Brian Nibley

<div id="highlights-block_635847caca01c" class="highlights">
 <ul>
 <li>Crypto valuation is the process of determining if the fair value of a crypto asset is overvalued or undervalued by the market</li>
 <li>Traditional valuation methods can be difficult to implement in crypto, given the nuance in the developing space</li>
 </ul>
 
</div>



One of the first lessons in finance is that an asset&#8217;s value is not always the same as an asset&#8217;s price. Intrinsic value is something financial analysts can quantify through evaluating dividends, cash flows and growth rates. Because crypto assets lack these traditional and quantifiable metrics, the legacy valuation framework has evolved in an effort to make better sense of this new asset class.&nbsp;



Crypto valuation in this sense is the process of determining if the fair value of a crypto asset is overvalued or undervalued by the market. These models require a high degree of nuanced understanding because digital assets exist along a spectrum of functionality — with some qualifying as commodities and others as securities. Analysts need to properly identify and apply a different set of tokenomic and regulatory standards when valuing assets across this spectrum.&nbsp;&nbsp;



For more on this, we spoke with some of the experts at Teknos Associates.



Neil Thakur is managing director at <a href="https://www.teknosassociates.com/">Teknos Associates</a> (Teknos). In Neil’s words, Teknos is “a valuation advisory services firm that works with emerging growth technology companies, with our group specifically focusing on the crypto and blockchain industry.” These services are  related to the issuance and transfer of tokens, or related assets, for investment, tax or financial reporting purposes.  



<h3 class="wp-block-heading">Approaches to crypto valuation</h3>



Analysts traditionally use company operations data, and often leverage market data, to derive equity valuations. An income-based model such as the discounted cash flow or a market-based model such as a comparable companies analysis are mathematical methods used to provide educated estimates of what the fair market value of a company’s stock might be.



However, given the nuances of the crypto industry, some of these traditional valuation methodologies can be difficult to implement. These examples include stock-to-flow, token velocity (based on the quantity theory of money), daily active addresses/users, and network value to transaction ratios.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Without getting too lost in the details, it’s important to note that each of them have their various advantages and disadvantages. Furthermore, the proofing of these models really comes down to the ability to measure and test the inputs and assumptions. Given that we are still in the early stages of the crypto market, it’s still very difficult to back-test many of the theoretical constructs.



In addition to basic valuation considerations, there are also several regulatory factors to consider as there is still marked uncertainty as to whether or not some crypto assets would be considered a security under the Howey test. <a href="https://www.wsj.com/articles/ethers-new-staking-model-could-draw-sec-attention-11663266224" target="_blank" rel="noreferrer noopener">According to SEC Chair Gary Gensler</a>, many protocols, such as proof-of-stake tokens, could fall under security law enforcement.



As far as Teknos is concerned, Neil noted that the methodologies considered in their analyses can vary depending on the specifics of each engagement. According to Neil, “factors such as the stage of development of a protocol, lockups, staking, market dynamics, and functional characteristics all play a role in the value and risks associated with the token. Understanding these factors allows us to assess whether an asset, market, or income valuation approach is applicable.”&nbsp;



Neil added: “The purpose of the engagement also can influence methodology decisions.&nbsp; As an example, for some tax and financial reporting analyses, we may not always be able to consider the effect of token lockups unless they are structured in a very specific manner.&nbsp; Alternatively, for investment related engagements, we may spend more time looking at market dynamics and forward-looking analyses combined with scenario modeling.&nbsp; Given that the industry is still at a very early stage, it’s important to keep an open mind and evolve our valuation methodologies as the industry, and the regulatory environment in which it operates, continues to develop.&#8221;



<h3 class="wp-block-heading">Recent venture capital funding in crypto</h3>



Despite bearish market sentiment for the sector and macro environment overall, venture capital funding continues to grow. Unlike crypto assets though, this type of funding primarily relies on traditional valuation models. These investors are looking at crypto companies and relevant market metrics to try and measure intrinsic value. That is not to say crypto asset valuations are not used in this process. They still apply when analysts determine that the value of crypto companies is largely dependent on a single crypto asset or even the crypto market at large. Here are a few quick highlights from the year so far:



