The State of Crypto – Cryptoassets Case 

The State of Crypto

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The State of Crypto

Executive Summary

Valuation Methodologies: First, we introduce the two broad types of valuation approaches: (1) Fundamental or Intrinsic valuation composed of the Discounted Cash Flow (DCF) method and Mining
Production Cost. (2) Relative valuation composed of Multiples and Market Sizing.
Valuation methods depend on the type of cryptoassets:
Both fundamental and relative valuations can be applied to all cryptoassets but should differ and adapt to (1) The type of consensus mechanism: Proof-of-Work versus Proof-of-Stake — and (2) The type of token: Governance, Utility tokens, and NFTs.
Proof-of-Work Assets: The Mining Production Cost is an important fundamental metric for solely Proof-of-Work assets like Bitcoin.
Market sizing and multiples also apply to Bitcoin.
Proof-of-Stake

Assets,

Governance

Tokens,

and

NFTs:

Investors may value Proof-of-Stake cryptoassets like Ethereum and Governance tokens, including MakerDAO, using an intrinsic valuation computed with a DCF method.
Additionally, investors may value all cryptoassets, including NFTs, with relative valuation methods, such as Multiples and Market Sizing.
Limitations of valuation methods: The report concludes with the limitations and shortcomings of cryptoasset valuation methods, including bias, uncertainty, and complexity.

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Source:
21Shares

Valuation

Intrinsic

Approaches

Asset

Infrastructure Layer

Superclasses

Consumable/
Transformables

Capital Assets

Consumable/
Transformables

Store of Value
Assets

ʺCrypto-capitalʺ

ʺCrypto-commoditiesʺ

ʺCrypto-capitalʺ

ʺCrypto-commoditiesʺ

ʺCryptocurrencies and
Collectiblesʺ

(e.g. Bitcoin)

Tokens

Price-to-Sales

Discounted

Price-to-Earnings

Cash Flow (DCF)

Market Cap / TVL

Valuation

Price-to-Utility

Market Sizing

(e.g. Uniswap, Aave)

NVT-Ratio


Price-to-Utility
Market Cap /
Thermocap

Market Sizing

NVT-Ratio

Utility Tokens

Market Cap / TVL

(e.g. Chainlink)

Market Sizing

NFTs
(e.g. BAYC, CryptoPunks)

4

Cost of
Production
(Mining)

Proof-of-Stake

Governance

Application Layer

Capital Assets

Proof-of-Work

(e.g. Ethereum, Solana)

Relative

TO, I S S U E 7
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Market Sizing

Fine Art
Assessment

Market Sizing

Figure 1:

Source:

Valuation Price Ranges of Bitcoin,

21Shares

Ethereum, and MakerDAO
Asset: Bitcoin
Typ: Proof-of-Work Cryptoasset

Implied Bitcoin Price

Methodology

Current price as of July 28, 2022: $23,850
$28,881

$115,524

Market Sizing
$29,346

$33,679

NVT Ratio
$20,431

$26,991

Market Cap to Thermocap Ratio
$12,179

$20,298

Cost of Production
$0

$25,000

$50,000

$75,000

$100,000

$125,000

$150,000

Bitcoin Price

Asset: Ethereum
Typ: Proof-of-Stake Cryptoasset1

Implied Ethereum Price
Current price as of July 28, 2022: $1,720

Methodology
$924

$4,075

DCF-Valuation
$2,883

$16,476

P/E Multiple
$0

$2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000
Ethereum Price

Asset: MakerDAO
Type: Governance Token

Implied MakerDAO Price
Current price as of July 28, 2022: $1,115

Methodology

$2,319

$1,077

Market Cap / TVL Ratio
$0

$500

$1,000

$1,500

$2,000

$2,500

MKR Price
1

Post-Merge

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5

State of Crypto

Introduction
We are thrilled to release the update of our valuation framework report published
in September 2020. In two years, the cryptoasset industry grew by over 194%,
from $390 billion to more than $1.1 trillion in market value.
Despite the tumultuous first half of 2022 with macro uncertainty and implosions
of a handful of crypto protocols, lenders, and funds — our optimism and thesis
remain unchanged. The recent turn of events in crypto will lay more robust risk
management practices and infrastructure to onboard billions of people in the
next few years. We believe crypto will disrupt and expand business models in
financial services, eCommerce, art, music, and more. However, we are still in the
early innings of this innovation, created by just 0.06% of the world’s developers
and accessed by less than 5% of the global Internet population or circa 300
million users.
Valuing crypto remains a subject necessitating industry-wide consensus, and
frameworks must adapt to this fast-paced asset class that is offspringing
emerging use cases. This new State of Crypto release serves as a guide
combining and building upon previous efforts to develop a fundamental
framework for cryptoassets. Our goal is to propose valuation methodologies
that reconcile different approaches investors have taken in recent years.

Hany Rashwan, CEO at 21Shares
Ophelia Snyder, President at 21Shares
Eliézer Ndinga, Director of Research at 21Shares

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S TAT E O F C RY P TO, I S S U E 7

Hany Rashwan
Co-Founder and CEO

Ophelia Snyder
Co-Founder and President

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7

State of Crypto

About Our Research
21Shares is the world’s leader in providing access to crypto through simple and
easy-to-use products — co-founded by Hany Rashwan and Ophelia Snyder.
The Research team is a cross-functional department collaborating with the
distribution, product, and engineering teams. Composed of professionals with
more than 8 years of experience in the cryptoasset industry, our team places
education at the core of our industrial research as we stand by free and publicly
accessible content; and strongly believe information asymmetry contradicts
crypto ethos and philosophy. We provide data-driven, cutting-edge, unique
insights into the crypto markets and macroeconomic factors likely to influence
the state of this industry.
More than 10,000 investors read our research notes and reports on a weekly
basis, ranging from private banks, asset managers, professional traders, hedge
funds, tier-1 media outlets, and regulators.

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Eliézer Ndinga,
Director of Research
Adrian Fritz,
Research Associate
Carlos Gonzalez Campo,
Research Analyst
Karim Saber,
Research Associate
Tom Wan,
Research Analyst
Leena Eldeeb,
Research Associate
Ramshreyas Rao,
Research Associate

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State of Crypto

Company’s Update
21Shares and ETF Securities Launch the World’s First Bitcoin and Ethereum ETFs in Australia:
April 19, 2022 – 21Shares and the leading ETF provider, ETF Securities have launched two
funds that offer simple, cost-effective and direct access to cryptocurrency investments. ETFS
21Shares Bitcoin ETF is the first Australian ETF to invest directly in bitcoin, and ETFS 21Shares
Ethereum ETF is the first to invest directly in ether.

21Shares Launches BOLD, the World’s First Bitcoin and Gold ETP: April 27, 2022 – 21Shares
announced the listing of the 21Shares ByteTree BOLD ETP (BOLD) on SIX Swiss Exchange, the
world’s first ETP that combines Bitcoin and Gold. BOLD has been developed in partnership with
ByteTree Asset Management, a UK specialist provider and manager of alternative investment
strategies. BOLD’s core investment objective is to deliver protection against inflation via
optimized risk-adjusted exposure to Bitcoin and Gold with assets weighted in inverse proportion
to their risk.

Investing in the DeFi Revolution: 21Shares Launches Layer 1 and DeFi ETPs: May 12, 2022 –
21Shares announced the launch of the new 21Shares Layer 1 and 21Shares DeFi 10 Infrastructure
ETPs on SIX Swiss and BX Swiss Exchange, respectively. Both of these new products allow
investors to invest in the services and technical fundamentals of the DeFi industry.

21Shares Enters US Market with Launch of Two Crypto Index Funds: May 18, 2022 – 21Shares
US Advisers LLC, an affiliated entity of 21Shares marked its entrance into the US market with
the launch of two private funds: 21Shares Crypto Basket 10 Index Fund and 21Shares Crypto
Mid-Cap Index Fund, which seek to track the performance of the “Vinter 21Shares Crypto

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Basket 10 US Index’’ and “Vinter 21Shares Crypto Mid-Cap US Index,” respectively. Composed
of several of the world’s largest cryptocurrencies by market capitalization, both funds will be
rebalanced and reconstituted quarterly to reflect the dynamic nature of the crypto space. As
of today, accredited U.S. investors can invest in the funds.

21Shares Launches USDY, the World’s First USD Yield ETP: May 25, 2022 – 21Shares
announced the listing of the 21Shares USD Yield ETP (USDY). USDY provides collateralized
dollar-denominated yield at the rate of 5%. USDY generates yield by taking in US dollars
and lending them to counterparties against a minimum of 110% collateral in BTC and ETH
marked-to-market daily. The yield is generated by lending USD to well known counterparties
in the crypto space.

21Shares Announces Crypto Winter Suite: June 29, 2022 – 21Shares announced its Crypto
Winter Suite – a set of products designed to help investors weather the bear market. The first
product introduced in the suite is the 21Shares Bitcoin Core ETP (CBTC), the world’s cheapest
physically-backed Bitcoin ETP, which launched on SIX Swiss Exchange.

21Shares Unveils S&P Risk Controlled Bitcoin and Ethereum Index ETPs: July 20, 2022 –
21Shares announced the listing of two new ETPs on SIX Swiss Exchange to offer investors
exposure to the largest cryptocurrencies – Bitcoin and Ethereum – while targeting less volatility.
These two ETPs are the latest products in 21Shares’ Crypto Winter Suite – a set of products
designed to help investors weather the bear market.

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11

State of Crypto

Market Updates
Business
Justice Sun launched USDD, Tron’s algorithmic

Three Arrows Capital got liquidated for $400M,

stablecoin backed with $10B of crypto in collateral.

facing a liquidity crisis and dragging Genesis and
Voyager down.

Fidelity announced

plans

to

start

allowing

investors to put a Bitcoin account in their 401(k)s

Circle

introduced

by the end of 2022.

Euro-backed

$EUROC,

stablecoin,

an

fully

ERC-20

backed

by

euro-denominated reserves held in the custody
Emirati real estate tycoon Damac started accepting

of regulated financial institutions.

Bitcoin and Ethereum directly for purchases of its
properties.

Polygon, Solana, and mobile company HTC
launched three different phones that grant easy

Yuga Labs launched a sale of virtual land related

access to Web3 tools.

to its highly anticipated metaverse project, raising
$320M worth of crypto.

FTX finalized the deal with BlockFi on a $400M
revolving credit facility and an option to acquire

Jane Street took out a $25M USDC loan through

BlockFi at a variable price of up to $240M.

the institutionalized Clearpool protocol.
Aave
Coinbase recorded a $430M losses in Q1 2022.

introduced

GHO,

a

decentralized,

yield-generating stablecoin, with the collateral
being supplied by users who wish to mint GHOs.

Terra’s native currency LUNA crashed to zero,
and its algorithmic stablecoin UST drifted farther

Reddit launched “Collectible Avatars,” an NFT

from its peg at $0.09. Terra Luna Classic project

marketplace for avatars on Polygon.

launched two weeks later to replace what was
Terra Luna with LUNAC as the new token.

Celsius filed for bankruptcy with a $1.2B deficit,
and Voyager asked for bankruptcy permission

McKinsey predicted that the metaverse industry

to release funds from the custodian to honor

could reach $5 trillion by 2030.

customer withdrawals.

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Investments
Dapper Labs, developers of Flow blockchain,

MachineFi Labs, core dev of IoTeX, raised $50M,

raised $725M from Andreessen Horowitz, Digital

allegedly setting the company’s valuation at

Coin Group, and others to fund blockchain growth.

$100M.

