Valuation of Crypto Assets. A Conceptual Framework and Case Application to the IOTA Token

Table of contents

List of abbreviations

List of figures

List of tables

1. Introduction

2. Objective and approach of the thesis

3. Terminology and definitions
3.1 Definition of distributed ledger technology and blockchain
3.2 Definition and classification of crypto assets
3.3 About the fundamental value of crypto assets

4. Conceptual framework: Valuation techniques of crypto assets
4.1 Discounted Cash Flow (DCF) and CAPM
4.2 Asset rotation theory
4.3 Equation of Exchange (Quantity Theory of Money)
4.4 Network Value to Transaction (NVT) ratio
4.5 Metcalfe’s Law
4.6 Cost of production approach
4.7 Accessibility discount
4.8 Key findings

5. Case application: Valuation of the IOTA token
5.1 About IOTA
5.2 Valuation of IOTA

6. Conclusion

List of references

Appendices

List of abbreviations

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List of figures

Figure 1: Total market cap of all crypto assets in 2017/18

Figure 2: Illustration of centralized ledger and distributed ledger

Figure 3: Bitcoin network value and NVT ratio from 2012 to 2017

Figure 4: Bitcoin network value and refined NVT ratio – overvaluation

Figure 5: Bitcoin network value and refined NVT ratio – undervaluation

Figure 6: Upper and lower bound for Bitcoin value

Figure 7: Actual and estimated Bitcoin value

Figure 8: Ratio of Bitcoin market price to model price

Figure 9: Monero price appreciation after Bithumb listing

Figure 10: Development of DLT protocols from 2012 to 2017

Figure 11: Illustration of blockchain vs. IOTA Tangle

Figure 12: Transaction confirmation in the IOTA Tangle

Figure 13: Percent penetration of IOTA from 2019 to 2028

List of tables

Table 1: Bitcoin target markets and required monetary base in 2025

Table 2: PQV growth ratio (rPQ/rV)

Table 3: Key findings – conceptual part

Table 4: IOTA target markets in 2028

1. Introduction

2017 was a landmark year for crypto assets, such as Bitcoin or Ethereum. The total market cap rocketed from around $15 billion in January 2017 to over $700 billion in January 2018 (see Figure 1). The leading cryptocurrency Bitcoin hit its all-time high of almost $20,000 per coin on December 17th, 2017 finishing the year worth more than 1,300% of its value of around $1,000 at the beginning of the year (CoinMarketCap, 2018). Millions of people entered the new market around the world. The extremely high increase was characterized by low correlation with other financial assets. Even though crypto assets are still in an early and immature stage of their existence, many leading investors and thinkers in the crypto space consider them as a new asset class.

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Figure 1: Total market cap of all crypto assets in 2017/18 (CoinMarketCap, 2018)

The above chart (Figure 1) illustrates that Bitcoin and co are very volatile compared to other asset classes. In the world of crypto assets, it is not unusual that a token’s market price raises or drops by more than 100% within a few days. Obviously, these extreme price fluctuations do not necessarily reflect the underlying value of a crypto asset. The price is rather driven by hype and even market manipulation. This leads to the question: If the price does not represent the value, what is the fundamental value of a crypto asset? And how could this value be calculated? In the traditional financial world, fun- damental analysis based on financial statements is used to evaluate stocks of a com- pany. Since there are no financial statements for crypto assets new valuation tech- niques need to be developed, that comply with the different features of this emerging asset class.

2. Objective and approach of the thesis

This thesis aims at elaborating fundamental valuation techniques for crypto assets. Since research in this field is still at the very beginning this work intends to provide investors, financial analysts, token issuers, researchers or crypto enthusiasts a frame- work of how to determine the fundamental value of this emerging asset class. To do so, three main research questions are formulated:

1. How can the fundamental value of crypto assets be determined?
2. Which valuation techniques can be applied to the different token types?
3. What is the fundamental value of the IOTA token?