<ul><li>Mysten Labs, the developer of the Sui layer-1 blockchain, <a href="https://www.businesswire.com/news/home/20220908005607/en/" target="_blank" rel="noreferrer noopener">raised</a> $300 million in a Series B funding round that values the company in excess of $2 billion – a sign that investors see layer-1 blockchains as major disruptors.&nbsp;</li><li>Decentralized exchange Uniswap Labs raised <a href="https://uniswap.org/blog/bringing-web3-to-everyone" target="_blank" rel="noreferrer noopener">$165 million in a Series B funding</a> round that was led by crypto-focused investment firm Polychain Capital.</li><li>WeWork founder Adam Neumann’s Flowcarbon, a blockchain-enabled carbon credit trading platform, raised $70 million in its first major funding round.</li><li>Crypto exchange <a href="https://cms.blockworks.co/ftx-wants-another-1b-to-buy-more-crypto-companies-report/" target="_blank" rel="noreferrer noopener">FTX</a> recently raised $400 million in a Series C round and could raise an additional $1 billion. If the billion-dollar fundraising goes through, the exchange would retain a valuation of $32 billion.</li><li>Overall, <a href="https://techcrunch.com/2022/07/25/crypto-valuations-may-sink-until-september-as-vcs-play-a-waiting-game/?guccounter=1" target="_blank" rel="noreferrer noopener">capital raised</a> in the crypto sector has soared year over year, from $6.08 billion during Q2 2021 to $8.3 billion in Q2 2022.</li></ul>



While some venture firms are eagerly deploying capital, others remain on the sidelines, waiting for conditions to ripen.



<h3 class="wp-block-heading">Who is buying and who is waiting</h3>



In a sense, everyone wants to get into crypto, but at the same time, nobody wants to get into crypto. There are large amounts of capital continuing to be deployed in the space, yet there remain large sums of money waiting cautiously for the right time to enter as a result of various macroeconomic considerations and the aforementioned regulatory concerns.



A lot of this mixed sentiment has to do with the current macroeconomic uncertainty within the global economic and financial system. Neil described it as such: “They&#8217;re all putting money out there, but it&#8217;s a little bit more cautious, right? We&#8217;re not seeing as frothy of an environment, for obvious reasons. You&#8217;ve got macroeconomic issues at play and quite honestly, there&#8217;s still a whole level of regulatory uncertainty.”



He went on to say there is somewhat of “a wait-and-see approach,” but that at some point, “there is a lot of pressure on general partners to put money to work that has been raised over the last few years.”



With regard to whether or not potential investors are waiting for clearer regulations before getting involved, Neil said “I don&#8217;t think they&#8217;re necessarily going to wait for that entirely,” after noting that we’re not likely to see full regulatory clarity in the near future.



<h3 class="wp-block-heading">What to consider when it comes to crypto valuations</h3>



It can be hard to identify the items investors can most benefit from observing when determining the value of a crypto asset. Depending on what model is being utilized, certain factors may play a more outsized role than others.



One thing is for certain, though: Macro matters.



Alex Salvadori of <a href="https://www.daemonventures.vc/">Daemon Ventures</a>, a boutique crypto-focused angel fund, had this to say regarding one of the most important factors to keep in mind when conducting crypto valuations: “In the past, investors have assumed that BTC, ETH, and other altcoins were operating on their own cycle. As more institutional capital comes into the space, crypto early adopters are beginning to understand that those large players view the world through a top-down, macroeconomic lens. Given this paradigm shift, you need to not only understand the specific narrative within crypto that you’re investing in, but you also need to take into consideration some of the macro factors that may be driving things at the same time.”



Alex also noted an increased focus on macro content by various crypto outlets, including Blockworks’ recently launched macro-focused YouTube channel, highlighting the growing importance of this topic in crypto.&nbsp;



Once upon a time, crypto was an isolated asset class, largely uncorrelated with traditional markets. But now, in a market with growing dependence on the flow of central bank credit, speculative assets like crypto and tech stocks move in tandem. If the world is in what some call an ‘everything bubble’, then analysts need a better valuation of ‘everything’ before determining one for a specific asset or security. As the teams at both Daemon Ventures and <a href="https://www.teknosassociates.com/">Teknos</a> emphasized, this requires a serious consideration of macroeconomic forces in play.