Aurora launched a $90M fund to finance DeFi

Solana NFT marketplace Magic Eden raised

apps on Near protocol.

$130M at a valuation of $1.6B.

Goldman Sachs and Barclays joined a $70M

Goldman Sachs was raising a $2B fund to buy

Series A funding round in UK crypto trading

Celsius’s assets in case it went bankrupt.

platform Elwood.
MakerDao looking to invest $500M in 80%
Binance Labs raised $500M to invest in Web3 and

treasuries and 20% bonds to utilize untapped

made a strategic investment in PancakeSwap’s

reserves.

utility and governance token CAKE.
Animoca,

WeMade,

Samsung

Next

back

Cronos ecosystem launched a $100M fund for

Planetarium Labs, a Web3 studio, to develop

DeFi and Web3.

open-source games.

Ledger and Cathay Innovation VC launched a

Multicoin Capital raised $430M for its Venture

$110M crypto fund to invest in Web3 startups.

Fund III eyeing crypto projects demonstrating
what they call “proof of physical work,” creating

Solana Ventures set up a $100M fund for GameFi

economic

and DeFi in South Korea.

contribution.

incentives

for

permissionless

VeChain entered a $100M partnership with UFC
to support their marketing growth.
Huobi launched s $1B investment arm dubbed Ivy
Blocks, which focuses on DeFi and Web3.
Immutable launched a $500M developer and
venture fund to accelerate the adoption of Web3
games and projects.

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Regulations
New York State Assembly passed a bill to impose

Cardano pitched to Congress a software-enabled

a two-year moratorium on Proof-of-Work mining

self-regulation system that automatically monitors

operations that rely on carbon-based fuel.

compliance until an anomaly is encountered.

Argentina banned unregulated crypto transactions

Albania announced it will tax investment income

in traditional banks.

derived from cryptoassets by 15% in 2023.

Germany exempted BTC and ETH individual

Huobi crypto exchange won licenses in Dubai and

owners from paying taxes if they sold their holdings

New Zealand.

after a year.
BitMEX banned Russian citizens or residents
Crypto.com received provisional approval from

from accessing services from the European Union

Dubai Virtual Assets Regulatory Authority. While

as of July 5.

the SEC investigated Binance’s native token BNB
for potential violation, the crypto exchange got

India crypto volume slumped after introducing a

accused of being a conduit for the laundering of at

30% income tax and a 1% tax per transaction on

least $2.35B in 5 years.

crypto trades.

NY regulator released stablecoin guidance with

US Treasury developed a legal framework for

strict reserve and attestation requirements.

international crypto regulation.

Japan passed a bill limiting stablecoin issuers to

UK Court allowed serving legal documents to

banks and trusted companies only.

anonymous person(s) connected to two digital
wallets through an NFT drop to wallet addresses.

Jamaica made Jam-Dex, a central bank digital
currency (CBDC), a legal tender.

Russia passed a bill into law banning digital assets
as payments.

With a hash rate of 0.12%, Iran pulled the plugs on
authorized crypto mining facilities.

EU officials finalized the Markets in Crypto-Assets
(MiCA) framework, an agreement on what is likely

The UK government has amended controversial

to be the first major regulatory framework for the

plans for crypto transfers and information sharing.

cryptocurrency industry.

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Technology
Polkadot

launched

a

new

cross-chain

Terra Bridge V2 went live; users were able

communication protocol, XCM, secured at the

to transfer assets to and from Terra 2.0,

same level as Polkadot’s core hub, the Relay Chain.

Ethereum, Osmosis, Secret, Cosmos, and Juno.

Solana suffered from two outages this quarter;

Block subsidiary TBD announced plans to build

one for 7 hours due to unprecedented bot demand

“Web5,” a new decentralized web centered around

on the NFT project Candy Machine, and the other

Bitcoin for identity management.

for 4.5 hours due to some traffic on the network.
Ava Labs launched a contest calling for written
Bancor V3 went live with instant impermanent loss

developer

protection, dual rewards, and auto compounding

also

features.

native Bitcoin to bridge over to the network.

PancakeSwap switched from an unlimited supply

Double

model to a capped supply at 750M $CAKE.

the

Cloudflare

announced

it

will

run

Ethereum

tutorials

released

for

Core

protocol

newest

Subnets.
wallet,

which

launched

standard

Avalanche

EIP

facilitating

rental

market,

separating

use

rights,

allows

4907,

the

NFT

NFT

ownership,

and

automatic

recovery.

made

its

Proof-of-Stake validator nodes to serve as a
testing ground for research on energy efficiency,

Tornado Cash

UI

open

source.

for

trading

consistency management, and network speed.
Sudoswap

released

sudoAMM

BNB Chain unveiled its technical roadmap that

NFTs; users could gradually buy or sell NFTs,

includes sidechain, metaverse, and increasing

provide liquidity, and trade with a lower fee.

the number of validators to 41. The network later
launched a decentralized applications platform

A report by security firm CertiK showed that social

with ‘Red Alarm’ to warn users about scams.

media is a ‘major Web3 pain point’ as phishing
attacks increased by 170% in 2022.

Ethereum’s

Merge

arrived

at

Ropsten

Testnet, Ropsten Beacon chain was updated
on June 2. The Merge will focus on Goerli
or

Sepolia

for

the

post-merge

context.

Rinkeby, Ropsten, and Kiln will be shut down.

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15

State of Crypto

Glossary
An Automated Market Maker (AMM) is an automated decentralized exchange where trades
are made against a pool of tokens called a liquidity pool. An algorithm regulates the values and
prices of the tokens in the liquidity pool.
A Blockchain is an append-only, decentralized ledger that can be used to store data (such as
transaction history) in a censorship-resistant way.
Bridges allow independent blockchains to communicate with each other for the transfer of
assets or messages.
Cryptoassets are digital assets whose global transaction history is stored on a blockchain.
A Crypto Exchange is a platform that enables the exchange of cryptoassets for other crypto
assets or fiat currencies.
A Decentralized Autonomous Organization (DAO) is an organization managed by members
often using open source code and smart contracts, decisions are often voted upon by members
and utilize a native token for participation.
A Decentralized Exchange (DEX) is a platform for buying, trading, and selling digital assets,
directly and peer-to-peer on the blockchain without a centralized intermediary.
A Digital Wallet is software that interacts with blockchains to facilitate the storage of
cryptoassets.
Ether (ETH) is the native crypto asset of the Ethereum blockchain and is used to pay for the
transaction and smart contract fees on the network.
A Halving Event is when the number of new coins awarded to miners per block is cut in half.
The Hash Rate is the combined number of computations (hashes) performed by all miners
within a network per second.
Liquidity Mining is the process where traders often provide assets to a specific pool to earn
fees or rewards.

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Mining is a mechanism where individuals within a network solve computationally difficult proofs
of work to confirm transactions and add new blocks to a blockchain.
A Non-Fungible Token (NFT) is a unique cryptographic token that is not interchangeable with
any related asset and can not be divided or altered.
On-chain refers to information and transactions that are executed and stored explicitly on a
blockchain.
Proof of Stake (PoS) is a mechanism that selects block creators based on a participant’s stake,
such as the number of tokens they hold or how long they have participated on the network.
A Proof of Work (PoW) is a piece of data that is difficult to produce but easy for others to verify
and satisfies certain requirements. They are often used in the consensus mechanisms of crypto
asset networks.
A Rollup is an off-chain aggregation of transactions to be processed off-chain before on-chain
settlement and is often considered a throughput solution.
A Smart Contract is digital code typically programmed onto a blockchain that enforces a
previously agreed-upon transaction based on preset conditions.
Stablecoins are cryptoassets that aim to have similar volatility to widely-used fiat currencies
like the US dollar.
Staking is the process of locking up tokens in order to verify transactions on the blockchain and
earn rewards.
Total Value Locked (TVL) is a DeFi native metric that measures the crypto assets locked in
decentralized finance (DeFi) protocols through the use of smart contracts or assets under
management.
Zero-Knowledge Proofs (ZKPs) is a cryptographic method that enables an individual to prove
to a verifier that a certain asset or information exists without revealing details about the asset
or information itself.

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17

Valuation Frameworks

Valuation Approaches
Valuation in crypto remains an emerging topic seeking consensus, especially as the asset class expands
in use cases. Starting with basics, the answer to “what’s the value of an asset?” is two-fold per Aswath
Damodaran, professor of finance at the Stern School of Business at New York University:

1. Intrinsic or Fundamental Valuation:
The value of an asset as it relates to its fundamentals, namely ongoing cash flows, expected
growth, and risk. An intrinsic valuation is computed with a Discounted Cash Flow (DCF) method,
where the value of an asset is the net present value (NPV) of expected future cash flows, adjusted
for timing and risk.

2. Relative Valuation:
The value of an asset is compared to a group of assets or a single asset in a similar market
segment. A relative valuation is much more likely to reflect market perceptions and sentiment than
a fundamental valuation.
There are two main methods to compute a relative valuation:
• multiples – a standardized estimate of a price.
• market sizing — an estimation of the target market, also called total addressable market (TAM).

Important to note that Professor Damodaran described these two approaches for companies. Although
cryptoassets are not companies, the same general principles resonate with crypto – and any other
investable asset class. This framework helps navigate this new asset class by leveraging traditional
valuation methodologies.

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Table 1:

Source:

Comparison between Intrinsic and

21Shares

Relative valuation approaches

Definition

Methods
Market
Exposure

Intrinsic Valuation

Relative Valuation

Relates the value of an asset to its

How much to pay for an asset based

capacity to generate cash flows,

upon what others are paying for

adjusted for timing and risk.

comparable assets.

Discounted Cash Flow (DCF)

In sync with market sentiment and

perceptions.

perceptions.

information, which are difficult to
estimate.

Fundamentals

Limitations

price), Total Addressable Market (TAM)

Less exposed to market sentiment and

Requires more explicit inputs and
Complexity

Multiples (a standardized estimate of

Forces investors to think about an
asset’s fundamentals.

Requires less explicit information than a
discounted cash flow (DCF) valuation.
Assets that seem undervalued on a
relative basis may still be overvalued on a
fundamental basis.

Only assets that generate cash flows

Any asset can be valued using this

can be valued using this approach.

approach.

Table 1 highlights the distinction
between fundamental and relative
valuations.

In

the

following

section, we propose a simple
taxonomy of cryptoassets to give
a better sense of the differences
we

may

expect

in

valuation

approaches.

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19

Valuation Frameworks

Price and Value
Discrepancies
The one thing all valuation approaches have in common is the presumption that markets are inefficient, at
least in the short term. Otherwise, price would be the best estimate of value, and there would be no point
in valuing an asset. In this regard, Damodaran draws a clear distinction between value and price:

Value is driven by fundamentals including cash flows, growth, and risk.

Price is driven by market sentiment, narratives, and liquidity.

Source:

Figure 2:
Price and Value

21Shares based on
Damodaran2

Discrepancies

Drivers of Value

Drivers of Price

Cash flows from existing assets

Market sentiment and momentum

Growth in cash flows

Narratives about “fundamentals”

Quality of growth

Liquidity
Value of cash flows,
adjusted for timing
and risk

Intrinsic
Value

Investors “value” an asset and buy when price < value, or sell when price > value, hoping for convergence.

THE
GAP

Price

Supply and Demand

Traders “price” assets, based upon what others
are paying for similar or comparable assets.

SAFETY
CAPITAL

RISK
CAPITAL

Regarding valuation approaches, intrinsic valuations focus almost exclusively on the asset’s fundamentals,
excluding market dynamics. In contrast, relative valuations are more perceptive to market sentiment and
momentum. Thus, they can help gauge if: (1) an asset is undervalued relative to its peers and (2) if the asset
is historically overvalued or undervalued based on indicators such as the price-to-sales ratio (P/S ratio).

