized applications, and protocols.
Not only will this help to unlock “institutional money” into the space, but I also believe soon the crypto-industry will be dominated by large mergers and acquisitions – between DApps - DApps, Protocols – Protocols, and Protocols - DApps. Without standard methods to derive value, new investments made into the space, and any potential mergers/acquisitions to take place, will be done so based on speculation and guestimation.
As a co-founder and active advisor at Blockcrunch Capital, one of the most difficult tasks when consulting our clients has to do with exactly this… that is deeming the value of a ledger, it’s coins/tokens, and justifying valuations.
Unlike more conventional assets, which have the luxury of pointing to earnings, assets, liabilities, and all the ratios in between, deeming a Crypto Currency’s value is far more complex.
Part of the reason why is because valuing a crypto currency has to do with valuing it’s token economy, transactional volume to scarcity/availability of tokens, and intrinsic value of the network being utilized.
Further, when a company issues a decentralized ledger to power their transactional economy, they are in many cases digitizing most (if not all) of their future cash flow. Rather than experiencing profits or earnings, tokenized economies should reflect growth with increased liquidity and higher token market capitalization.
The topic of valuing cryptocurrencies, protocols, and DApps was a major topic of conversation during Blockchain week in New York City. At the ADI Mining Summit, a gathering of top crypto, mining, and blockchain experts in the industry - Alex Petrov, CIO of Bitfury, one of the world’s largest mining company mining almost $100million worth of crypto annually, broke down his take on valuing blockchains.
Crypto-projects typically fall under two classes – protocols (like Ethereum,) and Decentralized Applications (like the Fan Controlled Football League.)
Protocols are networks in which Decentralized Applications (aka DApps) are built upon. DApps are decentralized applications, which include any application utilizing decentralized ledger technology.
In analyzing the value of protocols, Alex started his conversation by pointing out the old world model of “market cap price * amount isn’t working so perfectly.”
Some of the aspects Alex looks at when valuing protocols, such as Bitcoin, Ethereum, Stellar, etc, include:
· Cost of infrastructure
"The total Investments in bitcoin development human/hours, investments in full-nodes, open internet connectivity.”
· Use cases & their cost
"Faster payments, direct internet2internet payments, no delays, 24/7/365+ online, cheaper/more flexible/more functional, expandable... all there benefits add cost vs existing slow fin.tech banks/cards.”
· Side effects & benefits
"Timestamping, side-chains, merged mining, time-locks/smart-contracts/lightning..."
· All businesses + investments
“Investments made in Businesses, in software product development, even developers education during product development.”
· Amount of users
“Similar to how when Facebook was IPOing they valued themselves based on the amount of users, Bitcoin and protocols have similar valuation metrics. Even if a user opens a wallet but has 0 bitcoins, he is already involved in process, he spends his time studying how bitcoin works, as result sooner or later he may pay-by-btc or get payment in btc.”
· Developers community
Developers are definitely being valued and at the heart of new technology moving forward. All development & innovations are based on developers activities, on qualified engineers, and analysts.
· Count of transactions and their nature
“Here I mean real amount of transactions, because as I said before there no match 1:1 like in SWIFT/VISA...
Bitcoin has a different nature and even smaller amount of transaction have different meanings.
Real economical nature means motivated by real economical deals or/and real use & efficiency, rather than speculative trading. Real economic transactions generates real cost.”
As can be seen, valuing protocols may not be straightforward and requires a great deal of analysis and information. With Bitfury, Alex has major responsibilities deciding which currencies to mine, and his insights can have major impacts to the success of his company.
At Blockcrunch Capital and as the company’s CRO, a major responsibility of mine is to evaluate DApps and sift through the many projects out there to find the few projects I believe will become successful in the real world. Collectively, our company and partners see over 100 projects a month, of which we take on 2 - 3 at a time.
When evaluating a project’s merit, we largely analyze three things: Product, Traction, and Team.
Is there, at the minimum, a Minimum Viable Product or Service that’s readily available.
Does the MVP have adequate resources to support scalability.
Market Size, Competitive landscape, and Ability to capture market share.
Key Performance Indicators on company’s up to date performance
Business plan / model to sustain growth
Completeness of Executive Team
Experience of Executive Team
Quality of Advisory Board
Once a company is live and token is trading in the real world economy, my take on valuing token economies:
Valuing tokens has more to do with transactional volume, liquidity, and token scarcity, than that DApp’s profitability or potential earnings. Right now, the most major thing on everyone’s mind is liquidity… when tokens are going to be listed on exchanges, and things of that nature. At the end of the day I believe that paradigm will phase out.While most (if not all) people right now are buying and selling tokens in an effort to speculate on the market and make money, I believe the market will fundamentally shift as soon as a few DApps hit scale and become a mainstream product or service in their respective industries. Should a DApp’s token be utilized for its utility within a transactional economy, rather than as an instrument for speculation, a token’s market cap should most likely reflect the total size of a DApp’s transactional economy compared to the availability of tokens powering those transactions.