Valuing a digital asset is difficult because of the many factors at play. In this article, we highlight ten key metrics that help determine valuation for bitcoin, altcoins and cryptocurrencies in general.
The “crypto valuation research” is a blog post that discusses the top 10 metrics for valuing Bitcoin, Altcoins, and cryptocurrencies.
More digital asset valuation methodologies have arisen as crypto investors become more educated, providing investors with mathematical algorithms to discover profitable investments.
Because crypto assets are an essentially distinct asset class than stocks, traditional business valuation techniques such as Discounted Cash Flow (DCF) or the Dividend Discount Model (DDM) cannot be applied to them. As a result, new valuation models are required to offer investors with frameworks for fundamental coin and token research.
Our editors examined 10 of the most widely used digital asset valuation methodologies, as well as how professional investors utilize them to make investment choices, in this article.
| Methodology for Valuation | MV=PQ Equation is related to | Metric That Can Be Seen | Financial Model (Pro-forma) | Traditional Methodology | A Novel Approach to Crypto Assets |
| a value store | X | ||||
| Token Acceleration | X | X | |||
| Metcalf’s Law is one of the most well-known laws in the world. | X | X | |||
| NVT Ratio | X | X | |||
| The Model of INET | X | X | X | ||
| Active Addresses on a Daily Basis | X | X | |||
| Small Emerging Economies as Crypto Networks | X | ||||
| The market-to-real-value ratio (MVRV) | X | X | |||
| Stock to Flow Ratio | X | X | |||
| Alternatives to Traditional Businesses: Digital Assets | X |
Methods for Valuing Digital Assets
Thesis on the Store of Value (SoV)
Potential total store of value / number of outstanding tokens = potential price per token
The store of value thesis asserts that the value of a digital asset is determined by its capacity to serve as a monetary value store for its investors and consumers. In other words, the more a digital currency or token may be utilized as a store of wealth, the higher its future worth should be.
“Value will eventually accrue to [store of value] crypto assets,” according to Messari’s Qiao Wang. He claims that for a digital asset to become a store of value, it must be resistant to theft, have a credible low rate of inflation, and have a cheap cost of conversion.
We may look at the price of gold as an example of determining the fair value of bitcoin with Store of Value (SoV) in mind, and assume that bitcoin would one day replace gold as the go-to store of value for investors.
The entire worth of the world’s gold bullion is estimated to be over $8 trillion at the current gold price of roughly $1,300 per troy ounce. If bitcoin were to overtake gold as the world’s most popular store of value, its entire network value would climb to $8 trillion, and the total number of coins would be limited at 21 million, the price of one BTC would be $380,000.
Example: Total store of wealth $8 trillion / 21 million BTC = $380,000 per bitcoin
Token Velocity is a term used to describe the speed with which a token
Kyle Samani, a co-founder of Multicoin Capital, calculates token velocity as a function of transaction volume and average network value on a yearly basis. A high token velocity indicates that although a token’s trading volume is high, the value of the underlying network may not expand at the same pace.
Token velocity is measured by dividing a digital coin’s or token’s total transaction volume by its average network value over a year.
Token Velocity is calculated as follows: Total Transaction Volume / Average Network Value.
Tokens with a high velocity likely to be of limited use in their networks. Hence, when comparing the token velocity of various digital assets – notably utility tokens – investors can discern whether a platform’s adoption will truly lead to a growth in network value and, hence, the price of the network’s token in the long term.
This may be deduced from the Equation of Exchange (MV=PQ), which shows that token velocity influences token price significantly.
M is the number of digital assets in the database.
V stands for token velocity.
P is the token’s price.
Q denotes the token’s quantity.
Through an appreciation of M on the left side of the equation, the lower the token velocity, the higher the token price. According to this theory, low-volatility tokens will have greater values than other digital assets.
3. The Metcalfe Law
Metcalfe’s Law, which was initially intended to quantify communication networks, is another prominent valuation tool in the digital asset markets. The value of a network is proportional to the square of the number of connected users, according to the legislation.
According to Dr. Ken Alabi’s study, Metcalfe’s Law may also be applied to digital asset networks. “[Blockchain] networks [are] reasonably well approximated by Metcalfe’s Law, which defines the value of a network as proportionate to the square of the number of its nodes, or end users,” Alabi found in a report titled “Digital blockchain networks seem to be following Metcalfe’s Law.”
We utilize the Daily Active Address (DAA) as the number of connected users of the network per day and market capitalization as the network value to compute the Metcalfe’s Ratio (MET) to evaluate a digital currency network. The Metcalfe’s Ratio is calculated by dividing the market cap by the Daily Active Address squared.
MET Ratio = Market Cap/Market Cap/Market Cap/Market Cap/Market Cap/Market Cap/Market Cap/Market Cap (Daily Active Address) ²
Metcalfe’s law is a great way to look at how a network grows in relation to its daily users.