2

https://aswathdamodaran.blogspot.com/2022/07/risk-capital-and-markets-temporary.html

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In this regard, market cycles can be viewed as a constant fluctuation between “safety” and “risk” capital
(see Figure 2).

When risk capital is abundant, it kickstarts periods of “irrational exuberance”, and asset prices soar to
relatively high levels.

Investors will avoid riskier ventures when risk capital is absent, and everyone seeks safety.

Greer3 argues that assets that lack an objective measure of value and have a constraint on supply are
more vulnerable to irrational exuberance, citing the dot-com bubble as an example.

Cryptoassets lack an objective measure of value today among investors, similar to emerging tech
companies in the late 1990s. As such, they tend to be “priced” by traders and bid up to unsustainable
levels when risk capital is abundant.

3

The superclasses of assets revisited, Robert Greer. http://www.jpmcc-gcard.com/wp-content/uploads/2018/11/Page-62_67-Winter-2018-GCARD-Greer.pdf

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21

Valuation Frameworks

The Taxonomy of
Cryptoassets
In traditional finance, an investor will value companies with some variation of a DCF method because it is a
known fact that common stock represents a residual claim to a company’s ongoing or future profits.
In addition, suppose the same investor was deliberating on whether or not to buy a piece of fine art.
In this case, it obviously wouldn’t make sense to use a DCF valuation, as there are no cash flows to
discount. Instead, it is a known fact that individuals value collectibles based on their subjective beliefs and
preferences.
Similarly, we must delineate a taxonomy of cryptoassets to understand the differences we may expect in
the value accrual and potential valuation approaches. We propose five types of cryptoassets, as shown
below.
Source:
21Shares

Figure 3:
Taxonomy of
cryptoassets

Cryptoasset
Taxonomy

Sectors

Cryptoasset
Taxonomy

Stack

Non-Fungible
Tokens(NFTs)

Governance
Tokens

Utility
Tokens

Decentralized Finance

Metaverse

Identity

Data

(e.g., MakerDAO)

(e.g., BAYC)

(e.g. Ethereum Name Service)

(e.g., Chainlink)

Proof-of-Work (PoW)
Cryptoassets

Proof-of-Stake (PoS)
Cryptoassets

Settlement – Layer 1

Scaling – Layer 2

Interoperability – Layer 0

App-Specific Blockchains

(e.g., Bitcoin, Ethereum)

(e.g., Optimism, StarkWare)

(e.g., Polkadot, Cosmos)

(e.g., Celestia, Filecoin)

Infrastructure Layer (Blockchains)

22

Application
Layer (dApps)

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At the infrastructure layer, we propose categorizing cryptoassets based on the consensus mechanism of
the blockchain4:
1.

Proof-of-Work (PoW) Cryptoassets: The native asset is not one of the inputs of block
production. Instead, PoW relies on a computationally and energy-intensive lottery called
mining to determine which block to add and reward the miners.

2. Proof-of-Stake (PoS) Cryptoassets: Validators must commit a portion of their capital (the
“stake”) to gain access to a recurring value stream generated by the network’s rules.
At the application layer, we propose the following labels:
3. Governance Tokens: Governance tokens yield voting rights and represent ownership of the
application.
4. Non-Fungible Tokens (NFTs): NFTs are unique tokens that are not interchangeable with any
related asset. This characteristic is in contrast to cryptoassets like Bitcoin (BTC) and Ethereum
(ETH), which are fungible in nature.
5. Utility Tokens: Tokens granting access to the products or services of an application and
intended to be used within the blockchain’s network, rather than serve as an investment.

4

Same approach used by Burniske. See Section 3, Asset Superclasses.

S TAT E O F C RY P TO, I S S U E 7

23

Valuation Frameworks

Asset Superclasses
Since the late 1990s, investable asset classes,

Proof-of-work (PoW) cryptoassets belong to

including equities, bonds, currencies and precious

the Consumable/Transformable class, as they

metals, have followed a superclass framework

essentially create “a digital native commodity

pioneered by Robert Greer’s paper, “What is an

in the form of secure, globally accessible

Asset Class Anyway?”. Professor Greer argued that

ledger space.”

there are three asset superclasses: Capital Assets,

Proof-of-stake (PoS) cryptoassets require

Consumable Assets and Store of Value Assets.

ownership of the native asset to gain access

In this regard, it’s arguably relevant to categorize

to a recurring value stream generated by the

cryptoassets within these superclasses.

network. PoS assets are productive and fall in

1.

the Capital Asset category. Their value may be

Capital Assets (CA): “An ongoing source of

derived from the net present value of annual

something of value.” Most obvious examples

flows to validators. In other words, investors

include equities and bonds.

can value PoS cryptoassets using a DCF

2. Consumable/Transformable Assets (C/T):

valuation.

“You can consume it. You can transform it into
another asset. It has economic value. But it
does not yield an ongoing stream of value.”
Examples include physical commodities like
grain or energy products.
3. Store of Value Assets (SoV): “They cannot
be consumed, nor can they generate income.
Yet they do have value.” Examples include
currencies and collectibles, such as fine art.
While there are only three investable asset
superclasses, there are subsets of these classes,

In our view, some confusion regarding cryptoasset
valuations stems from the fact that cryptoassets
seem to encompass characteristics of all three
asset superclasses: Capital Assets, Consumable/
Transformable Assets and Store of Value Assets.
We will address this concern in the following
section, but for now, suffice it to say that a DCF
valuation is the most appropriate method to value
PoS cryptoassets.

In contrast, for PoW cryptoassets, we may use

each with its own set of risk factors, as shown in

the mining production cost as a price floor

Figure 2. In his 2019 work5, Chris Burnsike divided

estimate.

cryptoassets into two groups based on their

For both PoW and PoS cryptoassets, we may

consensus mechanism at the infrastructure layer

also use relative valuations to price them in the

(See Figure 3):

context of market sentiment and momentum.

5

https://www.placeholder.vc/blog/2019/4/26/value-capture-and-quantification-cryptocapital-vs-cryptocommodities

24

S TAT E O F C RY P TO, I S S U E 7

Figure 4:

Consumable /

Asset superclasses
and their traditional
subsets

Source:
https://arkinvest.com/articles/an
alyst-research/bitcoinnew-asset-class/

Transformable Assets

Capital Assets
Equities

+

Bonds

+

Income-Producing Real Estate

+

Physical Commodities

+

+

+

Currency

+

Fine Art

+

(e.g. grains or energy)

Precious Metals
(e.g. gold)

Figure 5:

Consumable /

Asset superclasses

Capital Assets

Transformable Assets

Store of Value Assets

“Crypto-capital”

“Crypto-commodities”

“Cryptocurrencies and Collectibles”

PoS Cryptoassets

+

Governance Tokens

+

Utility Tokens

+

PoW Cryptoassets

+

+

NFTs (Collectibles)

+

and their cryptoasset
subsets

Source:
21Shares

Store of Value Assets

Regarding the application layer:

Governance tokens are analogous to common
stock in traditional finance, so they fall in the
Capital Asset class.

Utility tokens drive the economics of the
system as their sole function, meaning they fall
in the Consumable Asset category.6

NFTs are essentially collectibles like fine art in
their current form7, so they fall in the Store of

“To reiterate, the key differentiator boils
down to whether the internal asset of the
system must be staked to participate; if
it must, then that asset is a requisite to
receive value flows, and it becomes a
capital asset. If the internal asset is not one
of the inputs to production, then it’s likely
we have a crypto-commodity on our hands.”

Value category.

6

– Chris Burniske

Some utility tokens, such as The Graph’s GRT, generate cash flows for token holders. In these instances, utility tokens could be considered capital

assets and valued using a DCF method. Thus, the most significant difference between utility and governance tokens is that the latter yields voting
rights on the platform and represents ownership of the protocol, while the former does not.
7

NFTs can encompass a plethora of use cases outside collectibles. For example, “royalty-generating NFTs” can be used by artists to sell their content

directly to their fans. Because they generate cash flows, royalty-generating NFTs are capital assets. There are also “redeemable NFTs,” representing
ownership of real-world items, such as deeds to a car. Redeemable NFTs are consumable/transformable assets.

S TAT E O F C RY P TO, I S S U E 7

25

Valuation Frameworks

Fundamental
Valuation
This section delves into the rationale as to why a DCF model applies to PoS cryptoassets and governance
tokens while the mining cost of production sets a floor price for PoW cryptoassets.

Proof-of-Stake Cryptoassets
Two schools of thought emerged with regards to PoS cryptoassets: Blockchains as Businesses (BaB) and
Blockchains as Nations (BaN)8.

Blockchains as Business (BaB) advocates place more weight on token value accrual than the utility of
the network as whole.

Blockchains as Nations (BaN) aficionados deem native tokens as the unit of account of an ecosystem
akin to the legal tender of a sovereign nation. For instance, NFTs within the Ethereum ecosystem are
priced in ETH, and users must pay a fee denominated in the native token every time they perform a
transaction.
Capital Assets
C/T and Store of Value Assets

Blockchains as Businesses (BaB)

Blockchains as Nations (BaN)

Both philosophies have part of the truth, but neither has it all because PoS blockchains are at the same
time both like businesses and nations. Most smart contract platforms, scaling solutions, and interoperability protocols implement a PoS consensus mechanism. As such, they require ownership of the native token
to gain access to a recurring value stream generated by the network. From the standpoint of a staker, the
cryptoasset becomes akin to a stock that pays an annual dividend yield, which means we can conduct a
discounted cash flow (DCF) valuation.
In general, we need the following information to value a PoS cryptoasset using this approach:
1. Estimate the cash flows during the life of the cryptoasset.
2. Estimate the lifespan of the cryptoasset.
3. Estimate the discount rate to apply to these cash flows to get the net present value (NPV).

8

Credit to Nick Holtz for this framing in his article “Are blockchains businesses or nations?” which summarizes the dialogue between both approaches.

https://www.ar.ca/blog/are-blockchains-businesses-or-nations

26

S TAT E O F C RY P TO, I S S U E 7

3

1.

Estimate the cash flows during the life of

continue in perpetuity. Arguably, investors may

the cryptoasset: The “dividend yield” in a

apply the same logic to PoS cryptoassets, so

company is equivalent to the staking yield

they may, for instance, estimate future cash

in a PoS cryptoasset, which in most cases is

flows for ten years and assume that they will

determined by the following three variables:

continue in perpetuity beyond that point.

a. Transaction fees within the network
accrue to stakers. Just so, BaB
advocates view fees as a proxy for
revenue.
b. Token issuance doesn’t dilute the
value of stakers. On the contrary,
stakers have the right to new issuance,
similar to how shareholders may
receive stock-based compensation.
c. The number of staked tokens as a
percentage of the total circulating
supply will determine the staking
participation rate. Other things equal,
an increase in the staking participation
rate will cause a decrease in the
staking yield and vice versa.
Having laid out these variables, we may construct
the subsequent formulas:

HMLt

et or alpha)

Annual cash flows to validators (CF) = Transaction
Fees (a) + Token Issuance (b)

Staking Yield (Y) = Annual cash flows to validators

3. Estimate the discount rate to get the net
present value using the Capital Asset Pricing
Model (CAPM): The discount rate should
reflect the risk perceived by the marginal
validator in the PoS blockchain. Thus, the
discount rate should be consistent with the
asset’s risk profile and can be thought of as
the expected rate of return of the marginal
investor. While no model will perfectly quantify
risk, investors should be aware of the biases
and limitations of each model to choose the
one that best aligns with their needs. The
most straightforward approach is to use the
Capital Asset Pricing Model (CAPM), which
Nobel laureate Harry Markowitz introduced in
1952 and is the most widely used risk measure
today among traditional investors:
Expected Return = E(R) = R + β(Rₘ − R)
Where R is the risk-free rate, β is the beta
relative to market portfolio, and Rm is the
market risk premium.

