In the past article, The Genesis of Cryptocurrency– history and the origin of cryptocurrencies, the types of cryptocurrency and How to Run an ICO were tackled to give readers an overview and knowledge of what cryptocurrency is all about. Aside from keeping crypto-assets safe, valuing the crypto tokens is the most significant aspect of all, but entails framework valuation. There have been so many discussions going on just to give birds eye view about cryptocurrency, and not gearing towards investment advice, but as a discussion of valuation frameworks.
The big question now is how early are we in the development of valuation methodologies for cryptocurrency? Many said that the biggest problem in the market today is that everything is valued as if it’s a currency or a store of value. Like any other emerging technology, cryptocurrency is facing roller coaster challenges due to so many considerations.
- Uniquely part currency, part commodity and a mix or combination of all technologies and industries.
- Short history of crypto tokens has generally shown an even shorter lifespan of many of the projects.
- The success rate so far for most crypto projects is not very encouraging.
- The systemic risk is very hard to predict, due to the short time span that is unique to this kind of industry.
- No set risk-free rate for the crypto markets.
Despite so many attempts to provide valuation models, as of today no financial or economic model is considered the most reliable indicator of valuing crypto tokens, value predictions and acceptance from the market participants.
Though it has been a challenge valuing crypto tokens as currency, it can be modeled as an economic entity that allows a valuation method the same as stocks. An advantage of treating crypto tokens as stock for valuation purposes is that it allows to use existing economic and cash-flow models used in equity research. However, since bigger chunk of price is speculative in nature investors should bear in mind that the market price of crypto tokens can differ significantly from the valuation models. Commonly two steps involved with valuing a crypto token: modeling the market size and the extent that the project can reach, plus how the market reach translates to returns on individual crypto tokens.
On the economic structure a crypto token holder can value their token like a stock on the following bases, price appreciation, dividends and buybacks.
Price appreciation is present in many crypto tokens and is driven by adoption different from speculative price appreciation. The entire economic value of the ecosystem is modeled based on economic assumptions, and then divided among the token holders. Many application-specific crypto tokens belong to this category.
Dividends and Buybacks are similar Once the market size and earnings estimates are obtained, investors can use basic valuation frameworks like a dividend discount model which gives a present value based on projected earnings and dividends, or a relative valuation model that compares a crypto ecosystem to existing companies that have well-defined pricing.
Whatever model and whatever factor drives the valuation of cryptocurrency, it boils down to the investor side. Investors who invest in cryptocurrencies estimate their value based on the market capitalization of the process or asset it seeks to replace along with an estimation of how much market share the cryptocurrency will control. It is always on the investor’s perspective, speculations and trust. Cryptocurrencies have recently attracted increasing attention from investors and businesses as they promise to provide innovative, secure and cost-effective solutions that improve the current money transfer system and enhance the efficiency of transactions.
Here at Camuso CPA PLLC, we do have the ability to offer services to our clients. We will help you understand cryptocurrency. If you are interested to know more about how this might benefit your business and investments please don’t hesitate to give us a call today. One of our friendly and knowledgeable representatives will be happy to answer any questions you have.