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Explaining the valuation of encrypted assets: the characteristics and limitations of popular cryptocurrency valuation models.



How to reasonably value cryptocurrency assets is still a difficult problem. We try to introduce the methods and processes of several cryptocurrency valuation models in detail, and analyze the limitations of each valuation model. At present, the cryptocurrency market is still in the early stage of development, and each valuation model has flaws and limitations. The characteristics of different cryptocurrency projects and the factors affecting market value are different, and different models need to be used for analysis. There is no universal valuation model. With the rapid development of the cryptocurrency market, more and more attention has been paid to cryptocurrency in the market. Similar to the valuation of stocks, many researchers have also conducted in-depth research on the valuation model of cryptocurrency, an emerging asset. At present, the valuation models of cryptocurrencies mainly include cost pricing methods, transaction equations, NVT and Metcalfe's law. Cost of Production cost pricing method is the most intuitive cryptocurrency valuation method. Its core idea is to The cost of producing a currency (such as the cost of mining Bitcoin) is considered a floor indicator of the value of a cryptocurrency. Only when the production cost is lower than or equal to the market price of cryptocurrency, producers (such as Bitcoin miners) will continue to produce; and when the production cost is higher than the market price of cryptocurrency, rational producers will stop production to prevent Sustained losses. Methods and processes Take Bitcoin as an example. Miners are producers in the Bitcoin ecosystem. There are no legal and regulatory restrictions on the entry and exit of miners, and they are theoretically free. Bitcoin mining can be simply approximated as a perfectly competitive market. According to economic theory, in the long run, enterprises in a perfectly competitive market will eventually reach an equilibrium, and the net profit of all enterprises will be zero. For Bitcoin, that is to say, the net profit of all miners is zero, that is, the mining income is equal to the production cost (production cost includes electricity, mining machine cost, maintenance fee and labor cost, etc.), so the production cost can be used to analyze Bitcoin. valuation. The economic model is used to analyze the mining of Bitcoin miners, and the following symbols are introduced: h: Mining machine computing power, the unit is TH/s. PC: Mining machine unit power consumption (Power Consumption), the unit is kW h/TH. Assumed to remain constant over the lifetime of the miner. R: The block reward for the entire Bitcoin network within one day. Because the block reward is much greater than the handling fee, the handling fee is not considered here. HSBC Holdings CEO: No plan to enter the field of cryptocurrency trading: Jinse Finance reported that the CEO of HSBC Holdings (HSBC.N) said that he has no plans to enter the field of cryptocurrency trading. From the perspective of behavioral risk, it is difficult to sell cryptocurrencies to the mass market . (Golden Ten) [2022/12/1 21:16:03] H: The computing power of the entire network, the unit is TH/s. E: Electricity fee, the unit is $/(kW·h). D: Electricity fee coefficient, the proportion of electricity fee in the total production cost, generally 70%. P: Currency price, the unit is $/BTC. In a day, the electricity cost of the mining machine is 86400∙h∙PC∙E  (1 day has 86400 seconds), and it is expected to dig out h∙R/H BTC, and then consider factors such as mining machine cost, maintenance fee and labor cost The average mining cost is equal to: 86400∙H∙PC∙E/R/D According to the cost pricing method, the above formula is also the valuation of a single bitcoin. The main cost calculated in the cost pricing method is electricity, so only cryptocurrencies that adopt the PoW consensus algorithm can be valued. For cryptocurrency projects using other consensus algorithms such as PoS, DPoS, and PBFT, the generation of cryptocurrency depends on the rights and interests of holders, etc., and does not require electricity for mining, and the cost pricing method is not applicable. The cost of the latter type of project is mainly reflected in the fact that participating in the consensus algorithm requires locking rights and interests, and locking rights is to temporarily give up the right to sell rights and interests according to market conditions, which will cause liquidity costs. Liquidity cost is difficult to quantify, it is not only positively related to the amount and time of locked equity, but also related to the strategy of holding equity. The competition among miners is not equal. The electricity cost, mining machine cost and mining machine performance of different miners will be significantly different, so their production costs are also different. There is a competitive game among miners. For a large number of miners who hold new mining machines, what they most hope to see is that the price of cryptocurrency is higher than the shutdown price of new mining machines but lower than the shutdown price of old mining machines. , forcing old mining machines to leave the market. The second fund of Indian venture capital Fundamentum has completed a fundraising of US$227 million, which will focus on areas such as Web3 and electric vehicles: Jinse Finance reported that Indian venture capital Fundamentum announced that its second fund has completed a fundraising of US$227 million, of which 25% The