This content is sponsored by <a href="https://www.teknosassociates.com/" target="_blank" rel="noreferrer noopener">Teknos</a>.



Disclaimer:&nbsp;Nothing in this sponsored article and Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Blockworks is not a fiduciary by virtue of any person’s use of or access to the Site or Content.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.

The Investor’s Guide to Crypto Valuations in 2022

Garrett Harper

On today&#8217;s episode of &#8220;<a href="https://www.youtube.com/channel/UCEOv-8wHvYC6mzsY2Gm5WcQ" target="_blank" rel="noreferrer noopener">Empire</a>,&#8221; Jason and Santiago are joined by Jeff Dorman, chief investment officer at Arca. Jeff is a prominent crypto investor known for his fundamental analysis, contrarian bets and ability to simplify crypto&#8217;s arcane topics.



In this episode, Jeff Dorman explains crypto&#8217;s response to macro, why fundamentals matter, equity tokenization and crypto&#8217;s most exciting developments. Don&#8217;t miss Jeff&#8217;s insights on where crypto is headed next!



Plus, hear more on:



<ul><li>BTC vs. NASDAQ</li><li>Crypto&#8217;s watershed moment</li><li>CeFi merging with Defi</li><li>How to value layer-1 blockchains</li><li>And so much more!</li></ul>



Check out what they had to say in the video below.👇



<figure class="wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" title="Crypto’s Next Chapter | Jeff Dorman" width="1024" height="576" src="https://www.youtube.com/embed/XCFSYU_EJws?start=2529&#038;feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
</div></figure>



<h3 class="wp-block-heading">About the show</h3>



&#8220;Empire&#8221; is a twice-a-week show where we share the real crypto stories that aren’t heard elsewhere. On Mondays, Jason and Santiago Santos interview crypto industry movers and shakers to talk about their struggles, bold moves and tough decisions. Finish off the week with Friday&#8217;s weekly roundup episode that covers the top news and narratives of the week.



For any NPR or Guy Raz fans out there, you can think of &#8220;Empire&#8221; as a &#8220;How I Built This&#8221; for the bitcoin and crypto industry.



Subscribe to &#8220;Empire&#8221; today on&nbsp;<a href="https://podcasts.apple.com/us/podcast/empire/id1554930038" target="_blank" rel="noreferrer noopener">Apple</a>&nbsp;or&nbsp;<a href="https://open.spotify.com/show/4UTePv1CR3APdKOiosR3Iq" target="_blank" rel="noreferrer noopener">Spotify</a>. Watch episodes on&nbsp;<a href="https://www.youtube.com/channel/UCEOv-8wHvYC6mzsY2Gm5WcQ" target="_blank" rel="noreferrer noopener">YouTube</a>.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.

Podcast: Crypto’s Next Chapter | Jeff Dorman

Ben Strack

<div id="highlights-block_616457062140e" class="highlights">
 <ul>
 <li>Miller, an early believer of Amazon, noted that his average cost per bitcoin before this year was about $500</li>
 <li>Crypto exchange Coinbase could grow to a $1 trillion market cap as a “pure play” in a fast-growing, disruptive space, Miller says </li>
 </ul>
 
</div>



The risk of bitcoin is going down as crypto adoption rises, renowned value investor Bill Miller said in a recent <a href="https://millervalue.com/a-meeting-of-great-minds-september-2021/?utm_source=partners" target="_blank" rel="noreferrer noopener">conversation</a> with author William Green, as Miller is investing in a space he said has “enormous potential.”&nbsp;



Miller, the founder, chairman and chief investment officer of Miller Value Partners, was among the first big believers in the potential of Amazon. He noted in the discussion, during which he was wearing a bitcoin hat, that he bought the stock a couple decades ago for an average price of $17.&nbsp;



Amazon stock was selling for about $3,250 at 3 pm ET on Monday.



“I thought you might bring up Amazon … which is the reason I have my bitcoin hat on right now,” he told Green. “I’m willing to go over the waterfall with this one too.”



Miller bought his first bitcoin for about $200, he said, adding that his average cost per bitcoin before this year was about $500.&nbsp;



“Bitcoin’s a lot less risky at $43,000 than it was at $300, because it’s now established,” Miller said. “There’s been huge amounts of venture capital money that’s gone into it. All the big banks are getting involved with it.”



