Exploration of Encryption Asset Valuation Models

Cryptocurrency has become one of the most promising sectors in the fintech field. With a large influx of institutional funds, how to reasonably evaluate 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.

Encryption project types are diverse, including public chains, exchange platform tokens, decentralized finance projects, meme coins, etc. Each has its own unique characteristics, economic models, and token functions. Therefore, it is necessary to explore valuation models suitable for each subfield.

1. Public Chain Valuation: Metcalfe's Law

The core idea of Metcalfe's Law is that the value of a network is proportional to the square of the number of nodes.

The expression is: V = K*N² (V is the network value, N is the number of active nodes, K is a constant)

This law is widely recognized in the valuation predictions of internet companies. Research shows that over a 10-year statistical period, the value of companies such as Facebook and Tencent exhibits characteristics of Metcalfe's Law in relation to user numbers.

Ethereum as a case study:

Research shows that the market value of Ethereum has a logarithmic linear relationship with daily active users, which basically aligns with Metcalfe's Law. Specifically, the market value of the Ethereum network is proportional to the number of users raised to the power of 1.43, with the constant K valued at 3000. The calculation formula is:

V = 3000 * N^1.43

Statistics indicate that this valuation method has a certain correlation with the actual market value trend of Ethereum.

However, the Metcalfe's Law has limitations when applied to emerging public chains. For public chains that are in the early stages of development and have a smaller user base (such as early Solana, Tron, etc.), this approach may not be very applicable.

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 total locked value based on the security ratio in the public chain ecosystem.

2. Valuation of Exchange Platform Tokens: Profit Buyback and Destruction Model

The platform tokens of centralized exchanges are similar to equity tokens, and their value is related to factors such as the exchange's revenue (such as trading fees, listing fees, etc.), the development status of the public chain ecosystem, and market share. These tokens typically adopt a buyback and burn mechanism, and some also have a fee burning mechanism within the public chain.

The valuation of platform tokens needs to consider the overall income situation of the platform and the token burning mechanism. Its fluctuations are usually related to the trading volume growth rate of the trading platform and the token supply reduction rate. The simplified valuation formula for profit buyback and burning model is:

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

Taking the token of a well-known exchange platform as an example, its empowerment method has gone through two stages:

Phase One (2017-2020): Adopt a profit buyback mechanism, using 20% of profits each quarter to buy back and destroy tokens.

Phase Two (2021 to present): Implement an automatic burn mechanism, calculating the burn amount based on token price and the number of quarterly blocks in the blockchain; at the same time, introduce a real-time burn mechanism where 10% of the block rewards are burned.

The calculation formula for the automatic destruction mechanism is:

Burning Volume = sqrt(N) * P / K

Among them, N is the quarterly block production, P is the average token price for the quarter, and K is an adjustable constant.

Assuming that the trading volume growth rate of the exchange in a certain year is 40%, and the token supply destruction rate is 3.5%, taking the constant K as 10, then:

Token value growth rate = 10*40%*3.5% = 14%

This means that according to this data, the token value for the year is expected to increase by 14% compared to the previous year.

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

In addition, changes in regulatory policies have a significant impact on the valuation of centralized exchange platform tokens, and the uncertainty of policies may lead to changes in market expectations for platform tokens.

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

The core logic of the valuation method for decentralized finance projects using token cash flow discounting is to predict the future cash flows that tokens may generate and discount them to present value at a specific discount rate.

The calculation formula is:

Present Value = 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.

This method determines the current value of the token based on expectations of future returns from the protocol.

For example, a certain decentralized trading protocol:

Assuming that in 2024 the revenue of the agreement 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 a free cash flow conversion rate of 90%.

The total discounted free cash flow over the next five years is calculated to be $390.3 million, and the terminal value discounted is $611.6 million.

Total Valuation = Terminal Value + Free Cash Flow = 611.6 million + 390.3 million = 1.002 billion USD

The current market value of the protocol token is $1.16 billion, which is close to the valuation result. However, it should be noted that this valuation is based on the assumption of a 10% growth rate per year over the next 5 years, and the actual situation may vary due to market cycles.

However, the valuation of decentralized financial protocols faces several challenges:

1. Governance tokens typically do not directly capture the value of protocol revenue and cannot provide direct dividends to avoid being classified as securities.
2. Future cash flow forecasting is difficult due to the rapid changes in market cycles and significant fluctuations in protocol cash flows.
3. The determination of the discount rate is complex and requires comprehensive consideration of various risk factors.
4. Some projects adopt a profit buyback and burn mechanism, which may not be suitable for using the discounted cash flow method.

4. Bitcoin Valuation: A Comprehensive Consideration of Multiple Methods

1. Mining Cost Valuation Method

Statistics show that in the past five years, the time when the price of Bitcoin was below the mining cost of mainstream mining machines accounted for only about 10%, indicating that mining costs play an important role in supporting Bitcoin prices. Therefore, mining costs can be seen as the bottom line for Bitcoin prices, and historically, these periods have often been excellent investment opportunities.

2. Gold Substitute Model

Bitcoin is regarded as "digital gold" and can partially replace 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 corresponding Bitcoin price would reach $92,523, $138,784, $305,325, and $925,226 respectively.

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

Conclusion

Exploring the valuation models of encryption projects is crucial for promoting the healthy development of valuable projects in the industry, and it also helps attract more institutional investors to allocate to encryption assets.

Especially during periods of market downturn, we must use the strictest standards and the most basic logic to search for projects with long-term value. Through reasonable valuation models, just like discovering quality companies like Google and Apple after the internet bubble burst in 2000, we hope to uncover future giants in the encryption field during a bear market.