Crypto Valuation Theory
While there are many valuation methodologies, we believe Call Option Theory provides an elegant framework to value many cryptocurrency assets.
Welcome to our second research article. While this is a relatively short write-up, you can find the full research report HERE.
Note: This material is advisory only, and any positions taken may be at your own risk. BMV may hold positions in the underlying assets. Naturally, we do tend to believe our own research.
Objective Of this Article:
Today we will provide a quick overview of traditional financial valuation tools, and explain why we believe Option Theory is the best framework to view most existing Cryptocurrency assets (at least as of February 2019).
While existing valuation tools and methods are tempting to apply to Cryptocurrency assets, BMV believes two several differences require a different framework.
1. Absence of Cash Flows or Liquidatable Assets - Assets in this space do not traditionally have claims on any incoming cash flows or company assets
2. Long-Term Payoff from Development and Adoption - Many assets in this space represent a speculative bet on future development, adoption, and other uses not-yet determined. Successful payoffs tend to be exponential due to network effects.
3. Trust - The majority of current assets have no enforceable claim on assets or cash flows, requiring a large amount of trust in the development team
Call Option Payoffs
At Bear Market Valuations, we focus on setting the 'Rational Market Price' for these assets, which is equivalent to the value of a trading call option.
Rational Market Price: Value of discounted adoption, future development, and other non-specified payoffs
Payoff: This is the financial return. Price should equal payoff.
Today + N: An abbreviation for sometime in the future
Development + Adoption: This should underpin the payoff. More development and adoption should be correlated with a higher price.
Going forward, BMV will develop valuations for assets using the above framework.
Author's Note: This framework does not work for all assets - such as those without specified development timelines or those seeking to be pure currencies. In those cases, BMV will use alternate valuation methods (though primarily based on the Quantity Theory of Money).
Questions or Comments? Reach out at BearMarketValuations@gmail.com
THIS REPORT IS NOT FINANCIAL ADVICE. AUTHORS MAY OWN POSITIONS IN UNDERLYING ASSETS DISCUSSED. PLEASE SEE FULL DISCLAIMER WITHIN REPORT.