In order to answer the questions, the thesis will progress in the following manner: First, the reader will be introduced to distributed ledger technology (DLT) and blockchain, which represent the underlying technology of crypto assets. In the next step the term ‘crypto asset’ will be defined. It will be elaborated to what extent crypto assets can be considered as a new asset class and how crypto assets can be classified into different types. The terminological part will end up with a discussion of the fundamental value of this new asset class.

The main body of the thesis consists of two parts, a theoretical (conceptual) and a practical (applicational) part. The theoretical part aims to collect and evaluate all current valuation methods for crypto assets. Different absolute as well as relative valuation techniques will be elaborated, namely the Discounted Cash Flow (DCF) model and CAPM, the asset rotation theory, the Equation of Exchange, the NVT ratio, Metcalfe’s Law, the cost of production approach as well as the accessibility discount. At some points the current models will also be further developed. This part also discusses limi- tations of each model and elaborates the applicability of each model to the different token types. The conceptual framework is based on a profound literature review. Since research in this field is still at the very beginning most content is spread among very few books (Chris Burniske’s piece Cryptoassets to be highlighted) and mainly online sources, such as reports, studies, articles or blog entries. The discussion of the models is also inspired by experts from the crypto space, especially from members of the Block- chain Research Accelerator (BRA) who assisted this master thesis.

The second part of the main body comprises a case application of one valuation model, namely the Equation of Exchange, to the IOTA token. First, the general purpose, the underlying technology, the history as well as the token design of IOTA will be presented. In the second step the fundamental value will be calculated based on an in-depth Excel analysis which can be found in the appendices (Appendix 1). The input parameters are based on forecasts of market research firms, expert opinions from members of the BRA and personal assumptions. Three different scenarios of market penetration of the IOTA token will be conducted which results in a lower and upper bound of a present fundamental value of the IOTA token. The conceptual part ends up with a discussion of the results and limitations as well as the risks related to the IOTA project.

The conclusion will be summing up the key findings of this thesis by referring to the above research questions. It also comprises a discussion of the limitations as well as a future outlook of the research topic.

3. Terminology and definitions

The rise of the crypto ecosystem created a lot of new terminologies that are very often not clearly defined in literature. Nearly everyone has already heard of terms such as blockchain or Bitcoin, but only a few people are able to explain them and their underly- ing technology in a simple and comprehensible way. Casually spoken, the famous American talk show host John Oliver described crypto assets as “everything you don’t understand about money combined with everything you don’t understand about com- puters” (Oliver, 2018). This section explains briefly the basic terms that are relevant for this thesis and the general understanding of the topic. By reading it the reader should be able to grasp the meaning of terms such as distributed ledger technology, block- chain, crypto assets and the fundamental value.

3.1 Definition of distributed ledger technology and blockchain

It is quite important to understand how the underlying technology of crypto assets, namely distributed ledger technology and blockchain, work in order to understand how crypto assets derive their value.

The World Bank defines distributed ledger technology, short DLT, as a new and fast- evolving approach to record and share data across multiple ledgers, which each have the exact same data records. You can think of DLT as just a distributed database that eliminates the control over the ledgers by one central entity (World Bank, 2017, p. 1). The decentralized nature of DLT allows all participants in a peer-to-peer network to record any kind of “reality” such as ownership, transaction records, knowledge etc. without relying on a trusted central party. There exists, at any point in time, only one version of the ledger and each network participant owns a full and up-to-date copy of the entire ledger (World Bank, 2017, p. 5). The following graph (Figure 2) illustrates the general functioning of DLT compared to centralized ledgers:

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Figure 2: Illustration of centralized ledger (left) and distributed ledger (right) (Source: World Bank, 2017, p.7)

In the centralized ledger all parties reconcile their local databases with a centralized electronic ledger that is maintained and controlled by a trusted central party e.g. a bank (World Bank, 2017, p. 7). In the distributed ledger each node in a P2P network owns a full and up-to-date copy of the entire ledger. Every proposed local addition to the ledger by a network participant is communicated across the network to all nodes. Nodes col- lectively validate the addition through a cryptographic consensus mechanism. After val- idation is confirmed, the new addition is added to all ledgers to ensure data consistency across the entire network (World Bank, 2017, p. 7).

