Memecoins, NFTs, fungible tokens and more. That’s the stuff that the crypto space is made of. However, their values differ from project to project and is usually based on utility, market demand and more. It also drives the regulators crazy. So, we decided to reach out to our panel of experts for insights on the issue of cryptocurrency tokens and their valuation. Here’s what they had to say.
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James Davies CPO at Tacans Labs
Coins like Bitcoin get released into the circulation following a highly expensive process called “mining.” The mining process becomes more and less expensive in accordance with the demand for the token. The mining process cleverly balances supply-demand.
ScarcityUnlike fiat currencies, several cryptocurrencies have a fixed upper limit. For example, Bitcoin has an upper limit of 21 million. There will never be more than 21 million BTC. This adds a sense of scarcity to the coin.UtilityOne of the most powerful use cases of crypto is its borderless nature. It doesn’t matter who or where you are; you can send your tokens to someone else as long as they have a valid wallet. Plus, payment is just one of the many utilities. In DeFi protocols, you can own the governance token and participate in network governance. You can stake coins like ETH and earn staking rewards. Increased utility and use cases add to the underlying value of the token.
Michel Caspers Co-Founder & CMO at Unity Network
“To get a better valuation of cryptocurrencies people first need to be educated on the workings of crypto and the blockchain tech behind it. When people understand that it they will be more interested to use it and invest in it.
This form of adoption can take away the volatility and FUD that cryptocurrencies are known for. Thus creating a stable market and creating an even more interesting investment object for the masses. One domino must fall to put this all in motion and education is the key.”
Matt Benton CEO at Trenchless Information Center
In my experience, cryptocurrencies are valued based on the supply and demand of those currencies. The price of a crypto is determined by the forces of supply and demand. If more people want to buy a crypto than there are sellers willing to part with their holdings, then the price will go up. On the other hand, if many people want to sell their coins and there aren’t enough buyers willing to buy them, then prices will decrease.
There are several models that can be deployed to help increase adoption. For example, one model would be to create a new cryptocurrency that pays dividends like stocks in order to attract investors who are looking for ways to make money off their investments. Another model would be to create a cryptocurrency that acts like cash or credit cards do now so that merchants can accept them as payment for goods and services without having to first exchange them into fiat currency.
Arjun Khazanchi Co-Founder and Chief Legal and Strategy Officer at Rooba.Finance
“Not all cryptocurrencies are created equal – and therefore not all can be valued the same way. Using Taking Ethereum (ETH token) as an example – as a capital asset, ETH produces cash flows through user transactions which are captured by validators and block producers. However, in order to receive a yield, one must stake their ETH and provide a service to the network. Currently, stakers earn a 5% real yield, which can be considered a p/e ratio of 20 based on the current stake rate and transaction fee volumes.
As a consumable/transformable asset, ETH has features of a commodity. ETH is consumed as more people use the network, and a burn mechanism functions in a similar way to an automatic stock buyback as demand for block space increases. About 70-85% of what users pay for block space will be burned and removed from circulation, making ETH function like a digital commodity.As a store of value/money asset, the perceived value of ETH is dependent on the exchange rate and the perception of market participants. It can be perceived as a store of value due to the potential increase in the utility of the Ethereum network in the future and the decrease in supply of ETH.In terms of on-chain financials, Ethereum platform sells block space as its product, which has demand due to the network of developers, nodes, validators, data oracles, users, and businesses building on and around the blockchain. Users pay for block space with the native token, ETH, for transactions such as loans, trades, NFTs, and more. As a tech platform, Ethereum is a tech platform, similar to Amazon or Apple’s iPhone, and its economic value accrues through interesting new businesses built on the platform.”What currently exists per valuation?“Again, using Ethereum as an example – a good starting point to estimate value would be to look at total transaction fees. A conservative 25% annual average growth rate in fees can be used, leading to a potential market cap of $416 billion or $3,459/token fully diluted. However, the actual compound annual growth rate for fee revenue over the last 5 years is 146%, indicating a much larger potential market cap of $1 trillion. The revenue/earnings multiple for Ethereum is difficult to determine due to the decentralized nature of the network, but stakers provide the consideration for expenses, which is essentially the dollar value of the staked ETH.”How valuation models can be deployed to help increase adoption?“Valuation models coming into the space will help reduce information asymmetry from the market, helping people understand that this isn’t just a speculative asset class but one which requires different methods of valuation. Data providers like Arcana and analysts like Michael Nadeau (who created an Ethereum valuation framework) help reduce this asymmetry and help accelerate adoption.”
Josip Rupena CEO and Founder at Milo
Higher demand pushes prices up – similar to stocks. Some cryptocurrencies have a maximum supply and only increase by a limited release schedule, such as bitcoin. This creates a scarcity factor due to the small amount of available float to purchase.
About Milo: Milo is a financial technology company reimagining the way global and crypto consumers access financial solutions to ‘Unlock what’s possible. By building a proprietary technology stack from the ground up and bringing on a world class team, the company has enabled millions of dollars in U.S. home loans. Milo is passionate about driving digital transformation of financial services, solving real problems, and making a meaningful impact in people’s lives. For more information visit www.Milo.io
