Valuation of

Cryptocurrencies and
Digital Assets

Keith Black, PhD, CFA, CAIA, FDP

Managing Director
Program Director
FDP Institute

@CAIA_KeithBlack
@FDPInstitute
 Finance

The FDP Institute Domain

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2
 • Consider digital assets as publicly-traded venture
Digital capital
Assets as • Just like dot com stocks in the late 1990s, valuation
Venture has risen rapidly, but the majority of digital assets will
have zero value in the long run
Capital • The venture capital model is profitable when 80% of
investments lose 100%, 10% break even, and 10% reach
10x or more of the original investment
What Caused • Late 1990s Internet stocks were priced with assumptions
such as earning 50% brick-and-mortar retail business
dotcom within five years
• While valuations were rising, companies were burning cash
stocks to at a rate that would bankrupt them in months rather than
years
Crash? • Nasdaq lost $1.7 trillion in value March to November 2000
• Twenty years later, dot coms have earned 15% to 25%
market share in many retail industries, far from 100%
Long-term
Value of dot
com Era
Stocks
 • Notice that Amazon, Netflix, Google, Priceline,
Oligopolies Broadcom, and ebay are all in different industries
• An oligopoly is an industry with revenues highly
concentrated in a small number of companies
• The winning firms enjoy larger market capitalizations,
while firms not in the top 2-6 by market share may
struggle to maintain relevance and market value
• What industries and assets will be the most
successful in the cryptocurrency and digital assets
space?
 Platforms and
Cryptocurrencies
Smart Contracts
Industries and Payments
BTC, LTC, BCH,
ETH, SOL, DOT,
ADA, BNB, XLM,
in Crypto LUNA, DASH, XRP
EOS

Non-Fungible DeFi
Tokens, Gaming AAVE, LINK,
MANA, AXS, COMP,YFI, MKR,
SAND, FLOW CRV

Utilities and
Stablecoins
Operating
USDT, USDC, DAI,
Businesses
DGX, GUSD
FIL, BAT, GNT
Digital Currencies • Digital currencies: Spend it or save it (BTC)
• Digital tokens: Spend it, save it, use it to access a distributed
vs Digital Tokens application (dApp) (ETH)
• Initial Coin Offering (ICO): Original sale of tokens to raise
money by funding venture capital project
• Examples:
• Basic Attention Token (BAT): Comes with Brave web browser. Pays
users for viewing ads and pays publishers of content
• Binance (BNB): 50% discount on fees for trading cryptos on
Binance exchange
• FileCoin (FIL): Renting and borrowing distributed cloud storage
• On-chain assets: Virtual assets trading on a blockchain (Like
BTC or ETH)
• Off-chain assets: Real assets trading on a blockchain (Like
Real Estate)
• Tokenization: Digital claims on real assets.
• Could significantly democratize asset ownership. Owning a piece
of a Picasso!
• Liquidity. Custody. Transparency.
Decentralized • DeFi includes decentralized borrowing, lending, futures, and
options
Finance • Decentralized exchanges (Dex) offer ability to swap one digital
asset for another
(DeFi) • Centralized exchanges allow the purchase of digital assets for fiat
currency
• Borrowing
• Borrowing collateralized by crypto deposits
• Borrow to reinvest in crypto assets using leverage
• Borrow to free up cash without incurring taxes on large gains
• US Taxation: long-term gains over 12 months, short-term gains
under 12 months
• Every sale or transfer of cryptocurrency is taxable (even for
buying coffee)
• Proceeds from lending, airdrops, mining taxable over $600 per
year
• Lending
• Cash deposited into crypto projects or lending platforms
• Futures and Options
• Hedge and speculate on direction of BTC and ETH
Market Total Cap ($Billion)
Number of coins
$2,260
15,447
coinmarketcap.com
12/9/2021

Capitalization Cum
Coin Cap ($Billion) Weight % of Cap

BTC $ 905 40.1% Top 2 61.8%

ETH $ 492 61.8% Top 10 79.7%

BNB $ 96 66.1% Top 20 86.3%

USDT $ 76 69.5% stable Top 50 93.2%

SOL $ 56 71.9%

ADA $ 44 73.9% Coins over $50 billion 5

XRP $ 41 75.7% Coins over $25 billion 10

USDC $ 37 77.3% stable Coins over $10 billion 19

DOT $ 27 78.5% Coins over $5 billion 37

LUNA $ 26 79.7% Coins over $1 billion 91

Seven • Discounted Cash Flow on Staking Yields
• Compare to gold or operating business or Total
Valuation Addressable Market
Models • Value projects as venture capital using
price/revenue or revenue growth based on income
to miners, stakers, liquidity providers
• Stock-to-flow
• Metcalfe’s law on the value of the network
• The equation of exchange
• Cost of production

Source: “Cryptoassets,” Matt Hougan and David Lawant

Discounted • BTC, ETH, and DeFi coins are volatile, often over 100% annual StDev
• Stable coins pegged to USD 1.00 or EUR 1.00
Cash Flow • Used as key input into deposit and lending environment with low
volatility
on Staking • Most exchanges have their own stable coin (Gemini, Binance)