DLT shows significant advantages over centralized ledger systems. As already men- tioned it removes the need for an intermediary or central authority. This can translate into lower costs, better scalability and faster time to market. Since all members have a full copy of the distributed ledger, DLT also provide greater transparency, immutability and easier auditability than traditional systems. DLT also provide the possibility of pro- gramming “smart contracts”. These digital contracts are automatically executed once certain conditions are satisfied, for example invoices that are paid automatically once a shipment arrives. Furthermore, DLT is considered as more resilient against cyber- attacks because of its distributed nature (World Bank, 2017, p. 15 f.).

It should also be emphasized that DLT is not one single, well-defined technology. In- stead, every DLT that exists differs in its design and functionality depending on its pur- pose. Blockchain is the first and by far the most common type of DLT. It stores and transmits data in packages called “blocks” that are connected to each other in a digital ‘chain’ (World Bank, 2017).

The first application of DLT, more specifically blockchain, was the cryptocurrency Bitcoin. In 2008, the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” was published by an unidentified person or group of persons using the pseudonym Satoshi Nakamoto. The Bitcoin blockchain was designed with the specific intention of creating a digital currency that is free from central control and anonymizes the identities of its network participant (World Bank, 2017, p. 4). Due to limitations of the Bitcoin protocol, such as limited scalability and high transaction fees, a bunch of other DLT networks such as Ethereum, Ripple or IOTA were developed in the last years.

Even though DLT has been closely linked to digital currencies, various other DLT and blockchain applications exist or are under development. There is a particularly strong interest in DLT in the financial sector: at the time of publication, at least half of the top 30 banks are engaging in blockchain proofs of concepts. Stock exchanges around the world are also investigating and testing DLT to improve securities trading platforms, including NASDAQ, NYSE, and LSE. DLT could disrupt the way stocks are issued and traded, and in the long term potentially replace existing trading platforms. Other typical sectors that are exploring DLT solutions are trade and commerce, agriculture, govern- ance, healthcare and humanitarian aid (World Bank, 2017, p. 21 f.).

3.2 Definition and classification of crypto assets

After looking at the underlying technology, it is necessary to clearly define the term ‘crypto-asset’. The fundamental questions that need to be answered here are: How can crypto assets be defined? Can they be considered as assets? If so, do they fall under traditional asset classes or do they represent an entirely new asset class? And finally, what are the different types of crypto assets?

Crypto assets are digital assets recorded on a distributed ledger (usually blockchain). They derive their name from the cryptographic security mechanisms used within dis- tributed ledgers. Cryptography is used to verify transactions and secure the network without the intervention of a central party (EY, 2018). In fact, the term crypto asset refers to any kind of token that is created based on DLT through an ICO (“Initial Coin Offering”) (D’Onorio Demeo & Young, 2017, p. 4). Therefore, the terms crypto asset and token are used as interchangeable synonyms in this work. Some authors also dis- tinguish between tokens and coins, stating that a coin is built in its own blockchain protocol (e.g. Bitcoin or Ethereum) and a token is implemented on top of another block- chain protocol, for example all ERC-20 tokens are implemented on the Ethereum block- chain (Koenig, 2017, p. 50). However, for the purpose of this thesis this distinction is not necessary, and both terms are used as equivalents of the term crypto asset.

