Encryption Asset Valuation Model Exploration

Cryptocurrency has become one of the most dynamic and promising sectors in the fintech field. With a large influx of institutional funds, how to reasonably assess the value of encryption projects has become a key issue. Traditional financial assets have mature valuation systems, such as discounted cash flow models and price-to-earnings ratio valuation methods.

There are various types of encryption projects, including public chains, exchange platform coins, DeFi projects, meme coins, etc., each with its own characteristics, economic models, and token functionalities. It is necessary to explore valuation models suitable for each subfield.

1. Valuation of Public Chains: 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 effective nodes, K is a constant)

The law is widely recognized in the valuation predictions of internet companies. A 10-year study on Facebook and Tencent shows that the value of these companies exhibits characteristics of Metcalfe's Law in relation to the number of users.

Ethereum case:

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

V = 3000 * N^1.43

Statistics show that this valuation method does have a certain correlation with the market value trend of ETH.

Limitations:

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 this method for valuation, such as in the early days of Solana, Tron, and others.

In addition, this law cannot reflect the impact of the staking rate on token prices, the long-term effects of the burning mechanism, and factors such as the potential game of the public chain ecosystem based on the security ratio on the total locked value.

2. Valuation of Trading Platform Tokens: Profit Buyback & Burn Model

Centralized exchange platform tokens are similar to equity tokens and are related to the exchange's revenue, public chain ecosystem development, and market share. Platform tokens usually have a buyback and burn mechanism and may also incorporate a burning mechanism found in public chains.

The valuation of platform tokens needs to consider the overall revenue of the platform and the destruction mechanism. Their rise and fall are usually related to the growth rate of trading volume and the reduction rate of supply. A simplified model for profit buyback & destruction valuation calculation is as follows:

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

A case of a platform token:

The platform token has gone through two empowerment stages:

1. Profit Buyback (2017-2020): 20% of profits will be used each quarter to buy back and destroy tokens.
2. Automatic destruction + real-time destruction (starting from 2021): The destruction amount is calculated based on the token price and the quarterly block count of the public chain, and a real-time destruction mechanism is implemented.

Assuming the trading volume growth rate of the platform in 2024 is 40%, the supply destruction rate is 3.5%, and taking the constant K as 10, then:

Value growth rate = 10*40%*3.5% = 14%

This means that the expected increase in the token for 2024 compared to 2023 is 14%.

Limitations:

When using this valuation method, it is necessary to closely monitor changes in the exchange's market share. If the market share of a certain exchange continues to decline, even if current profit performance is good, future profit expectations may be affected, thereby reducing the valuation of the platform token.

Regulatory policy changes have a significant impact on the valuation of platform tokens, and policy uncertainty may lead to changes in market expectations.

3. DeFi Project Valuation: Token Cash Flow Discounting Method

The core logic of the discounted cash flow (DCF) method used in DeFi projects is to forecast the future cash flows of tokens and discount them to their present value at a certain discount rate.

Calculation formula: PV = Σ(FCFt / (1+r)^t) + TV / (1+r)^n

Among them, FCFt is the free cash flow for year t, r is the discount rate, n is the forecast period, and TV is the terminal value.

For example, a certain DeFi project:

Assuming that the project's revenue in 2024 is 98.9 million, with an annual growth rate of 10%, a discount rate of 15%, a forecast period of 5 years, a perpetual growth rate of 3%, and an FCF conversion rate of 90%.

Calculate the result:

• Present value of total FCF in the next five years: 390.3 million
• Terminal Value Discounting: 611.6 million
• DCF total valuation = 611.6 million + 390.3 million = 1.002 billion

The current market value of the project is 116 million, which is close to the valuation. However, it is important to note that this valuation is based on the assumption of a 10% growth rate per year over the next 5 years, and actual conditions may vary significantly due to market environment.

Limitations:

DeFi protocol valuations face several challenges:

1. Governance tokens typically do not capture the protocol's revenue value and cannot distribute dividends directly to avoid regulatory risks.
2. Future cash flow forecasting is difficult due to significant market fluctuations and intense competition.
3. The determination of the discount rate is complex and requires consideration of various risk factors.
4. Some projects adopt a profit buyback and burn mechanism, which affects circulation and value, and may not apply to this method.

IV. Bitcoin Valuation: A Comprehensive Consideration of Multiple Methods

1. Mining Cost Valuation Method

In the past five years, the time when the price of Bitcoin was below the mainstream mining machine's mining cost accounted for only about 10%, indicating that mining costs play an important supporting role for prices. Mining costs can be seen as the bottom line for Bitcoin prices; when prices fall below mining costs, it is usually a better investment opportunity.

2. Gold Substitute Model

Bitcoin is regarded as "digital gold" and can replace part of the value storage function of gold. Currently, Bitcoin's market value accounts for 7.3% of gold's market value. If this ratio increases to 10%, 15%, 33%, or 100%, the price of Bitcoin will reach $92,523, $138,784, $305,325, and $925,226, respectively.

However, Bitcoin and gold differ in physical properties, market perception, application scenarios, and other aspects. Gold has become a globally recognized safe-haven asset with widespread industrial uses; whereas Bitcoin is a virtual asset based on blockchain technology, whose value is more derived from market consensus and technological innovation. When using this model, it is essential to fully consider these differences.

Summary

This article aims to find suitable valuation models for encryption projects to promote the robust development of valuable projects and attract more institutional investors to allocate encryption assets.

Especially during bear markets, we must use strict standards and simple logic to look for projects with long-term value. Through reasonable valuation models, we hope to uncover potential stocks in the encryption field during bear markets, just like discovering Google and Apple during the internet bubble burst in 2000.