If you are asking yourself this question on how to value a crypto asset then these slides provide some framework for thinking about it. If you are not yet familiar with blockchain, bitcoin or ethereum then refer to masterclass in blockchain https://www.slideshare.net/rajan/masterclass-on-bitcoin-ethereum-cryptoassets/1
3. $100 in 2009 in bitcoin will be $500 million in 2017
5-6X
7% of 1 cent (1/100 $) in 2009 to $5000 on Oct 15 2017
Fastest growth of anything known to humans
As 20 Oct 2017
4. Google Search Trends - Bitcoin
Bitcoin Rises
from
$30 to $230Gawker Article
About Silk Road
$10 to $30
Passes $1000
first time
All time at $5000
China bans
ICO exchanges
https://trends.google.com/trends/explore?date=2009-01-01%202017-10-15&q=bitcoin
5. Ethereum is the new Java
$150b $30b
All cryptocurrency
Ethereum
All
India Internet
Startups
$60b
All India B2B
Software Startups
Startups
$8b
In 10 yrs In 10 yrs In 4 yrs In 10 yrs
6. In 3rd Stage, hitting escape velocity
Prototype
Stage
Sin Enterprise
(Gambling, Black
Markets)
Legitimate
Enterprise
The Evolution of the Bitcoin Economy: Extracting and Analyzing the Network of Payment Relationships -
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808762
7. Bhajan, Gita & Veda level of thinking
(Metaphor, Mental Model, First Principle)
11. Should bitcoin be valued like $ or gold or other other
commodity ?
If bitcoin does not serve the payment use case as anticipated, why is it trading at
$6000 ?
12. Should an ICO token be valued like IPO stock or
startup angel investment ?
13. Bitcoin like money, ICO like IPO is only a metaphor
âNever confuse brains with a bull marketâ - Warren Buffett
âAll models are wrong, some are useful but some dangerous â - NN
Taleb
âIt ain't what you don't know that gets you into trouble. It's what you
know for sure that just ain't so.â - Mark Twain
14. Popular mental models break down
F= ma
âNever forget the six-foot tall man who drowned crossing the stream that was five feet deep on
average.â- Charlie Munger
Modern Portfolio Theory (Standard Deviation, Sharpe Ratio, Correlation) have
several limitation already
15. Many mental models are creaky
F= ma
Source - Howard Marks, Oaktree Capital
Volatility is not risk
16. What is value ?
Use Value, Exchange Value, Symbol Value, Store Value
Marx Talks
about
18. Money is story with highest belief coefficient
that help in survival against both fear and hunger in the future
19. Belief/trust on Nation state as custodian of the money
story is broken
Alternates ? Gold, Distributed Consensus ?
20. âBitcoin will be a store of value when everyone
believes it is. The price is the current probability.
Fundamental analysis is impossible. â
@naval
26. Innovation Accounting tracks journey of a startup to
well functioning company
Uncertain & Non repeatable Value
Probability distribution Unknown
Certain & Repeated Value
Probability distribution Known
Idea/Startup Large Company
Takes 7-11 year journey
Pivots
P/M fit
Power law, 1 in 10,000 succeed
27. Valuation
Intrinsic Valuation
Relative Valuation
Early
Startup Growth
Startup
Large
Company
Value using DCF
(With adjusted rate of return)
Value as âOptionsâ Value like DCF,
(replaceCashflow with
Growth rate)
Use Comparables
Uncertainty Risk
DCF - Discounted Cash Flow
Source - Aswath Damodaran
28. About Price (aka Relative Valuation)
âCanât estimate or predict the outcome of the collective based on
individual action, markets are emergentâ - NN Taleb
âMarkets can remain irrational longer than you can remain solventâ
- John Maynard Keynes
29. Relative Valuation is arbitrage or pyramid scheme ?
Idea/Startup
Public Company
7-11 years
P/M fit
Angel Investors Venture Investors
PE, Hedge Funds & Public
market Traders
Crypto
Token
ICO
31. Error in your mental model is my opportunity - Value investing
Value is different from Price, Picking mispriced, Invest out of cycle
32. Arriving at an intrinsic value still need lot of
assumptions
For a given supply & velocity of token, what is the GDP (measured in $) of the use
case need to be supported
F= ma
33. MV = PQ
F= ma
M = size of the asset base, V = velocity of the asset , P = price of the digital resource being
provisioned, Q = quantity of the digital resource being provisioned
34. INET Valuation, Example from Chris Burniske
https://docs.google.com/spreadsheets/d/1ng4vv3TUE0DoB12diyc8nRfZuAN13k3aR
R30gmuKM2Y/edit#gid=1912132017
F= ma
35. New Markets in early stage, must watch out for
Speculation of Crowds , Bubbles, Ponzi Scheme & Scams, Cornering , Pumping &
Dumping.
No putting the genie back.
Most exciting technology after internet.
Be an early adopter in your circle
But do not ride the tide (Dotcom)
MUST understand it in a way that you can explain it others.
2008 Crisis exposed the risk of modelling using normal function & standard deviation
As risk increases,
â˘the expected return rises,
â˘the range of possible outcomes becomes wider, and
â˘the worst outcome worsens and ultimately becomes negative.
Valuation is an exercise in estimation of future value today
It is part story of future & part data/numbers from past.
Future in general is unknowable, sometime the past data modelled as probability can give a model to use for estimation.
Uncertainty is when probability distribution is unknown, Risk is when there exists a probability distribution model
Each person can do own estimation of future value today. Use value is subjective
Exchange value (Price) is the arbitrage in different individuals estimation.
Most of the times it is hard to understand & predict second order effects.
It is always useful to look for a comparable.
15.5%India
8.5% US
22-26% IRR US
Estimate Intrinsic value
Look for Margin of Safety via in Mispriced assets
Out of cycle investment
Healthcheck for Networks
Miners * Hash rates
HHI Index
Geo distribution,
Factors that influence valuation - Governance, Supply Schedule, Use case, Basis of Value
Whitepaper - Should tell the narrative of the future of use case ( keep in mind pivots are possible)
Is there Need/edge for decentralization (Blockchain need ?) - That a token would be needed Money replacement for bitcoin working for remittance not others)
For the use case GDP to work what of # tokens are needed. Growth/Adoption assumptions change price.
Supply Schedule determine impact amount of token available for circulation.
Total Value = Utility (Use Value) + Speculation Value (Exchange Value)
Velocity of token exchange itself has implication for price
GDP of a cryptonetwork is represented by the on-chain transaction volume of its cryptoasset.
TAM & Market share
Coins needed to support the GDP of the use case. Equation of Exchange is MV = PQ, and when applied to crypto is interpreted
Cryptoasset valuation is largely comprised of solving for M, where M = PQ / V. M is the size of the monetary base necessary to support a cryptoeconomy of size PQ, at velocity V.
Supply Schedule
Velocity
( more deflation than inflation), Lessons from Zcash, Bitcoin & Steemit (premine & instamine)
(Affirmation, Contagion, Repetition, Prestigious)
This time is different argument