Many still see no discernible value in cryptocurrencies. JP Morgan head Jamie Dimon even recently called Bitcoin a “decentralized Ponzi scheme”.
The world’s largest issuer of exchange-traded cryptocurrency products (ETPs), 21Shares AG, shows why this is not the case. The subsidiary of 21.co released the seventh edition of its State of Crypto Report on October 5. Here she presents possible crypto asset rating systems, which should clarify what Bitcoin and Co. be really worth.
Objective or relative?
According to 21Shares, there are basically two ways to judge the value of a cryptocurrency, internal (intrinsic) valuation and relative valuation. The internal evaluation is based on fundamental parameters such as cash flow, risk or growth. The value can be measured almost objectively.
The opposite is the case with the relative valuation of a coin or token, which is highly dependent on sentiment, narrative or supply and demand. This counterplay results in a gap (“The Gap”) of fundamental value and price. So the smaller the gap, the more realistic the price.
According to 21Shares, in the absence of objective evaluation, asset prices are often very exuberant, similar to the times of the dotcom or crypto ICO bubble.
The authors of the report divide cryptocurrencies into five categories: Proof-of-Stake (PoS) blockchains, Proof-of-Work (PoW) blockchains, utility tokens, governance tokens, and NFTs (non-fungible tokens). These in turn are assigned to an “asset superclass”.
For example, proof-of-stake tokens can be considered “crypto assets” because of the recurring revenue generated through staking rewards, according to 21Shares. Proof-of-work coins, on the other hand, would be more like a “crypto commodity” because of their energy-intensive production.
The main difference between utility and governance tokens in the latter is the participation in the network embodied in the token and the right to vote. So governance tokens should be of interest to large investors given that they behave very much like traditional shares in a company. The Uniswap decentralized exchange community recently voted for a new fee model in which token holders participate in the trading fees incurred by the platform – crypto dividends, so to speak.
The almost entirely subjective value perception of the NFTs makes them pure collectibles or stores of value, similar to a painting. They are therefore largely subject to a sentiment-driven valuation.
Like their counterparts from the financial world, known valuation methods can then be applied to these superclasses. A corresponding price for the crypto asset in question can then be determined from this. This fluctuates depending on the method, but provides information about a possible undervaluation or overvaluation.
For example, Ethereum, as a PoS asset, could be priced between $923 and $4,000 based on a fundamental valuation method, according to 21Shares. On the other hand, if you judge it relatively, for example when compared to an aggressively growing company like Tesla, an Ethereum price of up to $16,000 per token could be charged.
According to the authors, the base price of the “crypto commodity” Bitcoin would be between $12,000 and $20,300, taking into account current production costs. A relative price can be determined via “market size”, ie the comparison of the size with a target market. For example, at 20 percent of the gold market, Bitcoin would have a price of about $115,000 per coin.
A combination of the objective and relative assessment methods would be optimal in certain cases. According to 21Shares, a relative valuation is possible in almost all cases. However, the report also provides information about possible limits.
However, the quoted prices are conceivable. Especially when wealthy institutions invest in the crypto sector. A small portion of their portfolio would suffice. If the world’s largest banks allocate just five percent of their capital to the crypto sector, it would equate to an investment of nine trillion dollars. Triple the total crypto market cap to all-time highs during last year’s bull market.
No wonder, then, that major financial institutions do not want to miss this opportunity. Big names like BlackRock or Fidelity have long been available with large sums for the crypto sector. An industry-wide consensus on the valuation of cryptocurrencies, as suggested by 21Shares, would certainly help them.
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