Bitcoin’s price was about $57,300 as of 4:30 pm ET, according to <a href="https://www.coingecko.com/en" target="_blank" rel="noreferrer noopener">CoinGecko</a>. The price represents an increase of 2% in the last day and a boost of nearly 19% week over week.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Truly one of the greatest legacy mkt investors who saw the value of the <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> invention before his peers. Up 100x on his <a href="https://twitter.com/hashtag/btc?src=hash&amp;ref_src=twsrc%5Etfw">#btc</a> purchase. Long term visionary. Sees <a href="https://twitter.com/hashtag/Coinbase?src=hash&amp;ref_src=twsrc%5Etfw">#Coinbase</a> up 15x from here. Every time he talks publicly I listen&#8230;.so should you. <a href="https://t.co/zUCHgSx2FN">https://t.co/zUCHgSx2FN</a>&mdash; Dan Tapiero (@DTAPCAP) <a href="https://twitter.com/DTAPCAP/status/1447576731108483075?ref_src=twsrc%5Etfw">October 11, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



By mid-June, <a href="https://cms.blockworks.co/crypto-venture-funding-is-at-an-all-time-high-this-is-where-the-money-is-going/" target="_blank" rel="noreferrer noopener">a record $17 billion</a> of venture capital had already been invested in crypto projects this year.



Among the investors are incumbent banks, who are getting involved in the crypto space in various ways. Last week alone, Bank of America <a href="https://cms.blockworks.co/bank-of-america-is-bullish-on-digital-assets-believes-bitcoin-is-only-the-beginning/" target="_blank" rel="noreferrer noopener">officially launched</a> its digital asset research division and US Bank rolled out its <a href="https://cms.blockworks.co/banking-giant-launches-custody-services-for-bitcoin/" target="_blank" rel="noreferrer noopener">crypto custody services</a> for fund managers.



“Bitcoin is the only economic entity that I’m aware of where the supply of it is unrelated to the demand for it,” Miller said, noting the cap of 21 million bitcoin. “That doesn’t mean that there might not be other things created in the crypto world that could bleed that off, but for bitcoin that’s unique.”&nbsp;



<h3 class="wp-block-heading">How many altcoins will last?</h3>



While Miller said bitcoin and Ethereum will likely be around for a while, he expects only a handful of the 10,000 or so crypto tokens will prove worthwhile.



The value investor pointed to recent comments from SEC Chairman Gary Gensler, who said that most cryptocurrencies fall under the definition of a security.



“The same sort of regulation that is going on with what the average investor invests in is perfectly appropriate for bitcoin and crypto,” Miller said. “It will lead to almost all those crypto things disappearing unless there’s a real business purpose for them [and] unless they register as securities, as most of the tokens ought to do.”



Beyond bitcoin and Ethereum, Miller mentioned Solana, which industry watchers have pointed to as offering more transactions per second and lower fees than Ethereum.&nbsp;&nbsp;&nbsp;



“There are protocols that are theoretically superior to Ethereum,” Miller said. “Will they overtake it? I have no idea, but it’s a complex area, and that’s why I tend to stay with Michael Saylor and some of these other people. I own Ethereum, but I own a trivial amount of Ethereum relative to what I own in bitcoin.”



<h3 class="wp-block-heading">Coinbase’s potential</h3>



Crypto exchange platform Coinbase could be “the default position for growth investors” that want exposure to the crypto market without investing directly in crypto assets.&nbsp;&nbsp;



The company <a href="https://cms.blockworks.co/coinbase-off-to-rocky-start-after-public-listing/" target="_blank" rel="noreferrer noopener">went public in April</a>, reaching a peak valuation during its first day of trading of more than $110 billion. Coinbase, which SkyBridge Capital Founder Anthony Scaramucci said <a href="https://cms.blockworks.co/are-tradfi-and-crypto-set-for-an-ma-explosion/" target="_blank" rel="noreferrer noopener">a big bank could try to buy</a>, reported 68 million users, $180 assets on the platform and $462 billion quarterly volume traded, as of June 30.&nbsp;



Miller noted that the reason Tesla’s market capitalization is larger than all of the big auto companies combined is that it was “the only pure-play” within the big secular change from internal combustion engines to electric engines.&nbsp;



“If Tesla can be a $750 billion market cap in a mature industry that is never going to grow very fast just because it could hoover up the technological change, Coinbase could easily be $500 billion or a $1 trillion market cap in a rapidly growing secular changing business that is very disruptive.”