funds come from the Fundamentum team. The venture capital disclosed in May this year that this fund will focus on investment in areas such as Web3 and electric vehicles. It is reported that the fund will select 4-5 start-up companies for seed round investment every year. The investment scale is expected to be between US$25-40 million. Fundamentum’s first fund raised US$100 million and was launched by Nandan Nilekani and Sanjeev Aggarwal in 2017. Sanjeev Aggarwal, who is currently the co-founder and general partner of the venture capital, revealed that thanks to the success of the first fund, They intend to further deepen the investment plan. (recently heard) [2022/8/20 12:37:14] The cost pricing method assumes that miners are only motivated by profit expectations, which is an oversimplification. It is not a completely frictionless process for miners to enter the market. Miners need to buy mining machines, build mines, sign agreements with power plants, etc. After investing a lot of time and money in the early stage, short-term losses will not make miners shut down and leave immediately. If a miner continues to lose money, it must have pressure to exit the market, but the pressure point for each miner to exit is not the same. The transaction fees received by miners are not considered in the cost pricing method. At present, the block reward is much greater than the handling fee, and the handling fee has little impact. However, the block reward of Bitcoin will be halved every four years or so, and as time goes by, the proportion of transaction fees will increase. In the future, it is necessary to consider the impact of transaction fees in the cost pricing method. As far as bitcoin is concerned, the claim that the cost of producing bitcoin supports the price of bitcoin has also been questioned a lot. In a given period of time, the supply of Bitcoin is determined in advance by an algorithm and has nothing to do with the computing power invested in mining. If the price of Bitcoin rises, more computing power will be invested in mining, but the supply of Bitcoin will not increase, and the price of Bitcoin will not be stabilized. At this time, more computing power competes for a given amount of new bitcoins, and the production cost of bitcoins will rise. Similarly, if the price of bitcoin falls, the computing power invested in mining will decrease, but the supply of bitcoin will not decrease, and the price of bitcoin will not be supported. At this point, less computing power competes for a given amount of new bitcoins, and production costs drop. The Bank of England plans to hire another 100 staff to oversee the crypto market and businesses operating in it: Golden Finance reported that Bloomberg reported that the Central Bank of England (BOE) Prudential Regulation Authority intends to raise funds from local commercial banks to sponsor the hiring of more staff to oversee the crypto market and the businesses operating within it. The financial watchdog wants to hire 100 more people, a source said, needing $419m (£321m) to do so. It plans to raise funds from this year to next February. That would be 8% more than what was raised in 2021. The regulator plans to create a framework for crypto assets that will be used internationally. The Bank of England has some concerns that the expanding cryptocurrency market, currently worth $1.7 trillion, is big enough to disrupt the traditional financial system in times of trouble. Additionally, the regulator intends to continue working on the regulatory basis for stablecoins. Currently, the crypto market is valued at just 0.4% of the $469 trillion value of the global financial system. However, in the BOE, they argue that the digital asset market is now bigger than the subprime mortgages that sparked the financial crash in 2008, and that Bitcoin is here to fix that. ( [2022/4/22 14:40:13] In comparison, there is a closer relationship between the price of precious metals and their production costs: if the price of precious metals is higher than their production costs, driven by profit , the production activities of precious metals will increase, pushing up the supply of precious metals, thereby stabilizing the price of precious metals; on the contrary, if the price of precious metals is lower than its production cost, the production activities of precious metals will decrease, reducing the supply of precious metals, thereby pushing up the price of precious metals. In general, the cost pricing method has great limitations, but for miners who have a large amount of mining data in their hands, the cost pricing method can still provide them with a useful valuation lower limit reference index. Chris Burniske, partner at Equation of Exchange cryptocurrency investment fund  Placeholder , believes that the use value token holders get from token ownership is related to the size of the economy that the token is expected to support and the holder is expected to participate in. , which is the network value of the token, and is named "current utility value (CUV)". The company of the late NBA star Kobe Bryant submitted trademark applications involving NFT and metaverse to the US Patent and Trademark Office: According to news on February 4, Kobe Inc, a company owned by the well-known NBA star Kobe Bryant, has submitted three applications to the US Patent and Trademark Office. Trademark applications, including "Kobe Bryant", "Mamba Forever" and "Mambacita" (referring to his daughter Gianna). According to the documents, these trademarks will be used for digital products such as clothing, jewelry, avatars, emoticons, toys, and trading cards, involving NFT, Metaverse and other