28Apr 2020

Crypto Asset Valuation Revisited

by Henrik Andersson

Excitingly, valuation of crypto assets are starting to look more and more like traditional cash flow valuation, especially with the rise of what we call Work Tokens. This is a follow-on to our earlier piece A New Crypto Valuation Framework

We find that most crypto assets falls in one of several of the below categories. As an example, Bitcoin clearly falls in the first category as an emerging form of Digital Gold but simultaneously it is clearly also used as a currency, and as such falls in the third category.

Source: Apollo Capital

Source: Apollo Capital

Let’s take a closer look at the different categories and the different models that are applicable for each.

Crypto-commodities, Bitcoin

As frequently mentioned, Bitcoin has favourable properties as an emergent Digital Gold. While Gold’s supply on earth is fixed but unknown, Bitcoin’s supply is known and fixed at 21 millions.

One of the most attractive models we have seen that captures the increased scarcity in Bitcoin in relation to its market capitalisation is the Stock-to-Flow model by PlanB. The graph below captures the essence of that model. As a store-of-value like commodity becomes increasingly scarce, its value tends to follow the regression line in the graph, up and to the right.


While this dynamic has proven to be valid so far, there are other dynamics in play as well. In our eyes, due to its superior properties Bitcoin is likely to capture market share away from Gold over time.


If that’s indeed the case, Gold will over time move to below the regression line in the graph above. Market share can flow from the close to $10 trillion asset that is Gold to its much smaller digital version which is Bitcoin at $130 billion.

While the store-of-value narrative in crypto is dominated by Bitcoin, other assets are also showing signs of ‘moneyness’ such as Ethereum’s ether.

Work Tokens

These are tokens that serve a particular function— they reward a certain work — and there is a payment compensating for that work. We have seen a growth in this kind of on-chain cash flow, especially in the important DeFi vertical.

Let’s take an example to illustrate what we mean. MakerDAO is a two-token system consisting of Dai, a stablecoin pegged to the USD and Maker, a governance token. The Maker is used to pay for the interest charged for participants who create or mint Dai. Those Maker tokens that are collected are removed from the ecosystem. In this way, the cash flow in Maker is very similar to a stock buyback. The work Maker token holders perform is not just as governors, but also by backstopping the system in case of a default.

There is a growing ecosystem of these work tokens that all have some form of on-chain cash flow. It is fundamentally no different valuing this cash flow than the cash flow from a stock.

The website Token Terminal captures the earnings for some of these networks and their associated work tokens.

Source: Token Terminal

Source: Token Terminal

It is possible to do a NPV calculation, or a calculate simple PE-ratio for work tokens tied to an on-chain cash flow.

One interesting observation is that these earning are ‘higher up’ in the income statement that traditional earnings from companies. Since there is no cost items associated to this cash flows, they in this sense resemble a claim on revenues which is more valuable than net earnings.

Another important point is that all crypto investing resemble early stage investing. As such, making ‘earnings’ forecasts for these tokens is fraught with uncertainty. The earlier you invest the more important other factors become such as credibility of team and the design and differentiated features of the proposed network. Research has shown that as this stage you will want a broad exposure to a number of assets that can appreciate by a very large factor.

‘Credible’ is a key word here

‘Credible’ is a key word here

Utility Tokens

Looking at crypto assets as currencies is one of the earliest approaches to crypto asset valuation. The equation of exchange states:


, where M is the Monetary value, V the velocity, P the price of a good and Q the quantity of the good.

Willy Woo created the NVT-ratio in order to visualise the relationship between the Network Value (our M in the equation above) and Transaction Value (P times Q), the NVT-ratio is the inverse monetary velocity:

NVT-ratio (red) against Bitcoin’s price (yellow). Source: Woobull

NVT-ratio (red) against Bitcoin’s price (yellow). Source: Woobull

While our traditional fiat currencies belongs to this category, we believe pure crypto asset utility tokens will face a tough time. Part of the reason for that is that the typical token value for a utility token is only a fraction of the transactional value on that network.

While Bitcoin’s value is tilted to the first category as a potential store-of-value, we see some of the most interesting opportunities in crypto asset investing in the second category, work tokens with an on-chain cash flow.

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.