Exploration and Practice of Encryption Asset Valuation Models

Cryptocurrency has become one of the most promising sectors in the fintech field. With a substantial influx of institutional funds, accurately assessing the value of encryption projects has become a key issue. Traditional financial assets have mature valuation systems, such as cash flow discounting and price-to-earnings ratio methods.

The types of encryption projects are diverse, including public chains, exchange platform tokens, decentralized finance projects, etc., each having its unique characteristics and economic models. Therefore, it is necessary to explore valuation models suitable for different fields.

Public Chain Valuation: Application of 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. Its formula is:

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

The law is widely recognized in evaluating the value of internet companies. Research shows that the value of companies like Facebook and Tencent exhibits characteristics of Metcalfe's law in relation to the number of users.

Ethereum is a typical case of Metcalfe's Law in application. Research shows that the market value of Ethereum has a logarithmic linear relationship with daily active users, which basically conforms to Metcalfe's Law. The specific formula is:

V = 3000 * N^1.43

Statistical data shows that this valuation method has a certain correlation with the actual market value trend of Ethereum.

However, Metcalfe's Law has limitations when applied to emerging public chains. For new public chains with a smaller user base, such as early Solana and Tron, this method may not be very applicable. Furthermore, this approach cannot reflect the impact of factors such as staking rates and burning mechanisms on token prices.

Exchange Platform Token Valuation: Profit Buyback and Burn Model

The platform tokens of centralized exchanges are similar to equity certificates and are closely related to the exchange's revenue, ecosystem development, and market share. These tokens typically employ a buyback and burn mechanism, and some also include a burning mechanism.

The valuation of platform tokens needs to consider the overall income of the platform and changes in token scarcity. A simplified valuation model is as follows:

Token value growth rate = K * Trading volume growth rate * Supply destruction rate (K is a constant)

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

1. Profit Buyback Phase (2017-2020): Use 20% of profits each quarter to buy back and destroy tokens.
2. Automatic Destruction Phase (2021 to present): Calculate the amount of destruction based on the token price and block count, and implement a real-time destruction mechanism.

Assuming that the trading volume of the platform grows by 40% in 2024, and the token supply destruction rate is 3.5%, with a constant K of 10, then:

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

This means that the token is expected to increase by 14% in 2024 compared to 2023.

However, this valuation method also has limitations. It is necessary to closely monitor changes in the exchange's market share and regulatory policy trends, as these factors can significantly impact the valuation of the platform's tokens.

Decentralized Finance Project Valuation: Token Cash Flow Discounting Method

For decentralized finance projects, the token cash flow discounting method (DCF) can be used for valuation. The core idea is to forecast the future cash flows of the token and calculate the current value using a certain discount rate.

DCF valuation formula:

PV = Σ(FCFt / (1+r)^t) + TV / (1+r)^n

Among them, FCFt is the free cash flow in year t, r is the discount rate, n is the forecast period, and TV is the terminal value.

Taking a certain DeFi project as an example, assuming the income in 2024 is 98.9 million, the annual growth rate is 10%, the discount rate is 15%, the forecast period is 5 years, the perpetual growth rate is 3%, and the FCF conversion rate is 90%.

According to calculations, the total discounted FCF for the next 5 years is 390.3 million, and the terminal value discounted is 611.6 million.

DCF total valuation = 611.6 million + 390.3 million = 1 billion

The current market value of the project 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% annual growth rate over the next 5 years, and the actual situation may fluctuate significantly due to market cycles.

Valuation of DeFi projects faces multiple challenges: governance tokens often do not directly capture protocol revenue; forecasting future cash flows is difficult; determining the discount rate is complex; the buyback and burn mechanisms adopted by certain projects may affect valuation results.

Bitcoin Valuation: A Comprehensive Examination of Multiple Approaches

Mining Cost Valuation Method

Statistics show that over the past five years, the time when Bitcoin prices were below the mainstream mining machine mining costs accounted for only about 10%, indicating that mining costs play an important supporting role for Bitcoin prices. Therefore, mining costs can be seen as the bottom line for Bitcoin prices, and when prices fall below this cost, it often presents a good investment opportunity.

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 about 7.3% of gold's market value. If this ratio increases to 10%, 15%, 33%, or 100%, the corresponding Bitcoin price will reach $92,523, $138,784, $305,325, and $925,226, respectively.

However, it should be noted that Bitcoin and gold still have significant differences in terms of physical properties, market perception, and application scenarios. Gold has evolved over thousands of years into a globally recognized safe-haven asset, while Bitcoin, as a blockchain-based virtual asset, derives its value more from market consensus and technological innovation.

Conclusion

Exploring encryption project valuation models is crucial for driving industry development and attracting institutional investors. Especially in a bear market, we need to search for projects with long-term value using strict standards and fundamental logic. Through reasonable valuation models, we hope to discover potential stocks in the encryption field during bear markets, just like Google and Apple emerged after the burst of the internet bubble in 2000.