(CF) / The Number of Staked Tokens (c)

The Fama and French Three-Factor Model: More
As mentioned previously, carrying out a DCF

sophisticated investors could go a step further

valuation also requires two more quintessential

and use the Fama and French Three-Factor Model,

variables:

which expands on the CAPM by adding size and
value risk factors to the market risk factor. This

2. Estimate the lifespan of an asset: With public

model was developed by Nobel laureates Eugene

companies that at least in theory can last

Fama and his colleague Kenneth French in 1992.

forever, equity analysts generally assume that

Similar to the CAPM, the procedure for estimating

cash flows beyond a specific point in time

betas and computing the expected return in the

S TAT E O F C RY P TO, I S S U E 7

27

Fama French model is to regress the historical
returns of the asset against three factors — (1)

Ethereum DCF Valuation

market premium, (2) size premium, and (3) value

We will apply the DCF valuation methodology

premium:

proposed above to Ethereum, the largest network
in terms of daily revenue (average of $2.8 million

Figure 6:

Source:

Fama and Fench
Three Factor Model

Investopedia

in August, 2022). But first, it’s worth providing a
brief recap of The Merge. Ethereum’s main chain
currently runs on a PoW consensus mechanism but

Rit − Rft = αit + β(RMt − Rft) + β2SMBt + β3HMLt
where:

will soon merge to a fully-fledged Proof-of-Stake
network. PoS will eliminate the need for energy and
computationally-intensive mining, relying instead

Rit = Total return of asset i at time t

on staked ETH to secure the network. From an

Rft = Risk-free rate of return at time t
αit = Intercept of the regression (i.e., excess return of the asset or

investor’s perspective, ETH will become a capital

alpha)

asset when The Merge takes place — tentatively

RMt = Total market portfolio return at time t

in September of this year.

Rit − Rft = Excepted excess return
RMt − Rft = Excess return on the market portfolio

Moving on to the valuation,

SMBt = Size premium (small minus big)
HMLt = Value premium (high minus low)

Step 1:

β123 = Factor coefficients

We can divide the total revenue Ethereum validators
will accrue into two segments: (a) transaction fees
With these variables in mind, we arrive at the
following equation to determine the “intrinsic”
value of the cryptoasset:

Value of asset =

CF1
(1 + r)

+

CF2
(1 + r)

of the network and (b) token issuance.
(a) Fees: Ethereum’s cumulative revenue through
transaction fees in the past year stands at

+

CF3
(1 + r)

+

CF4
(1 + r)

…..+

CFn
(1 + r)

where CFₜ is the expected cash flow in period t, r is the appropriate discount
rate given the riskiness of the cash flow, and n is the life of the cryptoasset.

$8.47 billion9.
(b) Issuance: Currently, mining rewards amount to
~13,000 ETH per day. However, post-Merge,
mining rewards will disappear, and staking
rewards will amount to ~1,600 ETH per day10,
which translates to an annual staking issuance
of ~584,000 ETH (1,600 x 365 days). At ETH’s
current price ($1,720) as of July 28, validators
would perceive about $1 billion in revenue
through issuance alone.
(c) Total Cash Flows: With the above estimates,
we could assume that annualized cash flows
to validators will amount to $9.47 billion (a +
b) in year 1.

9

Source: TokenTerminal, as of Jul 28, 2022

10

https://ethereum.org/en/upgrades/merge/issuance/

28

S TAT E O F C RY P TO, I S S U E 7

Step 2:

Step 3:

Calculate the expected future cash flows and life

Estimate the discount rate to apply to these cash

of the cryptoasset. We propose a slight variation

flows to get the net present value (NPV). We used

of the three-stage growth model to project

five years of daily data (July 2017 – June 2022) to

Ethereum’s future cash flows. As such, we forecast

calculate a lower and upper bound of the expected

an initial period of very aggressive growth,

rate of return based on the Fama and French

followed by a period of incremental decrease that

Three-Factor Model. We have also included the

eventually stabilizes at a more moderate growth

traditional CAPM in Table 3 as a reference for

rate. For example, if we believe that ETH’s life will

investors that might prefer a more straightfor-

be 20 years, we can consider the following growth

ward approach. The lower bound discount rate

rate in revenue

(17.6%) takes into account the risk-free rate (10

11:

Year Treasury Yield as a proxy) and Fama and
French’s three factors (market premium, size
Table 2:

Source:

Ethereum’s Three-Stage

21Shares

premium, and value premium). Then, we add ETH’s
expected excess return (alpha12) to the lower
bound to estimate the upper bound discount rate.

Growth Model

If investors incorporate “alpha” into the formula,
Aggressive

Incremental

Growth

Decrease

Year

11

Annual
Growth

Year

Annual
Growth

Stabilization

Year

the expected rate of return would be 35.5%.

Annual
Growth

2022

40%

2027

30%

2036

15%

2023

40%

2028

30%

2037

15%

2024

40%

2029

30%

2038

15%

2025

35%

2030

30%

2039

10%

2026

35%

2031

25%

2040

10%

2032

25%

2041

10%

2033

25%

2034

25%

2035

20%

This may seem too aggressive for some investors, but Ethereum’s revenue increased ~1,600% and ~1,500% in 2020 and 2021, respectively, so this is

actually a conservative estimate based on historical performance. This being said, current market conditions could cause a decrease in year-over-year
revenue in 2022, but we try to exclude market sentiment and momentum from the DCF analysis, assuming that over the long term, future growth rates
will offset cyclical variations.
12

The standard procedure for estimating betas is to regress cryptoasset returns (Rj) against market returns (Rm), (Rj = a + b Rm) where “a” the intercept

and “b” is the slope of the regression – investors can interpret “a” as the expected excess return of the asset in question, while “b” represents the beta.

S TAT E O F C RY P TO, I S S U E 7

29

Table 3:

Source:

Fama and French Three-Factor Model Applied to

21Shares, French and Fama data:

Ethereum (Historical Data from 31/07/2017 –

https://mba.tuck.dartmouth.edu/pages/faculty/

30/06/2022)

ken.french/data_library.html#Research

ETH
Price

ETH
Return

200.94

Fama and French Expected Daily Parameters
Date

Al pha

Mkt-RF

SMB

HML

RF

31-Jul-17

225.91

11.71

1-Aug-17

1

0.24

-0.18

0.15

0.004

217.79

-3.66

2-Aug-17

1

-0.08

-1.17

0.15

0.004

224.68

3.11

3-Aug-17

1

-0.21

-0.33

-0.31

0.004

219.53

-2.32

4-Aug-17

1

0.25

0.3

0.38

0.004

269.59

20.54

7-Aug-17

1

0.16

-0.1

-0.57

0.004

296.08

9.37

8-Aug-17

1

-0.24

-0.06

0.25

0.004

295.03

-0.36

9-Aug-17

1

-0.14

-0.76

-0.06

0.004

297.86

0.95

10-Aug-17

1

-1.49

-0.31

0.26

0.004

309.28

3.76

11-Aug-17

1

0.19

0.24

-0.87

0.004

299.27

-3.29

14-Aug-17

1

1.03

0.29

0.11

0.004

286.55

-4.35

15-Aug-17

1

-0.11

-0.85

-0.02

0.004

301.18

4.97

16-Aug-17

1

0.18

-0.13

-0.44

0.004

Alpha ff

b mkt

b smb

b hml

0.0716

1.3625

0.421

-0.1036

Risk-Free 10 Year Treasury Yield

2.68%

Market Beta according to CAPM

1.3989

Al pha accoring to CAPM

17.23%

Market beta according to Fama
and French

Alpha is the intercept of of the regression of
ETH return’s against (mkt – rf) returns

1.3625

Annualized (Mkt-rf)

11.14%
-1.06%
-1.68%

299.9

-0.43

17-Aug-17

1

-1.6

-0.17

-0.16

0.004

Annualized (SMB)

292.27

-2.58

18-Aug-17

1

-0.15

0.12

0.24

0.004

Annualized (HML)

321.72

9.6

21-Aug-17

1

0.06

-0.24

-0.22

0.004

Annualized Al pha according to

313.61

-2.56

22-Aug-17

1

1.06

-0.02

-0.24

0.004

317.08

1.1

23-Aug-17

1

-0.33

0.09

0.42

0.004

325.07

2.48

24-Aug-17

1

-0.14

0.59

0.17

0.004

329.55

1.36

25-Aug-17

1

0.18

0.12

0.55

0.004

347.68

5.35

28-Aug-17

1

0.08

0.34

-0.74

0.004

372.39

6.86

29-Aug-17

1

0.1

0.13

-0.39

0.004

383.4

2.91

30-Aug-17

1

0.53

0.01

-0.31

0.004

388.37

1.28

31-Aug-17

1

0.62

0.48

-0.43

0.004

391.31

0.75

1-Sep-17

1

0.27

0.41

0.4

0.005

1,191.13

-2.15

27-Jun-22

1

-0.28

0.54

1.24

0.003

1,142.74

-4.15

28-Jun-22

1

-2.1

-0.35

2.36

0.003

1,098.80

-3.92

29-Jun-22

1

-0.2

-0.44

-1.3

0.003

Fama and French 3-Factor Model

35.50%

= Alpha + Rf + b1 (Mkt-rf) + b2 smb + b3 hml

1,070.15

-2.65

30-Jun-22

1

-0.95

0.43

-0.15

0.003

CAPM

35.50%

= Alpha + Rf + b (Mkt-rf)

30

S TAT E O F C RY P TO, I S S U E 7

Fama and French

17.90%

Alpha is the intercept of of the regression of
ETH return’s against Fama French 3-Factors

r
Fama and French 3-Factor Model

17.60%

= Rf + b1 (Mkt-rf) + b2 smb + b3 hml

CAPM

18.30%

= Rf + b (Mkt-rf)

r + ETH Expected Excess Return (Al pha)

Step 4:

Results:

Finally, we can estimate the net present value

Assuming a discount rate of 17.58%, the implied

(NPV) of cash flows using the above parameters:

price per one ETH today would be $4,075.06, a
~137% increase from ETH’s current price ($1,720).

Table 4:

Source:

ETH Discounted Cash

21Shares

On the other hand, if we use a 35.48% discount
rate, the implied price per one ETH would be

Flow Valuation (DCF) 13

Ether
Supply

$923.83. Investors should interpret the results of
this DCF valuation with caution and run their own
119,869,673.14

assumptions regarding projected cash flows and
discount rates. For instance, one could argue that
our discount rates are too high, which evidently

#

Year

Annu al
growth

Revenues

1

2022

40%

$9,473,888,409.00

2

2023

40%

$13,263,443,772.60

3

2024

40%

$18,568,821,281.64

4

2025

35%

$25,996,349,794.30

the asset’s monetary premium (SoV) is embedded

5

2026

35%

$35,095,072,222.30

into the DCF14.

