Inherent Valuation Methods for Cryptocurrencies: Part 1

This is the post that crypto day traders will scoff at, and developers will say they aren’t ready for yet. Regardless, at some point this needs to be stated. With the cryptomarket approaching a cool $750B in total market cap, and a negligible number of non-speculative transactions, the individual trader has efficiently priced out venturefirms from investing in many of these projects (not including those they have reserved/discounted ICO spots i.e. Filecoin).

This is not a problem for those who believe in the decentralized vision of blockchain, to distribute wealth/value creation more fairly and without the need for trust. It has certainly accomplished that to date, with early bitcoin investors typically being cypherpunk coders who believed in a distributed financialsystem. However, it is a problem for those common men who enter the market too late. Obviously everyone has their own opinion for how the cryptomarket will evolve but I want to move past the speculation and talk about intrinsic value. If these cryptoassets were being valued by disciplined financial institutions, (and I say disciplined with a grain of salt) what would the relevant metrics be? I think the only way to explain this is by walking through a full example so that you can pick and choose the relevant valuation methods to apply to the example you need it for.

Valuation Example:

I pick Filecoin because it shows the nuances of valuing a cryptoasset while still providing tangible and widely applicable methods (valuing cryptoassets like bitcoin are far more ridiculous as their main source of value is speculating whether people will want it in the future, i.e. “store of value” argument). The first assumption I make is arguably the most significant, so let’s get started.

Assumption 1: The Market Tether

Inherent Valuation Methods for Cryptocurrencies: Part 1
Inherent Valuation Methods for Cryptocurrencies: Part 1

Many cryptoassets today are essentially just marketplaces for some other asset with intrinsic value. Filecoin is a great example of this, unlike some of its competitors i.e. Storj and MaidSafe, Filecoin claims it is exclusively a digital marketplace for data storage (where Storj is a centralized service with revenues similar to a firm and MaidSafe is doing a blockstack like thing). Assuming the coin is exclusively tethered to this marketplace, we can assume the value of the token is tied to the value of the asset, in this case data storage, or more specifically, cloud storage. This market was at $25B in 2017 and is projected to grow at a 29% CAGR. But does it make sense to use antiquated metrics around a firm when the root of value was the dividend? The inherent value of filecoin is not tethered to anything relating to the profit of the filecoin foundation, it is tethered to the supply and demand of file storage hardware. So instead of a cloud storage industry valuation I’m going to use a cloud storage hardware/price valuation. This is because at the end of the day, people will only buy filecoin if they can use it to purchase data storage more cheaply than other services. So the baseprice for filecoin is the cost of data storage hardware.

Assumption 2: Point-in-time Valuation Only

Businesses have this concept of ‘discounted cash flows’ because you are investing in the company’s ability to pay their shareholders dividends. This implies that you assume that futurecompany profit is included in the valuation. In theory, this is different from a token that can only be spent on file storage because there is no concept of monetary inflows. In practice, this is quite similar to how the value of the token will increase as more storage demand and supply come onto the network. What this means most importantly for valuation is that growth assumptions of the marketplace are speculative, whereas in traditionalstock valuation they are assumed. I think it would be silly not to assume growth of the marketplace as cryptoassets (as all other assets) should have a bit of speculation baked into their prices, but the intrinsicvalue of this cryptoasset is based off of the supply and demand charts of the marketplace.

Assumption 3: Inflation

The total supply of filecoin increases as time goes on. The chart by which this mechanism operates will be shown later in this article, but for now it is important to say that because the asset has been dubbed a ‘currency’, its value will decrease as the purchasing power decreases with an increase in supply.

There is around 1 exabyte of data stored in the cloud today, and for simplicity’s sake I will assume that this will grow marginally quicker than the industry (as price per storage usually decreases regardless of total costs), let’s say 32%. Amazon currently charges ~$0.022 for one GB of cloud storage per month. An individual filecoin should be worth:

Market clearing price of a GbM * Total GbM on the network / Total Supply of Filecoin in the hands of data storage purchasers

The hardest part of this formula is the filecoin supply in the hands of datausers. A theoretical way to calculate this would be:

Total Supply in Existence-Miner Rewards-Filecoin Foundation Supply-Protocol Labs Supply = Supply of purchasers

Unfortunately we have no way of knowing how much of the miner supply is being sold back to the users as well as other inflows/outflows so we have to make assumptions. On the bright side, Filecoin has handed us this dandy inflation chart of how much the miners get of the supply, so we can apply some assumptions to this.

Based on this chart, and the albeit rough assumption that data storage purchases will possess roughly 10% of the filecoin supply at any given point, this gives us a wildly lower estimate of future filecoin price than we see in crypto valuations today. Given all these assumptions, the price of an individual filecoin in 2028 will be a measly $0.48

So that you can all shred my assumptions, I have attached the preliminary calculations here (and I would love to hear some concerns):

Filecoin Valuation

This number is wildly prone to differences in beliefs about the future, but it serves an important point. If you believe that at some point these cryptoassets will be valued in an intrinsic way as they have been intended to, and even if you believe that they will capture the market faster, or the cloud storage market will grow faster than it is currently, this still means that cryptoassets today are valued insanely high. Filecoin futures are currently trading at $25.96! And that includes wild assumptions about the marketshare filecoin will capture as well as the price per cloud storage. These assets have soared faster, and higher than even stocks did in the dot combubble. None of these companies have working businessmodels yet, and most of them will be worth nothing in 5 years. Be careful out there.

Sources:

Filecoin Token Sale Economics

Ryan Shea — The Economics of Filecoin

Amazon Web Services Pricing Page

Cloud Storage Market Research

Global Dots IT Cloud Data Storage Research

Filecoin futures


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