Yields • Dai and Tether stable coins trade across exchanges

• Evaluate backing of the stable coins
• Backed 1-for-1 with hard currency or based on loans or money market
securities. Consider if there is credit risk or counterparty risk
• Value using DCF models
• Gemini Earn (Annual paid-in-kind yields)
• Gemini Dollar 8%
• BTC or ETH 2.05%
• 23 other digital assets earn 1.26% to 4.48%
• Yields are paid-in-kind
• Realized yield can vary from PIK yield if value of digital assets changes
after the yield is paid
Compare to •
•
Value of Digital Assets Space: $2.2 trillion
Value of Gold: $9.318 trillion @ $1,805
Value of Gold • Value of Bitcoin: $1.2 trillion @ $63,000
• Value of Ethereum: $500 billion @ $4,200
or Operating • Value of Decentralized Finance Space: $30 billion (LINK, UNI,
AAVE, SNX)
Businesses or • Value of JP Morgan stock: $510 billion @ $172
Total •
•
Bitcoin dominance: 40% (ETH 21%, Other Alt coins 39%)
Value projects as venture capital using price/revenue or
Addressable •
revenue growth
Only invest in projects with audits, development activity, and
Market network use
Multiple of • Tokens and staking pools earn substantial revenues
by charging trading, mining, and transactions fees
Revenue to • Borrowing, lending, and international money
Miners and transfers may disintermediate portions of the global
banking system
Stakers • Projects may be valued using stock-to-flow or price-
to-sales

Project 12 Month Revenue

Bitcoin (BTC) $1.1 billion
Ethereum (ETH) $4.1 billion
Uniswap (UNI) $790 million
Sushiswap (SUSHI) $250 million
Compound (COMP) $200 million

Source: TokenTerminal.com
 • Bitcoin price has historically risen each time reward to miners
has halved
• Nov 2012, July 2016, May 2020, 2024…
Stock-to- • Long-term value may follow stock-to-flow model with large
drawdowns
Flow

https://www.forbes.com/sites/stevenehrlich/2021/04/29/demystifying-bitcoins-
remarkably-accurate-price-prediction-model-stock-to-flow/?sh=642fcec9476a
Metcalfe’s • Value of a network is proportional to the square of
the number of participants
Law • Works for relative valuation across social media
companies or crypto networks
• Track daily average users or number of wallets per
crypto
• Assumes each user is of equal value regardless of
amount traded or invested

Source: “Digital Blockchain Networks Appear to be

Following Metcalfe’s Law” Ken Alabi
Equation of • MV=PQ
Exchange • Money supply * velocity = price of goods and
services * quantity of goods and services
• USD velocity varies from 0.9 to 3.5 over the last 30
years
• 100 billion BTC transactions per year at $100 each, $10
trillion
• Velocity of 5, each BTC changes hands 5x per year
• $10 trillion / 5 = BTC value of $2 trillion
• $2 trillion/21 million = $95,238 per BTC

Source: “Cryptoassets,” Chris Burniske and Jack Tatar

Cost of • Cryptos with limited supply are like other
commodities
Production • In proof-of-work protocol, miners expend resources
to purchase mining rigs and electricity
• Price should equal marginal cost of producing next
unit
• Bitcoin production limited to 21 million, so there can
be scarcity value
• Related to stock-to-flow, cost of producing bitcoin
increases with each halving of the block reward
• Shiba Ina has 540 trillion potential supply, no scarcity
value

Source: “A Cost of Production Model for Bitcoin,” Adam Hayes

Ways to • Investors have many choices to access
cryptocurrencies and digital assets
Access Digital • Holding in wallet directly
• Safe from hackers, but vulnerable to loss of access
Assets • Holding on exchange
• Can recover password and leave to heirs, but vulnerable
to hackers
• Buying closed-end funds, Spot ETFs, Futures ETFs
• May be eligible for retirement accounts, but adds extra
layer of fees
Access through
Closed-end Funds
• Closed-end funds
periodically issue
shares at NAV
• Shares are permanent
capital for fund, so
investors transact
floating shares at
premium or discount to
NAV
• GBTC from 40%
premium to 23%
discount
• Index funds also
available
Access through
Futures or Futures
ETFs
• Bitcoin futures at Growth of $1
CME can trade in Bitcoin Spot vs Bitcoin Futures
contango or $4.50

backwardation $4.00
$3.50
$3.00
• Capital efficient, $2.50

but futures $2.00

$1.50

underperformed $1.00
$0.50
spot by average $-

of 1% per month 12 2 18 4 6 8 10 12 2 18 4 6 8 10 12 2 18 4 6 8 10 12 2 18 4
18 18 18 18 18 18 18 19 18 18 18 18 18 20 18 18 18 18 18 21 18 18 18 18
6 8 10

since inception 17 18 18 18 18 18 19 19 19 19 19 20 20 20 20 20 21 21 21 21

Bitcoin Spot Bitcoin Futures

Access through
Spot ETFs
• US SEC still has not approved ETFs based on actual
holdings of cryptocurrencies, as CME is highly
regulated but cryptocurrency exchanges are not
• Other jurisdictions, such as Canada, have approved
spot ETFs
• Spot ETFs should trade very close to NAV, as they
have an arbitrage mechanism to create and retire
shares
Risks to • Custody
• Some exchanges and smart contracts have been hacked and had
value stolen
Cryptocurrencies • You can self custody in a hardware wallet, but lose all value if you lose
the hardware device or password
• Inflation
• Bitcoin is respected due to known monetary policy and maximum 21
million BTC. Other currencies or tokens may have no limit on issuance
• Regulation and Taxes
• Some countries may restrict citizens from trading, owning, or exporting
cryptocurrencies
• Smart Contract Risk
• New coins may have code that can be exploited to steal value
• Audit code to determine degree of safety vs exploitability
• Technology Risk
• Many projects are open-source
• Sushiswap copied Uniswap source code and started a new protocol
with some additional features
• Current projects are paying users to build network effect
• How do you know your favorite token will be in strong use in five years?
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