6

2027

30%

$47,378,347,500.10

7

2028

30%

$61,591,851,750.14

8

2029

30%

$80,069,407,275.18

9

2030

30%

$104,090,229,457.73

10

2031

25%

$135,317,298,295.05

11

2032

25%

$169,146,622,868.81

12

2033

25%

$211,433,278,586.01

13

2034

25%

$264,291,598,232.52

14

2035

20%

$330,364,497,790.65

15

2036

15%

$396,437,397,348.77

16

2037

15%

$455,903,006,951.09

17

2038

15%

$524,288,457,993.75

18

2039

10%

$602,931,726,692.82

19

2040

10%

$663,224,899,362.10

20

2041

10%

$729,547,389,298.31

lowers the expected NPV. However, the rationale
behind our approach was to be conservative and
capture the high volatility of ETH in the discount
rate to reflect the asset’s riskiness accurately.
Another implicit assumption of this approach is that

13

Discount
Rate

NPV (Market Cap)

Price per ETH

17. 58%

$488,475,711,787.33

$4,075.06

35.48%

$110,739,419,663.86

$923.83

At an average gas price of at least 16 gwei, at least 1,600 ETH is burned

every day, which effectively brings net ETH inflation to zero or less
post-merge. https://ethereum.org/en/upgrades/merge/issuance/
14

By definition, PoS requires validators to commit a portion of their

capital (“the stake”) to propose and validate new blocks. Thus, one could
argue that stakers must believe in the long-term prospects of the asset
as a store of value.

S TAT E O F C RY P TO, I S S U E 7

31

Governance tokens
What are Governance tokens?

large and positive cash flows. Otherwise, a

Governance Tokens give token holders voting

governance token will find it virtually impossible to

powers

the

accrue value in the long term. For this reason, we

underlying protocol. Investors could compare them

argue that governance tokens are capital assets,

to common stock in traditional finance, where

meaning they can be valued using a DCF valuation.

for

proposals

and

changes

to

stockholders can elect the board of directors and
vote on corporate governance. In theory, they also

Uniswap, a decentralized exchange:

represent a residual claim to a protocol’s ongoing

Figure 7 shows the top dApps based on their

and future profits. Some governance tokens accrue

cumulative revenue in the past year as measured by

a percentage of the platform’s revenue, which

total fees paid by users. Applications like Uniswap

allows investors to compute the “intrinsic” value of

and Axie Infinity generated more than $1 billion in

the token with a Gordon Growth Model (GGM) or

revenue. Uniswap’s token, UNI, does not currently

Dividend Discount Model.

accrue part of the protocol’s profits; only liquidity
providers (LPs) do. However, because governance

Governance tokens are pre-revenue tokens and

token holders are collectively the owners of the

could be deemed capital assets:

future of Uniswap, a proposal and corresponding

Notwithstanding, in their current state, most

approved

governance tokens yield voting rights on the

parameters. UNI holders could, for example, vote

platform but don’t accrue revenue. While the

to pay themselves a dividend funded by a portion

intuition is to conclude that this circumstance

of the protocol’s revenues. In the long term, most

prevents a DCF valuation, the reality is that a

dApps will likely take a similar route.

plethora of high-growth stocks – especially tech
stocks – don’t pay dividends. For instance, Apple
didn’t pay a single dividend for seventeen years
(1995 to 2012). Simply put, companies are better off
reinvesting the profits during high-growth periods
instead of paying out dividends. Arguably, the
same phenomenon is happening with governance
tokens today, as most dApps are in the early
stages of their lifecycle, and thus reinvestment in
the protocol is very high.
As dApps mature in the next 5-10 years (again,
Apple didn’t pay a single dividend in seventeen
years!), investors should expect them to generate

32

S TAT E O F C RY P TO, I S S U E 7

vote

can

change

the

platform’s

Figure 7:

Source:

Top dApps based on cumulative

Token Terminal, date

revenue in the past 365 days.

27-Jul-2022

Uniswap
Axie I nfinity
PancakeSwap
Looks Rar e
Convex Fi nance
dYdX
Aave
MetaMask
Sus hiSwap
Lido Finance
Compound
Tr ader Joe
yearn.finance
SpookyS wap
Curve
BENQI
Balancer
Maker DAO
QuickSwap

$332m
$321.3m
$313.6m
$289.9m
$212.8m
$209m
$162.6m
$138.7m
$111.9m
$81.8m
$80.7m
$75m
$73.9m
$0

$200

$1.2b

$673.1m
$586.9m
$572.2m
$484.2m

$400

$600

$800

$1,000

$1.3b

$1,200

$1,400

Total Revenue (millions of $)

PoW Cryptoassets
Bitcoin: As mentioned in the previous sections,

sets the price floor at which producers (miners)

PoW cryptoassets rely on a computationally and

are willing to sell. From the outset, it is crucial to

energy-intensive lottery called mining to verify,

emphasize that we are not suggesting that the

settle transactions and secure the network. The

price of BTC should be determined by its marginal

native asset of a PoW network like Bitcoin is not

cost of production. To do so would be to adopt

one of the inputs of production but the mere

a labor theory of value, which is ostensibly false.

output of it. Hence, we refer to PoW cryptoassets

Instead, the marginal cost of production is a tool

as “crypto-commodities.”

that can help investors estimate a lower bound
price level for BTC and other crypto-commodities.

The Marginal Cost of Production: When it comes
to commodities, Professor Damodaran would argue

In February 2010, Satoshi Nakamoto, Bitcoin’s

that they cannot be valued, only priced against

anonymous creator, wrote the following statement

their own history. In practice, however, the marginal

on Bitcointalk:

cost of production is vital for commodities, as it

S TAT E O F C RY P TO, I S S U E 7

33

Mining Production Cost
“The price of any commodity tends to gravitate

In 2019, Charles Edwards proposed a methodology

toward the production cost. If the price is below

to estimate the global average US dollar cost of

cost, then production slows down. If the price

producing one BTC. The first component of the

is above cost, profit can be made by generating

method is the Cambridge Bitcoin Electricity

and selling more. At the same time, the increased

Consumption Index (CBECI), which provides an

production would increase the difficulty, pushing

up-to-date estimate of the Bitcoin network’s daily

the cost of generating towards the price.

electricity load. The underlying model is based on
a bottom-up approach initially developed by Marc

In later years, when new coin generation is a small

Bevand that uses the profitability threshold of

percentage of the existing supply, market price

different types of mining equipment as the starting

will dictate the cost of production more than the

point. Edwards estimates the cost of production

other way around.”15

per BTC by:
1.

Calculating the number of BTC Mined Per Day
(based on miner rewards)

From an investor’s perspective, what’s crucial to
realize is that miners are compulsory sellers in PoW
networks because of the high capital expenditure
on

mining

hardware,

facilities,

and

power

consumption. Mining is also very competitive and
operates on slim profit margins because of the
“difficulty adjustment” that Nakamoto alluded

2. Calculating the daily electricity cost to mine
one BTC (Daily Electrical Cost)
3. Estimating the global average “Elec-to-Total
Cost Ratio” = (Bitcoin Electrical Cost) / (Daily
Cost of running a Bitcoin Mining Business)

to. In other words, when more miners join the
network and the hash rate increases, the difficulty
of solving a block will also increase so that the
average amount of time it takes to confirm a block
stays the same. For example, with Bitcoin, it takes
an average of 10 minutes to find a valid nonce and
create a new block.
With this in mind, let us explain a methodology to
estimate Bitcoin’s Cost of Production.

15

https://bitcointalk.org/index.php?topic=57.msg415#msg415

34

S TAT E O F C RY P TO, I S S U E 7

An investor can then compute Bitcoin Production
Cost as (Daily Electrical Cost) / (Elec-to-Total
Cost Ratio). Finally, the Bitcoin Production Cost
is compared to the “Bitcoin Miner Price,” which
attempts to capture the revenue one BTC provides
to miners. Bitcoin Miner Price is calculated as
follows: BTC Price + (Daily Transaction Fees) /
(Daily BTC mined).

Figure 8:
Bitcoin Cost of Production
(October 2017 – July 2022)

Source:
TradingView, script by
Charles Edwards

$80000.00
$70000.00
$60000.00
$50000.00
$40000.00
$30000.00
$23308.56

$20000.00
$10000.00
0.00
2018

Jul

2019

Jul

2020

Jul

Electricity Cost to Mine

Total Cost to Mine one

one BTC $12,178.87

BTC $20,298.12

2021

Jul

2022

Jul

BTC Miner Price: $23,597.24

Figure 8 above shows BTC’s cost of production since late 2017. As we can observe, past cycles’ bottoms
have roughly coincided with BTC’s cost of production range estimate. When BTC Miner Price is below the
total cost of mining one BTC, it signals that Bitcoin miners are struggling and potentially taking short-term
losses.
As of July 28, 2022, the estimated global average electricity cost to mine one BTC is $12,178, while the
estimated global average total cost to mine one BTC is $20,298.12. As mentioned, investors shouldn’t
interpret this range as the fundamental value of Bitcoin, which is subjective, but rather as an estimate of its
price floor based on miner profitability and subsequent behavior patterns.

S TAT E O F C RY P TO, I S S U E 7

35

Valuation Frameworks

Relative Valuation
(Pricing)
Multiples
A significant portion of equity valuations in traditional finance consists of relative valuations based upon
multiples and comparables. As mentioned in previous sections, this approach helps determine whether
a given asset is undervalued or overvalued relative to its peers. Damodaran defines a multiple as a
“standardized estimate of price.” As figure 9 shows, the “numerator” is what investors are paying for the
cryptoasset as measured by its market capitalization. On the other hand, the “denominator” is how investors
standardize the price of comparable assets.

Market value of cryptoasset

Figure 9:
Relative valuation based
upon “multiples”
Source:
21Shares

Multiple =

Numerator (i.e., what investors are paying for the asset)
Denominator (i.e., what investors are getting in return)

Revenue

Earnings

Transactions

Utility

In the following sections, we will explore various “multiples”, including the Price-to-Sales Ratio,
Network-Value-to-Transaction (NVT) Ratio, Price-to-Utility Ratio, and Market Cap to Thermocap Ratio.

P/E and P/S Ratio
Just as investors price equities with Price-to-Earnings (P/E) or Price-to-Sales (P/S) ratios, it is possible to
apply the same logic in the context of crypto-capital (i.e, PoS cryptoassets and governance tokens). For
instance, Figure 10 shows the top dApps with the lowest P/S ratios. This particular P/S ratio is calculated
based on annualized revenue, such that an investor computes the metric as follows: market capitalization
of a token / annualized total revenue of the protocol.

36

S TAT E O F C RY P TO, I S S U E 7

Figure 10:

Source:

Top dApps based on lowest P/S ratio

Token Terminal, date

(annualized total revenue)

26-Jul-2022

Euler
Looks Rar e
Solend
SpookyS wap
Alchemis t
Convex Fi nance
QuickSwap
Decentral Games
Or ca
PancakeSwap
Lyr a
Sus hiSwap
yearn.finance
Maple Finance
GMX
Idl e Finance
Cap
Aave
Compound
Uniswap

1.1x

2.1x
2.2x

x

2.9x
3x
3.2x
3.3x
3.5x
3.9x
4.1x

4.6x
4.8x

3x

6.5x
6.9x

7.7x
8x

10.2x
10.6x
10.8x

6x

9x

11.6x
12x

P/S ratio

In this regard, investors could set price estimates based on P/E or P/S multiples. Table 5 below shows
the implied value per ETH based on the average PE multiples of companies in the S&P 500, fast-growing
companies, and extremely fast-growing companies. For reference, the current P/E ratio of Tesla, a
fast-growing company, is 99x (July 28, 2022). Investors could argue that ETH merits a higher multiple because
it is earlier in its life cycle. For instance, Ethereum’s revenue in 2021 increased ~1,500% year-over-year.