Generally speaking, an asset is defined as something that has a monetary value (costs, book value, market value or residual value), and that an entity purchases, owns, bene- fits from or has use of, in generating income. An asset can be physical (cash, machin- ery, inventory, land and building…) or non-physical (patents, account receivables, stocks, bonds, goodwill…). Furthermore, assets are characterized by being convertible into cash (BusinessDictionary, n.d.). Since crypto assets clearly fulfil all these definition criteria, they can be considered as assets.

The question whether crypto assets represent a new asset class is not that simple. According to Wikipedia an asset class is defined as a group of assets “which have similar financial characteristics, behave similarly in the marketplace […] and are often subject to the same laws and regulations” (Wikipedia, n.d.). As already outlined, crypto assets have very different financial characteristics compared to other asset classes such as stocks or bonds. They don’t necessarily pay out any dividends or interest rates.

They are based on DLT which is not the case for traditional asset classes. Usually an investor in crypto assets receives tokens that can be sent, received, and earned through the participation in the DLT or blockchain. The price of a token depends on the supply and demand on so called crypto exchanges such as Coinbase, Binance or Bit- finex. Currently around 1600 different tokens exist with a total market cap of about $300 billion at the time of writing (CoinMarketCap, 2018). In 2017, the combined market cap rocketed from $15 billion in January to over $600 billion at year-end. This outstanding raise was accompanied by low correlations to other asset classes. The spectrum of crypto investors is quite broad, ranging from tech-savvy teenagers, high-net worth pro- fessionals to even highly sophisticated hedge fonds and institutions. Especially more and more institutional investments are expected to enter the crypto space (Horsley, 2017). Due to this development billionaire investor Mike Novogratz believes that “crypto markets will reach $20 trillion value” (Njui, 2018). All these specifications are tempting to consider crypto assets as a completely new asset class. However, from a legal and regulatory perspective they are not treated in a uniform way. While some nations such as China strictly prohibited the trading of crypto assets, others are welcoming them as a legitimate investment. Many regulators try to put them into legal classifications of existing laws. In the USA for example, it currently depends on the nature of a token weather it is legally treated as a security, commodity or anything else. In that frame- work, tokens that are developed by a single, centralized entity such as a corporation might be considered as securities. These tokens have to meet all the SEC requirements for securities. Other tokens, that are for example, backed by an underlying commodity, might be considered as a commodity under the supervision U.S. Commodity Futures Trading Commission (CFTC) (Fung, 2018). Tokens that do not fall under these defini- tions are considered as utility tokens and stay unaffected by regulation. All in all, it can be said that the regulators do not per se consider crypto assets as an entirely new asset class, but rather categorize them within existing frameworks according to their nature. However, this is does not lead to the conclusion that crypto assets cannot be seen as a distinct asset class. Regulatory steps towards crypto assets are still at the beginning and the future will show how they will be treated by the law makers. It can be assumed that a well-balanced regulation of the crypto market will strengthen the legitimacy of crypto assets as a new asset class since more people will feel more comfortable to invest their money in crypto assets. For now, they could be described as a new asset class in the nascent stage.

As the law makers noticed correctly, there are various types of crypto assets, also re- ferred to as tokens, which will be explained in the following. Generally, tokens can be broken down into four types: Utility tokens, security tokens, cryptocurrencies and asset backed tokens (Hahn & Wons, 2018, p. 10).

A utility token is characterized by a specific functionality (“utility”) within a DLT network or platform. Utility tokens provide the user (future) access to a good or service, which in most cases, have yet to be developed. A utility token might be best compared to a gift card or software license, for example. The vast majority of ICOs that launched in 2016 and 2017 generated utility tokens (Hahn & Wons, 2018, p. 10). Ethereum is the best-known example of a utility token. Ethereum provides the platform to create smart contracts (code that can execute transactions automatically). Furthermore, other to- kens (so called “ERC-20 tokens”) as well as decentralized apps (“dapps”) can be built on top of the Ethereum network. Augur, for instance, is a decentralized prediction mar- ket built on top of Ethereum where users can place bets on outcomes, like which team will win the World Cup, and be compensated for being right.

