This report provides an in-depth overview of the state of the crypto asset industry over the last few months — offering our view on the industry and a recap of the most important news items. In addition, we have included one of our research reports: Our insights into Valuation Frameworks, The Case for Cryptoassets.
What's inside?
Market Updates
The collapse of Terra Luna triggered by the depegging of the project’s algorithmic stablecoin UST took the markets by storm. A domino effect of crypto contagion tumbled over the industry, allowing players to rethink their strategies and products, reminding the industry that bear markets are a time to build.
Valuation Approaches
Valuation in crypto remains an emerging topic seeking consensus, especially as the asset class expands in use cases. Starting with basics, the answer to “what’s the value of an asset?” is two-fold: fundamental and relative valuation.
Fundamental Valuation
This section explains why a discounted cash flow model applies to proof-of-stake cryptoassets and governance tokens while the mining cost of production sets a floor price for proof-of-work cryptoassets.
Relative Valuation
A significant portion of equity valuations in traditional finance consists of relative valuations based upon multiples and comparables. This section explores crypto-specific multiples that help determine whether a given asset is undervalued or overvalued relative to its peers.
Taxonomy of Cryptoassets
In addition, suppose the same investor was deliberating on whether or not to buy a piece of fine art. In this case, it obviously wouldn’t make sense to use a DCF valuation, as there are no cash flows to discount. Instead, it is a known fact that individuals value collectibles based on their subjective beliefs and preferences. Similarly, we must delineate a taxonomy of cryptoassets to understand the differences we may expect in the value accrual and potential valuation approaches.
Asset Superclasses
Cryptoassets seem to encompass characteristics of all three asset superclasses: Capital Assets, Consumable/ Transformable Assets and Store of Value Assets. This fact explains the confusion that looms around valuing cryptoassets which this section aims to clear.
Price and Value Discrepancies
The one thing all valuation approaches have in common is the presumption that markets are inefficient, at least in the short term. Otherwise, price would be the best estimate of value, and there would be no point in valuing an asset.
Challenges to Cryptoasset Valuations
The report concludes with the limitations and shortcomings of cryptoasset valuation methods, including bias, uncertainty, and complexity.
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