Table 5:

Original Source:

Ethereum pricing based on P/E

Ryan Allis, Coinstack

multiples

$206,175,837,800.80
P/E

PE Ratio Comparative Valuations
0

Current Market Cap

Multiple

Implied Valuation

Implied Value

Expected

Per ETH

Increase

7

Actual Ethereum PE Ratio

24.35

$206,175,837,800.80

$1,720.00

0%

Average Company in S&P 500

35

$331,586,094,315.00

$2,883.36

61%

Fast Growing Company

100

$947,388,840,900.00

$8,238.16

360%

Extremely Fast Growing Company

200

$1,894,777,681,800.00

$16,476.33

819%

S TAT E O F C RY P TO, I S S U E 7

37

Total Value Locked (TVL)
In decentralized finance (DeFi), total value locked (TVL) is a crypto-native metric that investors can use
as a proxy for assets under management. Hence, an ingenious pricing approach is to represent the market
value of the governance token as a multiple of TVL. When comparing two assets, the one with the lower
Market Cap/TVL ratio would be undervalued relative to its peer. Figure 11 shows the top dApps based on
TVL.
Figure 11:

Source:

DeFi dApps based on Total Value

Token Terminal, date

Locked (TVL)

27-Jul-2022

Maker DAO
Lido Finance
Curve
Uniswap
Aave
Convex Fi nance
PancakeSwap
Compound
Balancer
Sus hiSwap
Venus
yearn.finance
dYdX
Liquity
Synthetix
Abracadabra.m oney
Tor nado Cash
QuickSwap
Rocket Pool
GMX

$1.4b
$657.1m
$640.3m
$574.6m
$567.4m
$499.3m
$482.8m
$415.2m
$378m
$340.8m
$297.6m
$270.2m
$0

$2,500

$2.9b
$2.8b

$4b

$4.7b

$8.1b

$6.3b
$5.9b
$5.8b

$5,000

$7,500

$10,000

Total Value Locked (millions of $)

Notice that only comparing the absolute TVL metric across various dApps is inaccurate, as we disregard
the market value of the cryptoassets. In this regard, Figure 12 shows the top dApps based on their Market
Cap/TVL ratio. The interpretation would be that cryptoassets on the right side of the chart are undervalued
relative to the ones on the left. However, some investors might object to this conclusion because a high
TVL does not necessarily translate to higher profits. Thus, this multiple is only appropriate to the extent
that TVL can effectively influence the protocol’s ongoing and future profits. For instance, some protocols
might have a high TVL but no means of monetizing it. This scenario is somewhat analogous to tech stocks
with substantial user traction that struggle to monetize their service (e.g., Twitter), negatively impacting
the stock’s performance.

38

S TAT E O F C RY P TO, I S S U E 7

Figure 12:

Source:

DeFi tokens based on Market

Token Terminal, CoinGecko,

Cap/TVL

date 27-Jul-2022

1.8

1.7

1.6
1.4
1.2
1

1.06
0.85

0.8
0.6
0.4

0.63
0.44 0.4 0.39

0.2

0.28 0.25

0.17 0.16 0.15 0.15 0.13 0.12
0.11 0.11 0.11 0.1 0.09

Sy
n

Ro the
tix
ck
et
Po
ol
G
M
U
X
ni
sw
ap
dY
Su
dX
s
y e h iS
ar
w
ap
n.
f
i
A
na
br
nc
ac
e
ad
A
ab
ra a v
Pa .m e
n c on
ey
ak
L i e Sw
do
ap
Fi
na
n
Ba c e
la
nc
e
Li r
q
C
ui
o
t
C
o n mp y
ou
ve
nd
x
Fi
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M
n
ak ce
er
DA
O
V
en
Q
ui
us
To c k
r n Sw
ap
ad
o
C
as
h
C
ur
ve

0

Bearing in mind this caveat, we can use this multiple to price cryptoassets by looking at what other investors
are paying for comparable assets. For example, MakerDAO is the largest lending protocol by TVL at $8.1
billion as of July 27, 2022. Therefore, we can compare its Market Cap/TVL ratio to other blue-chip lending
protocols like Compound and Aave to determine its “fair” price if MakerDAO’s native token – MKR – achieves
these multiples.

Figure 13:
MKR price estimates based on
Market Cap/TVL ratio of main
competitors.
Source:
21Shares, date 27-Jul-2022

$2,319.89

$2,500.00
$2,000.00
$1,500.00
$1,000.00

$911.39

$1,077.09

$500.00
$0.00

MKR Current Pr ice

MKR @ COM P’s
Market Cap/T VL

MKR @ AAV E’s
Market Cap/T VL

S TAT E O F C RY P TO, I S S U E 7

39

Caveats of TVL: There is a risk of double-count-

time and use this to scale the token’s market

ing and inflating Total Value Locked. For instance,

capitalization accordingly to arrive at a “fair” price.

let us suppose a user deposits 5 ETH in “X” dApp

For example, suppose the current NVT Ratio is

like Uniswap, gets back five (5) new tokens, called

25% lower than the historical average. In that case,

xETH, and goes on to deposit these new tokens

investors could adjust the current market cap

on “Y” dApp, such as Sushiswap. Even though the

upwards proportionally to produce an estimate of

user only had 5 ETH initially, if both “X” and “Y”

its NVT-based implied value.

dApps count deposits for their respective TVL,
there will be a double-counting error. In other

Figure 14 shows Bitcoin’s NVT ratio compared

words, five (5) more ETH would be accounted for

to its price history since 2016. Periods of rising

out of thin air. Worse still, it has been discovered

NVT (grey) suggest declining fundamentals and

that some protocols have historically inflated their

a bearish outlook, while periods of declining NVT

TVL metrics purposefully in this manner. Hence,

(yellow) suggest improving fundamentals and a

investors need to take these metrics with a grain

bullish outlook. We should note that this indicator

of salt and be extra inquisitive regarding the

is not always accurate. Also, it works best for

accounting method.

momentum-based strategies and for shorter
timeframes. However, it can still be a valuable tool
for investors to gauge if the asset is overvalued or

Network-Value-to-Transactions (NVT)
Ratio

undervalued.

The Network-Value-to-Transactions (NVT) Ratio

2022 (sample size = 4,393), Bitcoin’s NVT historical

measures the dollar value of on-chain transaction
activity of a given protocol relative to its Network
Value. This method views these protocols as
‘network commodities.’ Bitcoin analyst Willy Woo
introduced NVT as a metric analogous to the P/E
ratio used in equity markets but adapted to Bitcoin.

Additionally, using daily data from July 2010 to July
average is 64.12. As of July 26, 2022, Bitcoin’s NVT
ratio is 45.34, which means that BTC is trading
29.28% below its historical NVT average. However,
some investors might prefer using the median NVT
as a more accurate measure because the median
is not affected by outliers or the skewness of the
data. For instance, during Bitcoin’s first years of
existence, the NVT ratio experienced wild swings,

Network Value
NVT =
Value of On − Chain Transaction Activity

from as high as 450 in August 2010 to as low as
3.72 in November 2011. In this regard, BTC’s NVT
historical median is 55.87, which means that BTC
is currently trading at an 18.85% discount by this
metric.

By comparing the current NVT ratio to its mean
over some time, we can measure how over or
undervalued the asset is at a given point in

40

S TAT E O F C RY P TO, I S S U E 7

Figure 14:
Bitcoin’s NVT Ratio (30-day MA)
compared to its price history

Source:
Glassnode

(2016-2022)
$60K
$20K
$8K
$4K
$1K
$600

Jan’16

Jul’16

Jan’17

Jul’17

Jan’18

Jul’18

Jan’19

Jul’19

Jan’20

Price USD

Jul’20

Jan’21

Jul’21

$200
Jul’22

Jan’22

NVT Ratio

To estimate the NVT-based implied value, we must first calculate the 30-day average daily value of on-chain
transaction activity in the Bitcoin network. With a 30-day average transaction value of $10 billion, we can
now apply our average and median “multiples” (64.12 and 55.87, respectively) to arrive at a Bitcoin implied
market value range between $560 and $643 billion, which translates to a price range between $29,346
and $33,679 per one BTC, as shown in Table 6.

Table 6:
Bitcoin’s NVT-based

DATE

26/07/22

implied price

Implied BTC Market Cap

Sample Size (Days)

4393

axc=

$643.47 billion

a

Average NVT Ratio

64.12

bxc=

$560.70 billion

b

Median NVT Ratio

55.87

Data source:
Messari, as of July 26,

17/07/10

2022

c
d

30-day average daily on-chain
tx value
BTC Circulating Supply

Implied BTC Price
$10.04 billion
$19.10 million

(a x c) / d =

$33,680.05

(b x c) / d =

$29,347.55

S TAT E O F C RY P TO, I S S U E 7

41

Price-to-Utility (P/U) Ratio

What is worth emphasizing here is that the

Shortcomings of NVT failing to capture the

characterization of PoS tokens (CA + C/T +

store of value component of cryptoassets:

SoV) on the base layer is also pertinent to the

Investors can use the NTV ratio to produce a

interoperability and scalability layers. Examples in

relative valuation by standardizing price with the

the interoperability vertical include networks like

flow of transactional value through the network.

Polkadot and Cosmos, while Polygon and Optimism

However, this method does face certain limitations.

could be examples of the scalability vertical. The

NVT focuses on the token serving as a medium of

use case of the PoS network is almost irrelevant

exchange (MoE), but it falls short in accounting for

– from an investor’s perspective, the native token

the SoV component that some cryptoassets tend

fulfills a homogenous role across all PoS networks;

to reflect.

the only nuances are the specific means of

same mental model that demonstrates the triple

extracting revenue between different blockchains.
To illustrate, in the context of smart contract

With this mental framework in place, we’ll proceed

platforms such as Ethereum or Solana, their native

to choose Polkadot as a case study for this metric.

tokens are all used as the transacting currency for
on-chain dApp interactions, like purchasing an NFT
collection or paying for transaction fees. However,

Application

almost by definition, validators also believe that
value will accrue to the token as their hosted

Polkadot: ​​Polkadot is a protocol on which

app-layer ecosystem continues to grow and the

independent blockchains – dubbed “parachains” –

native asset’s demand increases in line with its

are built and connected into one unified network

escalating utility.

— “the Relay Chain”. It employs a shared security
model whereby the native asset “DOT” secures all

The various monetary policies in crypto impact

parachains. This design means that an increasing

value: In addition, specific platforms like Ethereum

number

or Avalanche also feature token burn programs

blockchain would increase the demand for the

where tokens like Ether or Avax are removed out

shared security overseen by the validators, which

of circulation permanently. This practice offers

in turn boosts the future cash flows that stakers

compelling prospects as it effectively restricts

receive.

of

projects

joining

Polkadot’s

main

supply – analogous to the halving’s impact on
Bitcoin – causing a price appreciation to occur if

Price-to-Utility Ratio: With this in mind, investors

the demand increases or stays the same while

can think of DOT as a hybrid between a MoE and

nullifying the networks’ inflation rate. In other

SoV. This designation makes it appropriate to

words, this monetary policy transforms some

discuss the Price-to-Utility metric introduced by Yu

networks into deflationary assets.