A security token (also equity token) has similar characteristics to traditional securities such as equities (stocks). It can be described as a mean of investment in a company, often associated with profit participation or other rights (Hahn & Wons, 2018, p. 10). Not so many security tokens have been issued so far, but many experts in the crypto space expect an increasing popularity of security tokens (especially equity tokens) in the near future.

Cryptocurrencies are probably the best-known token class due to the popularity of Bitcoin, “the mother of all cryptocurrencies”. A cryptocurrency is a cryptography-se- cured digital or virtual currency operating on DLT without the control of a central bank (Hahn & Wons, 2018, p. 10). Like traditional fiat currencies (USD, EUR, etc.), crypto- currencies primarily serve the the three main purposes of a currency being a medium of exchange, store of value and unity of account (Hosp, 2017, p. 25). Bitcoin represents the first widely-adopted and most popular cryptocurrency. Besides Bitcoin, over 1000 different “altcoins” (stands for alternative cryptocurrency coins) have been introduced over the past few years and many central banks are actively exploring the possibility of issuing their own cryptocurrencies. Many altcoins such as Litecoin and Bitcoin Cash are variants (forks) of Bitcoin, with modifications to the original open-sourced protocol to enable new features. Other cryptocurrencies such as Ripple created their own block- chain (Cong, et al., 2018, p. 6).

Finally, there are asset backed tokens (also referred to as crypto commodities) that represent a claim to an underlying asset (e.g. gold or other commodities, real estate…). It enables micro shares of assets (such as 0.01 wind turbines) (Hahn & Wons, 2018, p. 12). Tether, for example, is an asset backed token since every Tether is backed by 1 US Dollar. Tether is also an example for a so-called “stable coin” since it stays (almost) stable in value.

Note that tokens don’t necessarily fit into one token class but can also represent so- called hybrid tokens that have features of two or more token classes. IOTA, for example can be seen as a cryptocurrency designed for micro M2M payments (“medium of ex- change) but also as a utility token since it provides access to the IOTA network (‘the Tangle’). The IOTA network can be used among others for secured data transmission.

3.3 About the fundamental value of crypto assets

With the emergence of a new asset class comes the difficulty of quantifying the funda- mental, underlying value of these assets. For some, Bitcoin, the crypto asset with by far the highest market cap, is valueless comparing the crypto market with the tulip ma- nia in the 17th century in the Netherlands. Microsoft founder Bill Gates, for example, describes Bitcoin as a pure “greater fool theory” type of investment, meaning that the Bitcoin hype is based on the buyers’ belief that somebody will be willing to buy the asset at a higher price without considering the fundamental value (Cheng, 2018). For others, such as software pioneer John McAfee Bitcoin has fundamental value and one coin will be worth $1 million by 2020 (Nambiampurath, 2018). So how valuable is it really? The true value of Bitcoin is probably somewhere between the two extreme perceptions. Be- fore diving into the different valuation models for crypto assets, the term “value” will be discussed in a broader way. What is the fundamental value of an asset in general? And how do crypto assets derive their value?

Wikipedia defines the fundamental value of an asset as follows: In finance, fundamental value (also: intrinsic value) refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its market value which is influenced by market conditions such as a recession or a speculative bubble. It is ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value. It is worthy to note that this term may have different mean- ings for different assets” (Wikipedia, n.d.).

First of all, it is important to note that the fundamental value of an asset and the market value, which is reflected by the market price, need to be distinguished. The market price is very often driven by psychological factors. Especially in the crypto space many in- vestors make decisions based on the behavior of other market participants, rather than hard analysis. Also, positive media coverage is one of the main factors driving the mar- ket price (Cameron & Trinh, 2017). All these factors are part of the extrinsic value of an asset and need to be excluded from a fundamental value analysis.

