Bloomberg Research to Download: CRYPTOASSET MARKET COVERAGE INITIATION: VALUATION
(research.bloomberg.com)
Within the cryptoasset space, valuation has been a hotly debated topic for many years. During 2016 and particularly 2017 it was a relatively simple discussion, which in the parlance of the space was “when moon”, reflecting the market’s upward trajectory and an ever-hopeful voice that 10x or even 100x could be possible in the span of a month (which it sometimes was, especially in December ‘17/January ‘18).
This optimism was not surprising in a year where Bitcoin began at ˜$1,000 and saw an end of year peak of ˜$20,000. Nonetheless, there were many grappling with how to look more deeply at the fundamentals of valuation of a cryptoasset and/or its related project and how those two could be considered to intersect.
Much of 2018 has been a rather different year and a question we often hear now is "when tulips" or more precisely "what tulips" and a much stronger focus on valuation.
While we cannot answer the "when," we can provide a range of options as to the "what," and the lens that we provide certainly can paint a picture of certain areas of cryptoassets as having relatively strong fundamentals; while others appear heavily skewed, driven by speculation and not necessarily justifiable valuations.
We would further note that these aspects will continue to have real world consequences beyond market price, including standards around disclosure practices and GAAP reporting which do not currently have a well-fitting framework.
These are issues that we will continue to explore in later notes. Overview to Methodology In an entirely new asset class, consensus around valuation methodology is still evolving. Traditional securities like stocks and bonds are often valued based on their cash streams to securities’ holders, typically using either a DCF or multiples approach relative to the cash streams.
On the other hand, cryptoassets offer an expanded range of rights to their holders, and as a result valuation methodologies must vary based on the nature of each network.
Some networks have coins/tokens backed by real-assets (e.g. real-estate or commodity-backed) or distribution of cash flows from an underlying entity (e.g. exchange tokens, which return value via a token burn/buyback or distribute dividends using trading operations profits from the underlying exchange). As such, these can be valued using incumbent methodologies.
However, many cryptoassets are not backed by cash flows or real-assets. Instead, they resemble commodities within the networks they power, pushing appropriate valuation methodologies towards supply and demand of the cryptoassets.
Searching further into supply and demand of the cryptoassets, their versatility in use exposes them to multiple valuation options. In 2014, we helped develop one of the first fundamental valuation models for cryptoassets. We have now built upon the previous construct to develop a modified model and comprehensive view to be applied to our previously established coverage universe.
Broadly speaking, we believe there are seven buckets today in which cryptoassets can be grouped (pg. 3), which we have previously described in our initiation coverage.
Through this report, we will show examples of the following valuation methodologies (excluding stablecoins) from select coverage sectors:
• Top-Down: Currency, Platform, Privacy, Other Utility Sectors • Peer-Based: Platform Sector, Exchange Sector • Bottom-Up: Currency / Privacy Sector hybrid (e.g. DASH), Exchange Sector (e.g. BNB), Other Utility Sector (e.g. REP) We acknowledge that in the short-term markets are a voting machine, and reflect the price at which two parties were most recently willing to execute a trade, and as such do not necessarily represent the fundamental value of the asset.
However, we do believe over a longer time period, and especially as the industry matures, fundamental valuation techniques will begin to more closely approximate trading prices.
Our goal in this report is to outline several conceptual frameworks to understand the value capture and retention within cryptoassets based on market opportunity and usage.
Download the full free 19 page report here: https://research.bloomberg.com/pub/res/d37g1Q1hEhBkiRCu_ruMdMsbc0A
This optimism was not surprising in a year where Bitcoin began at ˜$1,000 and saw an end of year peak of ˜$20,000. Nonetheless, there were many grappling with how to look more deeply at the fundamentals of valuation of a cryptoasset and/or its related project and how those two could be considered to intersect.
Much of 2018 has been a rather different year and a question we often hear now is "when tulips" or more precisely "what tulips" and a much stronger focus on valuation.
While we cannot answer the "when," we can provide a range of options as to the "what," and the lens that we provide certainly can paint a picture of certain areas of cryptoassets as having relatively strong fundamentals; while others appear heavily skewed, driven by speculation and not necessarily justifiable valuations.
We would further note that these aspects will continue to have real world consequences beyond market price, including standards around disclosure practices and GAAP reporting which do not currently have a well-fitting framework.
These are issues that we will continue to explore in later notes. Overview to Methodology In an entirely new asset class, consensus around valuation methodology is still evolving. Traditional securities like stocks and bonds are often valued based on their cash streams to securities’ holders, typically using either a DCF or multiples approach relative to the cash streams.
On the other hand, cryptoassets offer an expanded range of rights to their holders, and as a result valuation methodologies must vary based on the nature of each network.
Some networks have coins/tokens backed by real-assets (e.g. real-estate or commodity-backed) or distribution of cash flows from an underlying entity (e.g. exchange tokens, which return value via a token burn/buyback or distribute dividends using trading operations profits from the underlying exchange). As such, these can be valued using incumbent methodologies.
However, many cryptoassets are not backed by cash flows or real-assets. Instead, they resemble commodities within the networks they power, pushing appropriate valuation methodologies towards supply and demand of the cryptoassets.
Searching further into supply and demand of the cryptoassets, their versatility in use exposes them to multiple valuation options. In 2014, we helped develop one of the first fundamental valuation models for cryptoassets. We have now built upon the previous construct to develop a modified model and comprehensive view to be applied to our previously established coverage universe.
Broadly speaking, we believe there are seven buckets today in which cryptoassets can be grouped (pg. 3), which we have previously described in our initiation coverage.
Through this report, we will show examples of the following valuation methodologies (excluding stablecoins) from select coverage sectors:
• Top-Down: Currency, Platform, Privacy, Other Utility Sectors • Peer-Based: Platform Sector, Exchange Sector • Bottom-Up: Currency / Privacy Sector hybrid (e.g. DASH), Exchange Sector (e.g. BNB), Other Utility Sector (e.g. REP) We acknowledge that in the short-term markets are a voting machine, and reflect the price at which two parties were most recently willing to execute a trade, and as such do not necessarily represent the fundamental value of the asset.
However, we do believe over a longer time period, and especially as the industry matures, fundamental valuation techniques will begin to more closely approximate trading prices.
Our goal in this report is to outline several conceptual frameworks to understand the value capture and retention within cryptoassets based on market opportunity and usage.
Download the full free 19 page report here: https://research.bloomberg.com/pub/res/d37g1Q1hEhBkiRCu_ruMdMsbc0A