Exploring Encryption Asset Valuation Models: From Public Chains to Bitcoin

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

There are various types of encryption projects, including public chains, centralized exchange platform coins, decentralized finance projects, meme coins, etc. Each of them has different characteristics, economic models, and token functions. It is necessary to explore valuation models suitable for each track.

1. Public Chain Valuation: Metcalfe's Law

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 )

The law is widely recognized in the valuation prediction of internet companies. An independent study on 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 user base.

Ethereum is an example of the application of Metcalfe's Law. Research has found that the market value of Ethereum has a logarithmic linear relationship with daily active users, which basically conforms to the formula of Metcalfe's Law. Specifically, the market value of the Ethereum network is proportional to the 1.43 power of the number of users, with the constant K set at 3000. The calculation formula is as follows:

V = 3000 * N^1.43

Statistics indicate that there is indeed a certain correlation between Metcalfe's law valuation method and the market value trend of ETH.

However, 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 to use Metcalfe's Law for valuation, as seen in the early stages of Solana, Tron, etc. Additionally, this law cannot reflect the impact of staking rates on token prices, the long-term effects of Gas fee destruction under the EIP1559 mechanism, and factors such as the potential game theory of public chain ecosystems based on security ratios affecting the total locked value (TVS).

2. Centralized Exchange Platform Coin Valuation: Profit Buyback & Burn Model

Centralized exchange platform coins are similar to equity tokens and are related to factors such as exchange revenue, public chain ecosystem development, and exchange market share. Platform coins typically have a buyback and burn mechanism, and some also have a Gas fee burn mechanism in the public chain.

The valuation of platform coins needs to consider the overall revenue situation of the platform, discount future cash flows to estimate intrinsic value, and also take into account the impact of the destruction mechanism on scarcity. The rise and fall of platform coins is generally related to the growth rate of trading volume on the trading platform and the reduction rate of platform coin supply. The simplified profit buyback & destruction model valuation method is calculated as follows:

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

The platform coin of a well-known exchange is the most typical example. Since its inception in 2017, this platform coin has gained widespread recognition from investors. Its empowerment method has gone through two stages: the profit buyback stage and the automatic destruction + real-time destruction mechanism stage.

When applying this valuation method in practice, it is important to closely monitor changes in the market share of exchanges. If the market share of a particular exchange continues to decline, even if the current profitability is still acceptable, future profit expectations may be affected, thereby reducing the valuation of the platform coin.

In addition, changes in regulatory policies greatly affect the valuation of centralized exchange platform coins, and the uncertainty of policies may lead to changes in market expectations for platform coins.

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

The core logic of the token cash flow discount valuation method used by decentralized finance projects is to predict the future cash flows that the token can generate and discount them to their present value at a certain discount rate. This method determines the current value of the token based on the expected future earnings of the DeFi protocol.

However, the valuation of DeFi protocols faces several major challenges:

1. Governance tokens generally do not capture the revenue value of the protocol and cannot distribute dividends directly to avoid being classified as securities.
2. Future cash flow forecasting is extremely difficult due to the rapid transition between bull and bear markets, significant cash flow fluctuations in DeFi protocols, and the variability of competitors and user behavior.
3. The determination of the discount rate is complex and requires a comprehensive consideration of various factors such as market risk, project risk, and others.
4. Some DeFi projects adopt profit buyback and burn mechanisms, and the implementation of such mechanisms will affect the circulation and value of the tokens.

4. Bitcoin Valuation: A Comprehensive Consideration of Multiple Methods

Mining Cost Valuation Method

Statistics show that in the past five years, the time when the Bitcoin price was below the mining cost of mainstream mining machines accounted for only about 10%, fully illustrating the important role of mining costs in supporting Bitcoin prices. Therefore, Bitcoin mining costs can be viewed as the bottom line of its price. History shows that when the price is below the mining cost of mainstream mining machines, it is usually an excellent investment opportunity.

Gold Substitute Model

Bitcoin is often regarded as "digital gold," capable of partially replacing gold's value storage 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 will reach approximately $92,523, $138,784, $305,325, and $925,226, respectively.

However, Bitcoin and gold still have many differences in physical properties, market perception, application scenarios, and other aspects. Gold has become a globally recognized safe-haven asset over thousands of years, with a wide range of industrial uses and physical backing; whereas Bitcoin is a virtual asset based on blockchain technology, with its value more derived from market consensus and technological innovation. Therefore, when applying this model, it is necessary to fully consider how these differences impact the actual value of Bitcoin.

Conclusion

The exploration of encryption project valuation models aims to promote the robust development of valuable projects within the industry while attracting more institutional investors to allocate encryption assets.

Especially during market downturns, we must use the strictest standards and the simplest logic to find those projects with long-term value. Through reasonable valuation models, just like capturing Google's and Apple's "bubble burst" in 2000, we can uncover potential stocks in the encryption field during a bear market.