Fun

How do you put the right valuation on digital assets?

News Feed - 2024-06-23 10:06:52

Jupiter Zheng19 hours agoHow do you put the right valuation on digital assets?What"s the best way to place a value on a cryptocurrency? Take your pick, because there are dozens of options.1089 Total views34 Total sharesListen to article 0:00OpinionOwn this piece of crypto historyCollect this article as NFTJoin us on social networksSuccessful crypto investing requires a solid framework for value-based decisions. The efficient-market hypothesis suggests that prices already include all the information that is available about an asset, and that prices reflect the perfect value.


However, there are thousands of examples in crypto and stock markets to contradict this theory. The reality is that markets are inefficient. Why did Apple’s stock price decline by 30% in during the Covid-19 crash in February 2020? Did Apple sell 30% fewer products? Did Apple earn 30% less? Why did GAP’s stock crash 70% over 49 days? Did the biggest clothing retailer in the United States suddenly sell 70% fewer clothes?


The answer to all these questions is a resounding “No.” Markets are often irrational, and prices will not reflect value. As Warren Buffett said, “Mr. Market is a drunken psycho.”


Related: The Oslo Freedom Forum is the best Bitcoin conference that isn’t about Bitcoin


This is where the concept of value investing comes from. Value investing tries to identify securities that are underpriced due to market irrationality. These securities are trading below market value (i.e., with a margin of safety), and investors who buy them, hope that one day, the price will reflect the value of the stock. Quoting the greatest investor Warren Buffett of all time again: “Price is what you pay, value is what you get.”


The same happens with crypto assets. Bitcoin’s (BTC) price fell 50% during the Covid-19 crash in March 2020 — only to recover to previous levels 55 days later and double its price in the subsequent five months. Did these movements in price accurately represent the real value of the network, its activity, active wallets, transaction volume, and network usefulness? Did the prices reflect the value?


The answer is no. The trick is having the right tools to spot these opportunities — tools like fundamental analysis.


Fundamental analysis enables traditional institutional investors to understand the industry, attracting more capital and giving rise to more unicorns, similar to what happened in the internet and consumer industries. These core techniques are also becoming increasingly standard for retail investors looking for the highest-potential investments across a long-term investment horizon.Hype versus growth, price versus value


There are a few axioms that are very important to any asset, including crypto assets. And although crypto assets are a relatively new asset class, they inherit similar core principles:Most crypto assets represent an underlying network, utility, or community, built on some spectrum of decentralization.The market forever swings between bull sentiment and bear sentiment, between greed and fear, between unsustainable optimism and unjustified pessimism. Valuation methods are important to maintain a rational investment strategy.The future performance of an investment is a function of its present price compared to its fundamental valuation.It is possible to minimize risks by avoiding overpaying for overhyped projects by looking at their valuation metrics — rather than their prices.


So what’s the difference between prices and value?


Prices are the result of many other variables that often differ from the value: sentiment, market hype or depression, speculation, fear, greed, overinflated news, etc. All assets have a non-negligible percentage of irrationalism, but crypto sometimes suffers from this disorder to a higher degree — especially recently in the memecoins sector. Specifically, there are many factors that can influence cryptocurrency prices, including market demand, market sentiment, government policies, regulatory changes, technological innovations, industry partnerships, project progress, and so on.


Related: Roaring Kitty’s gamification of GameStop is a menace to the market


Valuation refers specifically to determining an asset’s financial value. Valuation involves analyzing data to determine the intrinsic value of an asset using fundamental analysis. As the industry gradually matures, we are discovering that traditional financial valuation methods can help push past the hype to identify the projects with sustainable growth potential — whether due to being undervalued by the market or due to the size of the yet-to-be-tapped market opportunities.A framework for crypto valuation


Given the diversity of crypto assets in the market, there’s no “one-size-fits-all” valuation method. Investors need to look at different options and see which best fits each specific case. The first step is to categorize the asset. Is it a nonfungible token (NFT)? A payment token? A utility token? Or something else? (After all, unlike securities, cryptocurrencies and tokens have a wide range of purposes and utility and give investors different rights.)