Bill Miller is ‘Willing to Go Over the Waterfall’ with Bitcoin

Sam Reynolds

<div id="highlights-block_612d6b3904c3b" class="highlights">
 <ul>
 <li>Ethereum isn’t a bank, but its utility as a tool to generate yield via DeFi has gone noticed by the market</li>
 <li>Institutional investors have taken interest in DeFi, which in turn has driven up the value of ethe</li>
 </ul>
 
</div>



There may be a day where the Ethereum protocol, the digital oil behind the DeFi revolution, is worth more than JPMorgan Chase — the bank run by notorious crypto skeptic Jamie Dimon.&nbsp;



According to CompaniesMarketCap, Ethereum is worth around $391.5 billion, or around 80% of JPMorgan Chase’s $479.36 billion.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Ethereum&#39;s progress to flip JPMorgan: 81% <a href="https://t.co/tbZ13v6yev">pic.twitter.com/tbZ13v6yev</a>&mdash; Blockworks (@Blockworks_) <a href="https://twitter.com/Blockworks_/status/1432435289205706753?ref_src=twsrc%5Etfw">August 30, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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During the last year Ethereum has risen in value by approximately 720%, according to <a href="https://www.coingecko.com/en/coins/ethereum" target="_blank" rel="noreferrer noopener">CoinGecko</a>, with the price of ether now hovering around $3,200. This comes because the total value locked in DeFi projects has also surged past $80 billion, and is now at approximately $83.8 billion <a href="https://defipulse.com/" target="_blank" rel="noreferrer noopener">according to DeFi Pulse</a>.&nbsp;



If you add in the market cap of Solana and Polkadot, two new chains used by traders that make up part of the “<a href="https://cms.blockworks.co/ethereums-role-in-a-multi-chain-future/" target="_blank" rel="noreferrer noopener">multi-chain future</a>”, the three combined would already exceed the value of JPMorgan Chase.



Given DeFi’s robust ability to generate yield, venture capital is eager to get a piece of the action. As <a href="https://cms.blockworks.co/crypto-venture-funding-is-at-an-all-time-high-this-is-where-the-money-is-going/" target="_blank" rel="noreferrer noopener">Blockworks reported earlier</a> this month, $17 billion of capital was deployed into crypto projects during the first half of 2021 with the majority going to DeFi and NFT projects — the majority of which run on Ethereum.&nbsp;



While at one time JPMorgan Chase’s Jamie Dimon called <a href="https://www.bloomberg.com/news/articles/2017-09-12/jpmorgan-s-ceo-says-he-d-fire-traders-who-bet-on-fraud-bitcoin" target="_blank" rel="noreferrer noopener">Bitcoin a fraud</a>, and threatened to fire any trader caught with it,&nbsp; the bank has quietly done an about-face on crypto in the years since. <a href="https://www.cnbc.com/2021/08/05/bitcoin-jpmorgan-led-by-jamie-dimon-quietly-unveils-access-to-a-half-dozen-crypto-funds.html">In early August</a>, the bank began giving its clients access to Grayscale’s various digital asset funds like the Grayscale Bitcoin Trust and the Grayscale Ethereum Trust.&nbsp;&nbsp;



Recently, JPMorgan Chase’s research team published a report arguing that Ethereum’s upgrade to proof-of-stake would unlock $40 billion in value by 2025 via the <a href="https://www.forbes.com/sites/emilymason/2021/07/01/jpmorgan-says-ethereum-upgrades-could-jumpstart-40-billion-staking-industry/?sh=614787121512" target="_blank" rel="noreferrer noopener">creation of a staking industry</a>.&nbsp;



JPMorgan Chase’s stock closed the Monday trading day at $160, up 27% year-to-date.&nbsp;



Want more investor-focused content on digital assets?&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a>&nbsp;September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket.&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.