How to correctly value digital virtualassets? What is the best way to value cryptocurrencies? Bitcoin $63,212 In March 2020, the price of Bitcoin fell by 50% during the Covid-19 epidemic - only to recover to previous levels after 55 days, and the price doubled in the following five months. . Do these price changes accurately represent the true value of the network, its activity, active wallets, transaction volume, and network utility? Does the price reflect the value? the answer is negative. The key is to have the right tools to discover these opportunities - such as fundamental analysis. Today the editor of this website will share with you a detailed introduction on how to correctly value digital virtual assets. What is needed Friends, don’t miss it!
Successful cryptocurrency investing requires a solid **value assessment** framework. The efficient market hypothesis holds that prices already incorporate all available information about an asset and that prices reflect perfect value. However, there are thousands of examples in the cryptocurrency and stock markets that contradict this theory. The reality is that markets are **inefficient**. Why did Apple stock drop 30% during the Covid-19 crash in February 2020? Is Apple selling 30% fewer products? Did Apple's profits drop by 30%? Why did GAP’s stock price plummet 70% in 49 days? Did America's largest clothing retailer suddenly sell 70% less clothes? The answer to all of these questions is a resounding "no." Markets are often irrational and prices do not reflect value. As Warren Buffett said, "Mr. Market is a drunkard." ”This is the origin of the concept of **value investing**. Value investing attempts to identify securities that are undervalued due to market irrationality. These securities trade below market value (i.e. have a **margin of safety**), and investors who purchase these securities hope that one day the price will reflect the value of the stock. To quote again the greatest investor of all time, Warren Buffett: "Price is what you pay, value is what you get." ”The same goes for cryptoassets. Bitcoin $63,212 In March 2020, the price of Bitcoin fell by 50% during the Covid-19 outbreak – only to recover to previous levels after 55 days, and the price doubled in the following five months. Do these price changes accurately represent the true value of the network, its activity, active wallets, transaction volume, and network utility? Does the price reflect the value? the answer is negative. The key is to have the right tools to spot these opportunities - like
Fundamental Analysis. Fundamental analysis allows traditional institutional investors to understand industries, thereby attracting more capital and spawning more unicorns, as has happened in the Internet and consumer industries. These core technologies are also becoming increasingly standard for retail investors seeking the most promising investments across the long-term spectrum. Hype vs Growth, Price vs Value There are some
axioms that are very important for any asset, including crypto assets. Although cryptoassets are a relatively new asset class, they inherit similar core principles: Most cryptoassets represent an underlying network, utility, or community built on some form of decentralization. The market is forever oscillating between bull and bear markets, greed and fear, unsustainable optimism and unreasonable pessimism. Valuation methods are important to maintaining a rational investment strategy. An investment's future performance depends on the ratio of its current price to its
underlying valuation. By focusing on the valuation metrics (rather than the price) of over-hyped projects, you can avoid overpaying for these projects, thereby minimizing risk. So what is the difference between price and value? Price is the result of many other variables, often different from value: sentiment, market hype or depression, speculation, fear, greed, exaggerated news, etc. All assets suffer from non-negligible proportions of irrationality, but cryptocurrencies are sometimes severely affected by this chaos - especially recently in the memecoin space. Specifically, there are many factors that can affect cryptocurrency prices, including market demand, market sentiment, government policies, regulatory changes, technological innovation, industry partnerships, project progress, etc. Valuation specifically refers to determining the financial value of an asset. Valuation involves analyzing data, using fundamental analysis to determine the
intrinsic value of an asset. As the industry matures, we find that traditional financial valuation methods can help cut through the hype and identify projects with sustainable growth potential – whether due to being undervalued by the market or due to the size of the untapped market opportunity. Cryptocurrency Valuation Framework Given the diversity of cryptoassets on the market, there is no “one size fits all” valuation approach. Investors need to research the different options to see which one is best for each specific situation. The first step is to classify your assets. Is it a non-fungible token (NFT)? Pay in tokens? Utility token? Or something else? (After all, unlike securities, cryptocurrencies and tokens have broad uses and utility and confer different rights on investors.) For example, with native cryptocurrencies like Bitcoin, you can use Metcalfe’s Law. You can use the same approach on layer 1 such as Ethereum $3,422, or you can choose another model, such as a stock-to-flow model.
Are you trading NFTs, utility tokens or something else? Source: JupiterZheng’s
DigitalAsset Valuation Framework Once you have classified your
Tokens, use the analysis of your choice - one of the ones cited above, or a different analysis than the one below.
Source for choosing a valuation model: "
Digital Asset Valuation Framework" written by Jupiter Zheng. Successful long-term investment in cryptocurrencies does not require extraordinary IQ, special business insights or inside information. You just need a solid framework to make investment decisions based on value rather than speculation. Happy investing! This column is excerpted from "
Digital Asset Valuation Framework" published by HashKeyCapital
in April 2024.
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