Digital assets like cryptocurrencies and NFTs have rapidly become part of the mainstream economy. Several institutional investors, corporations and individuals now hold these assets as part of their long-term portfolio.
Unsurprisingly, there are plenty of ways to measure the price of these digital assets. Investors can tap into real-time statistics about the circulating supply, market price and market capitalization of nearly every digital asset ever created. However, investors still lack the tools and techniques required to measure the value of these digital assets.
In other words, we know how much a Bitcoin is worth in dollars. But how much should it be worth? Is a unit of BTC, currently trading at US$60,000, undervalued or overvalued? Academic literature on this subject is limited, but some tools and valuation methods have emerged in recent years. Here’s a closer look.
Income-based models
With proof-of-stake and Decentralized Finance (DeFi) quickly gaining momentum, digital assets finally have one more similarity to traditional assets: recurring yield. That makes it possible to measure the intrinsic value of a cryptocurrency or digital asset based on its ability to generate passive income for the holder.
For instance, staking ETH could generate an annual yield of roughly 5%. That’s better than most savings accounts and far better than most tech stocks with dividends. Investors can compare ETH’s 5% yield to Apple stock’s 0.58% and figure out if the cryptocurrency is a better bet on a risk-adjusted basis.
Usage-based models
Another way to measure the value of a digital asset is via its utility and popularity. Social media networks like Facebook and Pinterest were unprofitable for years, but they both generated value for shareholders based on their growing user base.
Similarly, the fact that there are 77.4 million active BTC wallets or that the Solana network has handled 36 billion transactions and the Open Sea marketplace has generated $3 billion in revenue in a single month all validate the intrinsic value of these assets and crypto startups.
Total Addressable Market
Perhaps the most simple way to measure the value of digital assets is to compare its aggregate market capitalization to its potential market size. Ethereum, for instance, is worth $500 billion at the moment, while the Total Addressable Market for decentralized computing and DeFi is estimated to be worth over $800 billion to $1 trillion by 2022. This could imply that ETH is undervalued and has much more room to grow.
Commodity-inspired models
Another way to compare the value of digital assets to traditional commodities is to measure statistics about basic supply and demand. Gold investors, for instance, rely on the stock-to-flow model to predict its price over the long-term. Veteran investor PlanB (pseudonym) adapted this model to measure the value of Bitcoin. The model predicts that each BTC should be worth more than $100,000 by now, which implies that it is currently undervalued.
Bottom line
Measuring the value of digital assets is tricky, but not impossible. As the sector evolves and matures, new valuation models like the ones above should help investors navigate this new asset class.