Liu, which accounts for both asset properties. On
the one hand, it serves as a capital asset since the

42

S TAT E O F C RY P TO, I S S U E 7

token can be staked and generate cash flows for

growth prospects. In this scenario, users perceive

its holders or yield further dividends with on-chain

the project to be more valuable, which can increase

activities like “bonding” and “crowd-loading.” On

the token’s value if translated to the supply and

the other hand, users also need DOT to transact

demand dynamics. Over the long term, this could

with the ecosystem or participate in cross-chain

allow the cryptoasset to consolidate as an SoV

messaging, which deems it a consumable asset.

asset. In sum, a high staking ratio effectively
manifests the utility of a token serving as SoV

As we’ll illustrate, the P/U metric considers elements

because validators must commit the internal

like token velocity and staking ratio, which reflect

asset of the system. Therefore, it is only rational

the MoE and SoV components, respectively. At the

to “stake” if they believe in the asset’s long-term

risk of being redundant, this delineation isn’t just

value.17

limited to DOT because, as already pointed out,
PoS tokens under all three layers (L0, L1, L2) share

Finally, we should note that this approach only

the same core functions related to staking.

makes sense to the extent that low and predictable
annual rates of supply inflation are programmed

(Market Cap)
Price to Utility Ratio (PU) =
(Token Utility)

into the blockchain. Highly inflationary PoS
cryptoassets would dilute the value of non-stakers
disproportionately, disincentivizing its use case as
an SoV asset.

To produce the PU ratio, we need to work out two
variables, (1) the utility of the chosen token and
(2) its network capitalization. Liu defines the utility
of a token as

Token Velocity X Staking Ratio
Dilution Rate

.16

In this regard, token velocity is calculated with the
following formula:

Total Transaction Value

Average Network Value

.

Investors can interpret velocity as the number of
times a token changes hands relative to the total
supply, making it the best proxy for a currency’s
role in serving as a medium of exchange.
In addition, investors can estimate the staking
ratio with the formula: (

Number of Staked Tokens
Total Token Supply

). A high

staking ratio would signify that users have high
expectations regarding the network’s long-term

16

Potentially, this metric could be applied to PoW cryptoassets as well. In this case, instead of using the “staking ratio”, investors would use the percentage

of supply held by long-term holders, or a similar proxy.
17

We were not able to apply the Price-to-Utility ratio to Polkadot due to lack of historical data regarding the staking ratio and supply locked in “crowd-loans”.

S TAT E O F C RY P TO, I S S U E 7

43

Market Cap to Thermocap Ratio
“Thermocap” is the cumulative sum of USD block rewards paid to miners. Nic Carter introduced this metric
as a proxy of the aggregate cost of production for all circulating BTC. Thus, investors can use the market
cap to Thermocap ratio to assess if the asset’s price is currently trading at a premium to the total security
spent by miners. Figure 15 shows the market cap to Thermocap ratio since 2010.

Source:

Market Cap to Thermocap Ratio (July

21Shares, Thermocap data by Glassnode,

18, 2010 – Jul 31, 2022)

Market Cap data by Messari

80

$100,000.00

70

$10,000.00

60

$100.00

40
$10.00

30

BTC Price

$1,000.00

50

$1.00

20
10

$0.10

0

$0.01
Jul-10
Oct -10
Ja n-11
Apr -11
Jul-11
Oct -11
Ja n-12
Apr -12
Jul-12
Oct -12
Ja n-13
Apr -13
Jul-13
Oct -13
Ja n-14
Apr -14
Jul-14
Oct -14
Ja n-15
Apr -15
Jul-15
Oct -15
Ja n-16
Apr -16
Jul-16
Oct -16
Ja n-17
Apr -17
Jul-17
Oct -17
Ja n-18
Apr -18
Jul-18
Oct -18
Ja n-19
Apr -19
Jul-19
Oct -19
Ja n-20
Apr -20
Jul-20
Oct -20
Ja n-21
Apr -21
Jul-21
Oct -21
Ja n-22
Apr -22
Jul-22

Market Cap / Thermocap

Figure 15:

Ma rket Cap / Ther moc ap

Bit coin Price

As we can observe, a high market cap compared to total aggregate security spent has historically been
an indicator that BTC is relatively overvalued and near the top of a market cycle. Conversely, a low market
cap to Thermocap ratio has historically signaled that BTC is relatively undervalued and near the bottom of
a cycle. As of July 21, 2022, BTC’s market cap to Thermocap ratio is 10.70. The interpretation of this ratio
is that, at a market cap of $452 billion, BTC is worth 10.70 times more than its total input costs. In addition,
by comparing the current ratio to its historical mean, we can measure how over or undervalued BTC is at a
given point in time and use this to scale the token’s market capitalization accordingly to arrive at an implied
“fair” price.
Using daily data from July 2010 to July 2022 (sample size = 4,397), BTC’s market cap to Thermocap’s
historical average is 12.21. However, some investors might prefer using the median as a more accurate
measure because it is not affected by outliers or the skewness of the data. In this regard, BTC’s market cap
to Thermocap’s historical median is 9.25. Table 7 shows BTC’s implied range price based on these multiples.

44

S TAT E O F C RY P TO, I S S U E 7

Table 7:
BTC’s implied range

DATE

18/07/10
31/07/22

price based on Market
Cap to Thermocap

Sample Size (Days)

multiple
a

b

Average Market Cap to
Thermocap Ratio
Median Market Cap to
Thermocap Ratio

BTC Implied Market Cap
4397

axc=

515,742,323,657.62

12.21

bxc=

390,392,975,117.11

9.25

BTC Implied Price

c

Thermocap as of July 31, 2022

$42.2 billion

d

BTC Circulaitng Supply

$19.10 million

(a x c) / d =

$26,991.04

(b x c) / d =

$20,430.96

Market Sizing
Overview
Most cryptoassets at the infrastructure layer are
shaping up to be capital assets in nature (PoS).
However, a select number of blockchains still
implement a PoW consensus mechanism, as is
most clearly the case with Bitcoin. While we refer
to this group as “crypto-commodities,” we expect
that the majority of value accrual for these assets
will derive from their use case as an SoV asset, to
the extent that PoW cryptoassets like Bitcoin have
low, programmable and predictable annual rates
of supply inflation. Only digital assets can achieve
αit + β(RMt − Rthis
) +quality.
β2SMBt + β3HMLt
ft

The methodology involves establishing a Total
Addressable Market (TAM) and a percent share the
asset in question could take — Market Penetration.
For instance, an investor could price Bitcoin by
setting a proportion it could capture of the market
value of gold, the seminal SoV asset.
The relative market value is arrived at using this
simple formula:

Market Value = Level of Penetration * TAM

et i at time t

In this sense, investors cannot value SoV assets
intrinsically because their value is primarily
gression (i.e., excess return of the asset or alpha)
determined by the subjective beliefs of many
olio return at time t
individuals. Thus, we can utilize a simple market
ess return
sizing approach to estimate a target price.

turn at time t

n on the market portfolio

mall minus big)

(high minus low)

s

S TAT E O F C RY P TO, I S S U E 7

45

Application
Bitcoin: As of July 28, the price of BTC is $23,850, with an implied circulating market cap of $455.66
billion. On the other hand, the market cap of gold sits at around $11.68 trillion. Thus, we can use the market
sizing methodology described above to estimate the hypothetical price of BTC if it were to capture a given
percent share of gold’s market cap. For instance, Figure 16 shows that if BTC were to capture 10%, it would
be priced at $86,643. In the most optimistic scenario contemplated, if BTC penetrates 30% of gold’s
market cap, the price of one BTC would be $173,287.
Figure 16:
Hypothetical value of BTC as %
of gold’s market cap in 2027*
Source:
21Shares, data as of July 28,
2022

BT C @ 30% of Gold’s M C

$173,287.26

BT C @ 25% of Gol d’s MC

$144,406.05

BT C @ 20% of Gold’s MC

$115,524.84

BT C @ 15% of Gold ‘s MC

$86,643.63

BT C @ 10% of Gold’s MC
*Assuming gold’s market cap of
$11.684 trillion, and BTC
circulating supply of 20.2 million

$57,762.42

BT C @ 5% of Gol d’s MC

$28,881.21

Curr ent BTC Price

units in 2027.

$23,850.08
$0

$50,000

$100,000

$150,000

$200,000

Optimism and the block space market: Using

can choose to send them to Optimism instead.

another example, if we perceive blockchains as

Therefore, investors can estimate Optimism’s value

sellers of block space, the entire market for block

by establishing a penetration rate of Ethereum’s

space can be viewed as the TAM. We can then

market for block space.

estimate the value of the given chain for three
scenarios of penetration into the block space

To produce a fair value for Optimism using market

market (users choose to transact on the protocol

sizing in the future, we could:

rather than on the target market).
Let us consider Optimism, a scaling protocol
in the Ethereum ecosystem. Optimism uses
Ethereum for consensus and re-sells Ethereum
blockspace to users for lower fees per transaction
and greater throughput. As such, users who may
have sent their transactions directly to Ethereum

46

S TAT E O F C RY P TO, I S S U E 7

1.

Estimate the future size of Ethereum’s market
for block space (ignoring its value derived from
network effects).

2. Consider three market penetration scenarios
for Optimism: low, medium, and high.
3. Price Optimism as a proportion of Ethereum’s
block space market size based on each
scenario.

Methodology Improvements
Shortcomings of market sizing: Investors should interpret the results of a market sizing analysis with
caution due to the limitations inherent in the valuation model. For instance, the market capitalization of
gold is a moving target, and we could be overestimating the percent share BTC could capture in different
scenarios. Furthermore, this approach omits other relevant variables, such as the impact of fiat supply
inflation. As a store of value asset, BTC should appreciate it as the Fed and other central banks keep
increasing the money supply, and fiat loses purchasing power. This section will explore different ways
investors can improve the accuracy of market sizing valuations.
The S-Curve: One way to more accurately gauge a given cryptoasset’s level of penetration of its TAM is
through the “S-curve.” The S-curve is a theory that states that technologies grow and emerge in multiple
waves. It was initially proposed by E.M Rogers in 1962 as the Diffusion of Innovation (DOI) Theory to explain
how, over time, a new technology gains momentum and spreads through a specific population or social
system. The end result of this diffusion is that people, as part of a broader social system, adopt a new
technological innovation. However, adoption doesn’t coincide in every segment of society. Instead, it is a
process whereby some people are more prone to adopt the innovation than others. Figure 17 shows the
five established “adopter categories” and the portion they represent of the entire social system.

The Chasm
MAINSTREAM

Figure 17:

MARKET

S-curve and the Diffusion of
Innovation Theory
Source:

EARLY MARKET

21Shares design based on
http://blog.leanmonitor.com/early-adopters-allies-launching-product/

Tech enthusiasts
Innovators 2.5%

Visionaries

Early Adopters 13.5%

Pragmatics

Early Majority 34%

Conservatives

Late Majority 34%

Skeptics

Laggards 16%

The pace of adoption of crypto, or what we call the S-curve, is interesting for the purposes of our analysis.
The S-curve shows the innovation from its slow beginnings as the technology is developed to an acceleration
phase (early majority) as it matures and, finally, to its stabilization over time (a flattening curve with late
majority and laggards). Most major technological innovations go through an S-curve-shaped adoption –
past examples include color TV, the microwave, PCs, mobile phones, and the internet. Now, crypto is going
through one of its own.