fields. "Different companies and celebrities file a lot of trademark applications to protect their rights because it involves metaverse stuff," said Josh Gerben, a Washington-based trademark attorney. He said it was the first time he saw a basketball star application. (Bloomberg) [2022/2/4 9:30:49] In order to estimate the network value of tokens, Burniske borrowed the transaction equation from monetary economics, whose core idea is that the scale and turnover frequency of money supply are related to the economic production of goods There is a relationship between it and the total value of services (ie GDP). The expression form of the transaction equation is M·V=P·Q, where M represents the amount of currency, V represents the number of times currency is used, P represents the price, and Q represents the total transaction volume of goods and services. Burniske uses the transaction equation to value cryptocurrencies. He believes that the network value (M) of cryptocurrencies is proportional to the size of the economy it supports (P Q), and inversely proportional to the number of times it is used (V), namely: M = P Q/V It can be seen from the above formula that when estimating the expected future token network value (M), it is necessary to first obtain the price (P), transaction volume (Q) and usage times (V) within the expected time . After obtaining the network value, if you want to value a single token, you can divide the network value by the number of tokens in circulation. At the same time, considering the future value and expected risks of tokens, it is necessary to use the discounted cash flow method and choose an appropriate discount rate. Exchange equations are often used to value utility tokens. Take BNB as an example: First, calculate the annual economic scale (P·Q) supported by BNB in the next five years. The value of BNB mainly comes from two aspects: the discount value of handling fees and the repurchase value of net profit. NEM is expected to carry out the seventh hard fork Harlock at block height 3,464,800: NEM announces the seventh hard fork Harlock, NEM nodes will vote to decide whether the NEM blockchain will be merged into a Symbol sub-chain, or a transaction-specific side chain. Harlock is expected to be executed at block height 3,464,800. (Crypto Briefing) [2021/11/6 6:34:55] Second, calculate the usage times (V) of each BNB. The number of times BNB is used is difficult to calculate accurately, and a value is generally estimated in the calculation. Third, the annual network value (M) of BNB is calculated by the formula M=P Q/V. Fourth, according to BNB's unlocking plan and repurchase plan, estimate the annual circulation of BNB. Fifth, use the annual network value divided by the number of circulation to get the value of a single BNB in the next five years. Sixth, choose an appropriate discount rate and calculate the current value of BNB through the discounted cash flow method. Trading equations are usually used to value utility tokens, but there are application scenarios in the cryptocurrency market and the number of utility tokens used on a large scale is very small, and the motivation of many cryptocurrency holders is speculation rather than use. At present, the more suitable valuation object is the exchange platform currency. In the process of using the transaction equation, due to the difficulty in obtaining or calculating the data, a large number of assumptions will be used, such as market size, market share, etc., which will make the calculation of the economic scale (P·Q) very difficult, resulting in the final calculation result Inaccurate. The number of uses (V) of a token is usually an estimate. However, V will be affected by multiple factors such as the user's frequency of use, expectations for future currency prices, and project incentives. These factors have exceeded the scope of economics and cannot be predicted in advance. In particular, the cryptocurrency market itself is in its early stages, with very limited empirical data, and the estimated value of V is likely to be inaccurate. Some researchers estimate V based on the on-chain transaction volume of tokens, which is debatable. The circulation of tokens can be carried out either through on-chain transactions or in exchanges. From an economic point of view, the meanings of property rights transfer and value transfer of the two circulation methods are basically the same. It is difficult to say that the "gold content-ethexc" of on-chain transactions is higher than that of transactions on exchanges. It should be noted that the transaction equation M·V=P·Q comes from the monetary and financial field, but its usage is very different from the cryptocurrency field. In the monetary and financial field, P represents the price of goods and services denominated in currency, and V represents the velocity of money circulation. The left side of the transaction equation measures the total amount of market activity from the perspective of currency circulation, and the right side of the equation measures the total amount of market activity from the perspective of commodity transactions. Because there are many kinds of goods and services in the real economy, P·Q is generally represented by the gross domestic product (GDP). The implications of velocity of money for precious metal currencies and cash are very clear. But at present, most of the currency is deposits, bank lending is accompanied by deposits, and there is a deposit multiple expansion mechanism under the fractional reserve system, the meaning of the circulation velocity of deposits is relatively vague.


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