Furthermore, it is important to determine from what perspective it is looked at the value of a crypto asset. One could for example assess the value of a token at an ICO from an issuer’s perspective or from a regulatory perspective with respect to financial report- ing standards (IFRS). For the purpose of this thesis the token’s value is viewed from a rational long-term investor’s perspective. There are basically two motivations of inves- tors that buy tokens. There are buyers who purchase a token in order to get access to the (future) utility of the token. Second, there are buyers that anticipate an in crease in the token’s value and are looking for return on investment (D’Onorio Demeo & Young, 2017, p. 6).

Generally speaking, the value of a token is based on a combination of the purpose of the token and the underlying rights the holder has. For cryptocurrencies value is derived from strong features as a medium of exchange, store of value and unit of account. Especially, the ability to provide a monetary store of value to investors can drive a to- ken’s value to a great extent. This is especially the case for Bitcoin that is often dis- cussed as the “digital gold”. The value of a utility token is mainly derived from its usa- bility. A good example is Ethereum, the second biggest crypto asset in terms of market cap, that derives its value from providing developers access to its virtual machine where they can build other tokens (“ERC-20 tokens”) and decentralized apps (“dapps”) on. For cryptocurrencies as well as utility tokens also, network effects play an important role which means the bigger the network gets the higher the value. Whereas the value of security tokens can be compared to the value of securities such as stocks that derive their value from future cash flow expectations. For asset backed tokens the value is theoretically equal to the value of the underlying asset (Hahn & Wons, 2018, p. 14).

4. Conceptual framework: Valuation techniques of crypto assets

The valuation of crypto assets is about determining the fundamental value of the asset regardless of the current market price. This helps to get a feeling for whether a token is over- or undervalued. It is comparable to fundamental analysis of traditional financial assets such as stocks. In traditional fundamental analysis for stocks financial reports help to calculate the value of a stock. This does not work for crypto assets anymore and new valuation techniques need to be developed in order to assess the monetary value of crypto assets.

A number of authors and leading thinkers in the crypto space have written about the valuation of crypto assets and have developed a wide range of valuation techniques that will be presented in the following pages. However, research is still its infancy as crypto assets themselves and it will take a few years until highly sophisticated and val- idated valuation models for this emerging asset class will be available. Historically, this is comparable to the development of valuation techniques for stocks which have been established decades after the first stock trading. While Dutch East India Co became the first company to offer its shares on a public exchange in the early 1600s, it was not until the 20th century that a comprehensive framework for calculating the fundamental value of equity securities was developed (Evans, 2018).

In general, there are two approaches of how to value a token or any other traditional asset class: absolute and relative valuation models. Absolute valuation models attempt to determine the absolute fundamental value, often referred to as the intrinsic value, for an asset. Such models are used to calculate an estimate of value that can be compared with the asset’s market price. In traditional finance the absolute value of equities is usually calculated based on future returns that the investor expects to receive from holding the asset. A very common absolute model is the discounted cash flow model (DCF) (Henry, et al., 2010, p. 18). When it comes to absolute valuation models for crypto assets market sizing techniques, especially the Equation of Exchange based on the Quantity Theory of Money, has gotten the most traction in the market. But also, the asset rotation theory and the cost of production approach can help to estimate an ab- solute value for a crypto asset and therefore fall under the category of absolute valua- tion techniques.

On the other side, relative valuation models provide an estimate for the asset’s value relative to that of another asset. The underlying idea of relative valuation models is that similar assets should be sold at similar prices. Relative valuation is usually conducted by calculating ratios. In traditional equity valuation the stock price is usually divided by a fundamental such as cash flow per share. The most common ratio for stocks is the price-to-earnings ratio (P/E ratio), which is the ratio of a stock’s market price to the company’s earnings per share. A stock with a relatively low P/E ratio is relatively un- dervalued (Henry, et al., 2010, p. 20). For crypto assets the most common relative metric is the Network Value-to-Transaction ratio (NVT ratio) that compares the network value (equals the market cap) of a token to the network’s daily on-chain transaction volume.