For a native cryptocurrency — such as Bitcoin — you could, for instance, use Metcalfe"s Law. You could use the same method on a layer-1, such as Ethereum (ETH), or you could opt for something else, such as a stock-to-flow model.Are you dealing with an NFT, a utility token, or something else? Source: "The Digital Asset Valuation Framework" by Jupiter Zheng


Once you’ve categorized the token, use an analysis of your choice — one of those referenced above, or a different one from the image below.Pick a valuation modSource: "TheDigital Asset Valuation Framework" by Jupiter Zheng


Long-term successful investing in crypto doesn’t require an unusual IQ, special business insights, or insider information. You only need a solid framework for making investment decisions that is based on value rather than speculation. Happy investing!


This column was excerpted from "Digital Asset Valuation Framework," published by HashKey Capital in April 2024.Jupiter Zheng is a partner of liquid funds and research at HashKey Capital, a financial services firm with offices in Tokyo and Singapore. He served previously as the deputy head of Zhongtai Financial"s FinTech Department and as a senior associate in research at BOCOM International. He holds an undergraduate degree in applied physics from Beihang University and a graduate degree in operational research and business statistics from Hong Kong Baptist University.


This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.# Investments# Markets# Stocks# DeFi# Stock Investment# Cryptocurrency Investment# Opinion# Stock ExchangeAdd reaction

News Feed

Poly Network Says Stolen User Assets on ETH Have Been Returned, Except Frozen USDT
Poly Network Says Stolen User Assets on ETH Have Been Returned, Except Frozen USDT On Friday, a few days after the initial hack for $611 million, the Poly Networ
Helen Partz11 hours agoCurve omnipool platform Conic Finance hacked for $3.2M in ETHAccording to initial analysis by Peckshield, the root cause for the hack was the new CurveLPOracleV2 contract.2323 Total views50 Total s
Chinese Stocks Tumble After Disastrous Industrial Production Data
Chinese industrial production showed renewed weakness in August. | Image: AFP / ChinaStocks in mainland China and Hong Kong tumbled on Monday after Beijing reported a sharper than e
Pac Finance reportedly causes $24M in liquidations via sudden parameter change
Christopher Roark2 hours agoPac Finance reportedly causes $24M in liquidations via sudden parameter changeMultiple users on social media claimed they had been liquidated after a Pac Finance admin wallet allegedly changed
Gemini reaches $50M settlement with New York AG over Earn program
Turner Wright5 hours agoGemini reaches $50M settlement with New York AG over Earn programGemini Trust said that affected Earn users could expect “100% of the assets owed to them” within seven days.1144 Total views19
Bitcoin Price To $122K Next Month? Research Predicts Big Move
Este artículo también está disponible en español. Many analysts are ruminating on the next significant milestone, as the remarkable price increase of Bitcoin has captivat
Craig Wright admits he’s not Satoshi, issues disclaimer on his website
Vince Quill5 hours agoCraig Wright admits he’s not Satoshi, issues disclaimer on his websiteThe Crypto Open Patent Alliance accused Wright of forgery in court and claimed that he “invented an entire biographical hist
Bitcoin Price Touches $75,000 ATH: Analyst Says This Is What You Should Expect Next
Este artículo también está disponible en español. The Bitcoin price hit a new all-time high (ATH)as it surged past $73,700 and rose to as high as $75,000 on November 6. F
Unofficial GameStop memecoin’s $4M token presale draws investor controversy
Christopher Roark6 hours agoUnofficial GameStop memecoin’s $4M token presale draws investor controversyThe memecoin project wants to follow in the footsteps of the Wall Street Memes token, but it has allegedly yet to s
University of Wyoming launches Bitcoin Research Institute
Brayden Lindrea7 hours agoUniversity of Wyoming launches Bitcoin Research InstituteThe Bitcoin Research Institute will open in August as part of the University of Wyoming’s College of Arts and Sciences.2615 Total views
Cowboy Maverick Johnny Cash Mines 2.6 BTC Jackpot in Gold Rush at Bitcoin.com’s Crypto Casino
Cowboy Maverick Johnny Cash Mines 2.6 BTC Jackpot in Gold Rush at Bitcoin.com’s Crypto Casino Gold Rush with Jonny Cash dishes out a massive win of 2.6 BTC! Massive Win on Casino
Venezuela To Start Using Cryptocurrency in Global Trade in Efforts To Fend off U.S. Sanctions
Venezuela To Start Using Cryptocurrency in Global Trade in Efforts To Fend off U.S. SanctionsVenezuela president Nicolas Maduro says the country is to start using cryptocurrency in