4. NVT Ratio (Network Value to Transactions)
The network value to transactions (NVT) ratio compares the monetary value of digital asset transaction activity to the network value, which is calculated using market capitalization. The NVT Ratio, which was invented by digital asset researcher Willy Woo in 2017, is the digital currency industry’s valuation counterpart to the P/E Ratio.
Take a coin’s or token’s market capitalisation and divide it by its most recent 24-hour transaction volume to get the NVT Ratio. The NVT Ratio is the result, and it may be used to compare one digital asset to another. As a result, the NVT Ratio is a measure of relative value.
NVT Ratio = Market Cap/Transaction Volumes = NVT Ratio = NVT Ratio = NVT Ratio = NVT Ratio = N
Woo outlined the reasoning underlying the NVT Ratio in a Forbes article. He said that the P/E Ratio is used to appraise firms in conventional stock markets by looking at their share price in proportion to their profits. However, since digital currencies have no revenues, a separate methodology is required to assess bitcoin and other digital assets.
“[In bitcoin world], we have a price per token, but since it isn’t a firm, there aren’t any profits to calculate a ratio.” We may use the money moving through bitcoin’s network as a proxy for “business profits” since bitcoin is essentially a payments and store of value network. […] The Bitcoin blockchain’s worth is inextricably linked to its network valuation. The notion that money moving through the network may be used as a proxy for network value is sound. This may be expressed as a ratio. “It’s referred to as the NVT Ratio, or Network Value to Transactions Ratio,” Woo explained.
As a result, a high NVT ratio for bitcoin (or any other digital currency) indicates a high speculative value since the price is high in comparison to network activity. While this might signal a bubble, it could also imply that investors feel the digital asset network’s usefulness will rise in the future.
The INET Model is number five.
Chris Burniske, a former Blockchain Products Lead at ARK Investment Management and now a partner at Placeholder, a New York startup business focused on cryptoassets, devised the INET concept.
INET is a made-up token designed to serve as a stand-in for whatever digital asset is being reviewed or studied.
Formula: Here’s a link to an example spreadsheet.
The INET model is a sophisticated financial model that uses the Monetary Equation of Exchange (MV=PQ), widely known as the Quantity Theory of Money by economists, to determine the value of a token. This may be seen in the Token Velocity section above.
Token price is split down even further in the INET paradigm into two more components. The Current Utility Value (CUV) and the Discounted Expected Utility Value (DEUV) are two of them (DEUV). DEUV indicates the value of the token linked with investment speculation, whereas CUV represents the value related with current usefulness and usage of the token.
Through the use of a number of inputs, the present value of each token may be modeled and projected into the future, including:
- Drivers on the supply side
- Adoption of a token;
- Growth rate of market saturation;
- Demand for tokens;
- The speed of a token.
Modeling and estimating the impact of CUV and DEUV on token price is also conceivable.
Any token (INET) price is equal to the future projected monetary base (M) divided by the number of circulating coins at that future date, according to the Monetary Equation of Exchange (MV=PQ). M is equal to PQ/V, where PQ represents the value of on-chain transaction value (also known as network GDP) and V represents token velocity.
The model suffers from limitations relating to token velocity and its interaction with other parameters, notably the fact that velocity cannot be measured or specified exactly, due to the assumptions made about velocity. This is true for the other variables in the equation, thus documenting velocity changes in terms of P, Q, and M is often arbitrary.
6. Active Users/Addresses on a Daily Basis (DAA)
The number of users making transactions on a blockchain network on a daily basis is referred to as Daily Active Addresses (or Daily Active Users). It’s also referred to as “daily active users.” (Note that a single user might be doing transactions from many addresses, so this number is likely to be inflated.)
For instance, look at this Dune Analytics dashboard for popular DeFi coins.
The DAA metric is often used to determine the number of users of a software platform (in this example, DAU), and it may give highly important information about a network’s users. This information complements Metcalfe’s law and the Network Value to Transaction (NVT) ratio in detecting new and continuing trends.
Crypto-networks as Emerging Markets No. 7
Another intriguing notion proposed by Placeholder partners Chris Burniske and Joel Monegro in a VC thesis paper is that crypto-assets may be appraised similarly to how economists evaluate currencies of tiny developing market nations. (Here’s where you can listen to the podcast.)
The consensus procedure utilized in the case of a cryptoasset may be compared to a country’s constitution. The blockchain community is therefore analogous to a political constituency, with users representing the demand side of the economy and miners representing the supply side. The core developers are analogous to the executive branch of government in that they execute code depending on community acceptance. The tokens are the same as the nation’s currency, and investors purchase and sell them based on the project’s attractiveness, just as they buy and sell fiat currencies based on the attractiveness of the tiny EM country.
Investors search for the same characteristics in cryptocurrencies and fiat currencies, such as productivity, equality, minimal corruption, excellent governance, and sound monetary policy. In the case of an EM nation, interest rates are important, and they may also be important in proof-of-stake currencies, which provide a return on investment that is akin to an annual return.
