14May 2019

A New Crypto Valuation Framework

by Henrik Andersson

Crypto valuation is still a nascent and evolving subject. With something radically new like crypto it is easy to fall into the trap of trying to fit it into the framework of something familiar. Instead we believe crypto assets are be a diverse set of different type of assets, with different valuation frameworks. Most crypto assets won’t fit squarely into one bucket but will have properties that span across multiple different types of assets.

Over the past 12 months our understanding of the subject has evolved primarily when it comes to the token type that is becoming known as ‘Work Tokens’. This is how we currently map out the space on a high level:

Source: Apollo Capital

Source: Apollo Capital

Note that the above table doesn’t include Security Tokens. These are a traditional asset class represented by a crypto token, thus fall into the left column even though they are represented by a crypto token.

Crypto-commodities, Bitcoin

Bitcoin can be thought of as a digital gold. It shares many properties with gold such as being scarce while Bitcoin’s properties are superior (easily divisible, transportable, stored, secured etc). It is probably no coincident that a similar system to Bitcoin proposed by Nick Szabo but not implemented was called Bit Gold.

It is not clear how to value a store of value like Gold, but it clearly has value as a hedge against inflation and currency devaluation. This is also the reason why practically all central banks have gold in their reserves.

In a way, Bitcoin is closing the circle as all gold is again becoming a global currency like it used to, but this time a new, digital gold.

Source: Apollo Capital Information Memorandum, Nick Szabo

Source: Apollo Capital Information Memorandum, Nick Szabo

One way to assess the value of Bitcoin under this framework is to estimate how much of gold’s value will be transferred to Bitcoin in the coming decades. The total value of all gold that have been mined is in the order of $10 trillion. We know there will not be more than 21 million bitcoin minted (less, since a portion of all bitcoin has been lost). Thus if Bitcoin captures 20% of gold’s value, the value per bitcoin would be roughly $100,000.

Work Tokens

Sometimes I’ve referred to Work Tokens as Blockchain Native Security Tokens. I don’t mean that they are securities from a legal standpoint, but they do exhibit some traits founds in Equities and Bonds, namely some kind of cash flow is involved. Note that I’m using cash flow generously here, in some cases crypto is distributed, in other cases there is a burn or you risk losing crypto if you don’t participate in a certain activity. Work Tokens is a good name as the payment is made in exchange for work. The kind of work the tokens encourage varies a lot:

Securing the blockchain

Bitcoin miners are paid newly minted bitcoin and transaction fees for securing the ledger. For them Bitcoin is a Work Token.

Validating blocks

In proof-of-stake systems new coin inflation is paid to the validators as a reward. By locking up coins, the validators risks being slashed in exchange for a possible reward.


Some projects such as 0X (in the case of 0X no cash flow per se is going to the token holders, its token economics is currently in flux) and MakerDAO have a token for coordinating decentralised governance.

Reporting outcomes

Augur is a predicting market where holders of the REP token can participate in reporting market outcomes. In V2 of Augur as a token holder you risk being slashed if you don’t participate during certain market related circumstances.

Predicting outcomes

Erasure is building a protocol where the token NMR is used as a stake in relation to ones confidence about your prediction.

The above is just some examples of possible work that Work Tokens can encourage, this is still an area of much innovation.

Note that just because there is a crypto-related ‘cash flow’ doesn’t mean the asset has a yield in the traditional sense. Ethereum moving to Proof-of-Stake doesn’t mean that Ethereum becomes a yield paying asset. The reason for this is that the reward is paid in the same currency as the token. It is a bit like a stock doing a stock split, it doesn’t make it more valuable. It does mean however that if you don’t participate in validating blocks, you’re leaving money on the table. The value comes from having a demand side and a supply side that work in sync. Take the case with the MakerDAO network. MakerDAO is a protocol for lending on top of Ethereum. There is a demand for Maker tokens from borrowers as they need to pay interest with the Maker token. Maker tokens that are used are burnt in the process. Thus it is relatively straightforward, at least in theory, to calculate a net present value of Maker using a discounted cash flow model.

Work tokens are often built on top of blockchains such as Ethereum and thus classified as Middleware assets. As such they can be blockchain agnostic and potentially capture value across blockchains. Decentralised work tokens is quickly emerging as one of the most exciting places for crypto investors to place capital and participate in the network.

Utility Tokens

Utility tokens are also known as Payment Tokens, they focus on the medium of exchange use case of crypto assets. Sometimes they are restricted to a certain payment or a product or service within a network, other times they try to be a general payment token. One of the most clear types of utility tokens are stablecoins. They are typically pegged to a national currency like the USD or the AUD.

For utility tokens we have a valuation framework in the Equation of Exchange:


Here M is the monetary base, V is the velocity, P is the price and Q is the quantity.

Bitcoin’s use case for remittances is an example of it being used as a utility. Say $1bn is sent through a particular remittances payment corridor per year. In our case P times Q equals 1bn. Assuming a velocity of 5, the monetary base needs to be 1bn/5 = $200M. This hypotethical example would be additive to any other use case for Bitcoin.

As we have seen with Bitcoin, a crypto asset can span two or three of the categories above.

In summary we are getting a clearer picture as how to look at crypto assets from a valuation standpoint. This is a fascinating subject that is evolving rapidly and that I’m sure we will come back to many times in the future.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.