In the following pages, the most common valuation techniques for crypto assets will be briefly explained. The aim is also to assess the usability of every valuation model for the different crypto asset categories, namely utility tokens, security tokens, cryptocur- rencies and asset backed tokens. Furthermore, the limitations of the presented frame- works will be discussed. It should be noted that the valuation models are not to be used as a justification for investment but can be helpful to understand what factors are driving the value of a crypto asset. Beside to the fundamental quantitative analysis of crypto assets qualitative analysis such as the assessment of the quality of the team, the un- derlying technology, the community and developers or the white paper of the crypto project is crucial when it comes to the investment in crypto assets. However, the qual- itative assessment of crypto assets is not subject of this thesis.

4.1 Discounted Cash Flow (DCF) and CAPM

First, one could think about using traditional valuation methodologies for assessing the value of crypto assets. This approach does not “reinvent the wheel” and looks at some very basic models from traditional finance and discusses how they could be applied to crypto assets. The basic traditional valuation model is the Discounted Cash Flow (DCF) model which derives the value of an investment from the discounted value of its ex- pected future cash flows. For common stocks dividends are the usual form of cash flow.

The following formula expresses the DCF model (Henry, et al., 2010, p. 85):

Abbildung in dieser Leseprobe nicht enthalten

with,

V0 = present value of the asset

n = number of cash flows in the life of the asset

CFt = expected cash flow at time t

r = discount rate or required rate of return

The discount rate r reflects the degree of risk of the investment. Alternatively, the re- quired rate of return resulting from the Capital Asset Pricing Model (CAPM) could be used as an input for r. The CAPM formula looks as follows:

Ri = rf + βi (rm – rf)

with,

rf = risk free rate

βi = beta of the investment rm = expected market return

(rm – rf) = risk premium

The CAPM formula is used to calculate the expected return on an investment. It is based on the assumption that an investor needs to be compensated for the time value of money (represented by the risk-free rate) and the systematic risk, also called non- diversifiable risk (represented by the risk premium). Beta is the investment’s volatility relative to the overall market (Henry, et al., 2010, p. 57).

So how could these models be useful for crypto asset valuation. Most of the existing tokens do not offer any cash flow. However, there are some exceptions to which the original form of the DCF formula could theoretically be applied. As already explained, security tokens can have similar characteristics to traditional securities such as equities (stocks). In case they pay the investor dividend-like returns the DCF model is applicable to this kind of tokens. In addition, there are some staking and masternode tokens (such as NEO or VeChain) that guarantee the investor certain payments as a reward for hold- ing the token that are used to validate transactions. These rewards could also be dis- counted to calculate the present value of an investment.

If somebody would like to apply the DCF model to other tokens than security tokens and proof-of-stake tokens formula needs to be adjusted slightly. Utility tokens provide a value to the investor based on a certain utility, which could be file storage, identity validation or supply chain trackability. Hence, one could estimate the value of future utility and discount it back to the present. These estimates for the future value replace the cash flows in the DCF formula (McKeon, 2017):

Abbildung in dieser Leseprobe nicht enthalten

with,

VFt = expected flow of value at time t

Anything else as in the original formula

The prediction of the future value can be based on a top-down or bottom-up analysis of the future market. In the top-down approach, one would start with the total size of the addressable market and then estimate what percentage of that market can be cap- tured by a certain token. In the bottom-up approach, one would start with the existing market size of the token and make assumptions on the rate of growth of that market. Sometimes a combination of these approaches could be useful (Kalla, 2017). Of course, this might be very sensitive to subjective assumptions. Another difficult task is to find a reasonable discount rate. Generally, it should represent the high risk of crypto asset investments. Discount rates of at least 30-50%, similar to high-risk venture capital stocks, seem to be accurate.

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