8. The Market-to-Real-Value Ratio (MVRV)
David Puell and Murad Mahmudov established the MVRV ratio in 2018. Nic Carter had proposed the notion of a realized cap the previous year. The MVRV is the ratio of an asset’s market capitalization to its realized capitalization, which is derived by dividing the first by the second.
The entire quantity of mined bitcoin multiplied by the most recent trading price is the market cap of bitcoin, for example. The realized cap is derived by pricing each bitcoin unit separately at the most recent on-chain price.
Whether these two indicators are compared, the MVRV ratio is utilized to determine when the price is below or over “fair value,” hence assisting in the identification of market tops and bottoms.
“Realized value helps us exclude some of the lost, abandoned, unclaimed coins from our overall worth estimations,” David Puell explains. “It is a sign of the total of levels where groups of long-term, legitimate, buyer-hodlers started their Bitcoin holdings, with local and immediate emotions and manias stripped away,” he continues.
MVRV is comparable to Willy Woo’s NVT in that it measures market participants’ interactions, such as hodlers vs. speculators, high time preference vs. low time preference, and irrational exuberance vs. uncertainty acclimation.
As a result, a low MVRV ratio indicates that the asset is undervalued. Higher ratios, on the other hand, would imply overvaluation as a result of hype-fueled enthusiasm.
9. Flow to Stock
The stock-to-flow model is used to appraise rare metals such as platinum and gold. This concept may also apply to digital assets since bitcoin satisfies the “scarce” criteria owing to its restricted quantity.
Stock refers to a token’s current supply, such as the total amount of bitcoins created to date. The yearly pace of production, or the number of tokens mined in a year, is known as flow. Stock-to-flow is the ratio of the two (S2F). The more valuable the commodity, the more rare it is.
In his effort to price bitcoin in accordance to its scarcity, a Dutch investor going by the nickname Plan B promoted this idea. Plan B elaborate on the fixed nature of bitcoin’s supply in an article, stating that fresh blocks are generated every 10 minutes. Subsidy, one of the newly generated currencies in a block, began at 50 bitcoin and was half every 210,000 blocks (approximately four years).
“That’s why ‘halvings’ are so essential for bitcoin money supply and SF,” he continues. Halvings also cause the supply growth rate (also known as’monetary inflation’ in the bitcoin context) to be stepped rather than smooth.”
According to Plan B, scarcity drives value directly. Furthermore, since stock to flow is directly related to market value, market value is greater when stock to flow is high.
Alternatives to Traditional Businesses: Digital Assets
This model investigates the method of tracking the value and performance of real-world enterprises using digital assets. From the standpoint of a firm owner, these digital assets are venture capital investments. For example, the Brave browser, which is a direct rival to Google Chrome, rewards users for viewing ads. The Basic Attention Token, or BAT (now worth $2.5 billion), is used to distribute the incentives.
Binance Coin ($102 billion market value) is also a direct beneficiary of the Binance company’s buzz, which is the world’s biggest crypto exchange. As a result, some investors consider owning BNB to be a proxy for investing in Binance itself. (BNB holders also have other perks, like as lower transaction costs on the Binance platform.)
When evaluating tokens from this standpoint, it’s beneficial to think of the underlying blockchain technology or project as a “business,” even if it isn’t organized like one. At Bitcoin Market Journal, we adopt this approach (see our Investor Scorecard for more details.)
Crypto Asset Valuation Principles
Here are a few lessons we’ve learnt over the years from assessing and analyzing hundreds of blockchain projects.
Intrinsic Value, Not Short-Term Volatility, Determines Price
Crypto assets, like other investments, should be regarded as a long-term investment (5 years or more). We hunt for initiatives that are likely to become leaders in their categories, much like conventional value investors, and then we wait patiently. (For more information, see our guide on Blockchain Value Investing.)
Include a Liquidity Risk Discount in your calculations.
Because most digital assets are lightly traded (low volume/high volatility), it’s best to impose a discount of 0-90 percent, depending on the asset. You may not be able to sell risky cryptocurrencies when you want to, so they receive a greater discount. You should be alright for the top 10 coins on CoinMarketCap (but don’t forget about fees – check our guide on Avoiding Fees).
The Frameworks for Valuation Should Be Consistent
Different forms of crypto assets are tough to compare: an NFT is not the same as an exchange token. So you’re looking for a framework to help you compare “apples to apples.” Our free Blockchain Investor Scorecard is a handy tool for comparing various crypto assets and assigning a 1-5 star grade to each.
Digital Assets are Not the Same
Crypto assets come in a variety of forms and shapes. Blockchain platforms like Ethereum, Solana, and Avalanche are not the same as digital currencies like bitcoin, Litecoin, and Monero. Using a few alternative valuation models and seeing possible investments through several “lenses” might assist.
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