S TAT E O F C RY P TO, I S S U E 7

47

For example, we can gauge crypto’s stage in the S-curve by comparing the number of crypto users to the
global internet population. According to data released by Crypto.com, there were 295 million crypto users
globally at the beginning of 2022, representing about 3.77% of the world population. The level of crypto
adoption today is equivalent to internet adoption in 1998-99, as shown in Figure 18. To project the growth
of crypto adoption over the next 20 years, we estimated the Compound Annual Growth Rate (CAGR) of
internet users from 1994 to 2022 and assumed crypto would grow at the same rate until 2044 (Expected
CAGR of ~28%). For reference, crypto has grown at a CAGR of ~97%, from 5 million users in 2016 to 295
million at the end of 2021. Given this data, one could argue that crypto has yet to cross “the chasm” to the

44

20

42

20

40

20
18

38

20

36

16

34

20

20

32

30

20

20

28
20

20

26

24
20

20

22

20
20

16
20

S-curve, crypto

20

Figure 18:

18

early majority of adopters (see Figure 17).

adoption compared to
internet adoption

7,000
6,000

Source:
21Shares, Data source

5,000
Millions of Users

in Footnote18

4,000
3,000
2,000
1,000

Global Internet Users

20

22
20

20

20

20

14
20

12
20

10
20

20

08

06
20

04

20

02
20

00
20

19
98

19
96

19
94

0

Global Crypto Users

Another shortcoming of traditional market sizing approaches is that the TAM of certain cryptoassets is not
necessarily constrained to a specific field. For instance, BTC could capture a percentage of gold’s market
as a store of value asset. Still, it could also grab a portion of the US dollar market as a medium of exchange
with the Lightning Network or even a percentage of the smart contract platform ecosystem with Stacks.
Thus, investors can improve a market sizing methodology in terms of accuracy by dividing the TAM into
several use cases. In crypto, on-chain transparency can help us gauge what percentage of an asset’s
supply is used for specific applications. In the case of Bitcoin, Glassnode data shows that 65.7% of BTC’s
supply has not moved in at least one year.19 Hence, an investor could extrapolate that ~66% of BTC’s value
capture will come from its use case as a store of value asset.

18

Internet data: https://www.internetworldstats.com/emarketing.htm Crypto data: Statista and Crypto.com

19

https://studio.glassnode.com/metrics?a=BTC&category=&m=supply.ActiveMore1YPercent&s=1572448116&u=1659398400&zoom=

48

S TAT E O F C RY P TO, I S S U E 7

Using Ethereum as an additional example, we could divide the TAM of Ethereum into the following segments:


Stablecoins – target market: global payments
ETH – target market: reserve currency or M2
Decentralized Applications (dApps) – target market: App Store + Google Play

To summarize, investors can improve a straightforward market sizing approach by estimating the following
variables:
1.

S-curve: Where does the technology (and cryptoasset) stand in terms of adoption versus the
target market?
2. CAGR: What is the target market’s historical compounded annual growth rate? What’s the
cryptoasset CAGR?
3. Total Addressable Market (TAM): The benchmark — to what market(s) should we compare
the cryptoasset? And why?

NFTs
Non-fungible tokens essentially represent a digital

Native tokens like Ether are the unit of account

proof of ownership. They can take various forms,

for NFTs: A crucial observation of NFTs is that

including event tickets, collectibles, virtual land,

they are not priced in fiat currency but rather

redeemables, art, music, deeds, and more. We

in the native token of the ecosystem to which

believe that NFTs will become an essential yet

they belong. For instance, NFTs in the Ethereum

almost invisible part of the infrastructure in the

ecosystem are priced in Ether (ETH). This creates

new generation of the internet. For these reasons,

an interesting dynamic because their price in fiat

it would be impossible and erroneous to value this

terms becomes directly dependent on the price of

market in its entirety. Instead, this section attempts

ETH, SOL, or the native token of the ecosystem

to provide a valuation framework for a specific

to which they belong. Almost by definition, then,

sub-sector – NFTs as art and collectibles.

most NFTs will have a high beta to the extent that
their returns are correlated to the rest of the crypto

So-called “blue-chip” NFT projects are collections

market. For instance, suppose the floor price of an

that are well-known, reputable, and regarded

NFT collection rises 10%, from 10 to 11 ETH. If the

as long-term investments due to their history of

price of ETH rises 20%, from $1,000 to $1,200 over

value and growth. One of the best examples would

the same period, then in USD terms the floor price

be the infamous Bored Ape Yacht Club (BAYC),

of the NFT collection rises 32%. Conversely, if the

an NFT collection by Yuga Labs LLC that was

floor price of the same NFT collection decreases

released in April 2021 and has seen a meteoric

10%, from 10 ETH to 9 ETH, and the price of ETH

rise in popularity. A simple collection of 10,000

decreases 20%, from $1,000 to $800, then in

different-looking Apes turned into a multi-billion

USD terms the floor price of the NFT collection

Web3 project.

decreases 28%.

S TAT E O F C RY P TO, I S S U E 7

49

In addition to this dynamic, the big question remains:

Quality – “That certain something.” The elusive

how to value such a project or even a single NFT?

qualities that prompt individuals to stand in front of

First, it’s essential to dissect the potential valuation

a painting with their heads down or users in front

in multiple parts. The first step is to evaluate the

of their screens for extended periods. Quality can

art itself. At this point, we can draw inspiration

also be determined by a work’s formal characteris-

from the traditional fine art market to gain insights

tics, such as the artist’s technical execution and

into the variables that make up the market value of

composition, or by the subject matter’s poignancy,

an art piece. This method combines objective and

originality, or relevance.

subjective assessments of an artwork’s cultural
worth.

Condition – Potentially, this factor is more
applicable to physical art. A work of art loses value

In the traditional world, art assessment firms are

if it is harmed, faded, or pierced. Conversely, an

primarily responsible for performing the valuation

art piece or collectible item is worth more if it’s in

of pieces of art. For instance, Sotheby’s and

perfect condition.

Christie’s offer services such as art appraisals,
determining value by comparing information from

Rarity – One of the most critical variables in

several sources, including art auction houses,

the physical and digital realm. Fine art, NFTs,

individual and corporate collectors, curators,

and virtually all collectibles tend to be more

art dealer operations, gallerists, advisors, and

valuable if they are exceptionally uncommon. For

professional market analysts. In the digital realm,

instance, looking at the famous NFT collection

it’s mainly the community that sets the value of

of CryptoPunks, we can see that NFTs with rare

a given NFT. However, at a high level, we can

attributes trade at a significant premium.

delineate some variables that investors take into
account when assessing an art piece:

50

Table 8:

Source:

CryptoPunk rarity

Opensea, as of

premium

July 31, 2022

% of

Highest

Price per

Sale Amount in

Type

CryptoPunks

Last Sale

Date of Sale

ETH

USD

Male

60.39%

667 ETH

April 27, 2021

$2,669.13

$1,780,309.71

Female

38.40%

888.8 ETH

August 28, 2021

$3,247.33

$2,886,226.90

Zombie

0.88%

2,000 ETH

September 11, 2021

$3,267.53

$6,535,060.00

Ape

0.24%

2,501 ETH

February 9, 2022

$3,246.82

$8,120,296.82

Alien

0.09%

8,000 ETH

February 12, 2022

$2,919.71

$23,357,680.00

S TAT E O F C RY P TO, I S S U E 7

Provenance

and

history-

An

intriguing

like the BAYC, come with a utility, which can have

component of art valuation is provenance.

various forms and shapes and go beyond the art’s

New things generally have a higher value,

standalone value. Below we identify the most

but artworks function somewhat differently.

common utility features of NFT collections:

Collectors usually deem art pieces more
valuable if a famous collector or celebrities have

Exclusive access

owned them. In this sense, the provenance or

Often NFT holders are granted exclusive rights

ownership history of an art piece or NFT may

and access to future benefits. For example, this

be significant. The transparent and verifiable

could be an additional NFT being “airdropped” to

nature of the history of an NFT is comparable

the current holders or exclusive access to certain

to provenance. An NFT’s worth might also

parties and events. The holder thus feels part of a

increase if it has been displayed or published

community, which is hard to put a price tag on.

somewhere prominent.
Status and Prestige

Demand / Network Effects- Demand and

While many of those NFT collections grant access

network effects around a collection or a piece

to an exclusive community, network, or club, they

of art are one of the main drivers of price. As

are also increasingly becoming a sign of status. We

collectibles lack an objective measure of value,

don’t need to look far to identify similar characteris-

they tend to be somewhat sentiment-driven,

tics in the real world. A perfect example would be

and therefore the success of an NFT is

Rolex. Even though a Rolex is a timepiece that

dependent on the network effects that it can

embodies sophisticated craftsmanship, most of

produce. A solid Twitter following and an

its value is derived from its inaccessibility, limited

engaged Discord community for the artist or

supply, and the prestige associated with the

the project are the first signs of a potentially

brand. Such luxury goods, also known as Veblen

high-value NFT. While this isn’t always a

goods, create an upward-sloping demand curve,

guarantee for success, sustainable demand

meaning demand increases as the price increases.

and network effects are essential for a project.

While this behavior appears to defy the law of
supply and demand, the higher prices of Veblen

In conclusion, while some of these NFTs come as a

goods make them even more desirable from a

1-of-1 unique piece, for which a valuation approach

social status perspective. We can apply the same

compared to the traditional fine art market could

logic to certain blue-chip NFTs. As digital identity

make sense, most of the NFTs come in collections

becomes increasingly important to many people,

to build a community and brand around them.

owning such an NFT becomes more of a social

This circumstance brings us to the core benefit

statement.

of certain NFTs – Utility. Many NFT collections,

S TAT E O F C RY P TO, I S S U E 7

51

Price

Figure 19:
Demand curve of
Veblen goods.

Veblen Good’s Demand
Curve
Quantity

Demand Curve when
The Law of Demand holds

Beyond Collectibles
NFTs can encompass a plethora of use cases

a share of the future trading volume. In the case

outside collectibles. For example, artists can use

of music NFTs, artists can capture some revenue

“royalty-generating NFTs” to sell their content

share in the form of royalties if a given track

directly to their fans. Royalty NFTs generate

becomes a hit. In that sense, NFTs can become

cash flows and could be labeled capital assets.

royalty or dividend-generating assets. Thus, they

There are also “redeemable NFTs,” representing

are capital assets, which theoretically would allow

ownership of real-world items, such as deeds

a DCF valuation.

to a car. Redeemable NFTs are consumable/
transformable assets. Below we describe some of

Redeemables

these use cases:

While some NFTs are collectibles, others can

Commercial rights

Adidas’ Into The Metaverse NFT collection consists

In the example of the BAYC collection, NFT

of 30,000 identical-looking NFTs, which grant

holders also have full ownership and commercial

access to future digital experiences. In addition,

rights to their apes, which sets the stage for

holders can also redeem physical goods with

more commercial ventures and potential revenue

their NFTs, like an Adidas tracksuit, hoodie, or

streams based on one single NFT. For example,

beanie. In this case, we would consider the NFT a

holders can sell merchandise and appliances or

consumable or transformable asset.

even lend intellectual property (IP).
Royalties
Royalties are another benefit of NFTs. As a creator,
royalties are usually set during the minting process
and promise an endless revenue stream based on

52

S TAT E O F C RY P TO, I S S U E 7

represent deeds to a real-world item. For instance,

Valuation Frameworks

Challenges to Cryptoasset
Valuations
There are various challenges and shortcomings when it comes to cryptoasset valuations, as shown below:

Fundamental Valuations

Lack of historical data. While cryptoassets like Bitcoin, and to a certain extent Ethereum, have a decent
track record, most are still in their embryonic stage, which translates into having minimal historical data
about the network’s financial health. As a result, investors have little to work with to shed light on future
projections.

Discount rate. While we have used the CAPM, and Fama and French Three-Factor Model to calculate
the expected rate of return, traditional investors have pointed out many flaws in this approach. For
instance, both approaches assume that the marginal investors are well diversified and that the only risk
they perceive in a given investment cannot be diversified away (i.e., market or non-diversifiable risk).

Risk-free rate. At an intuitive level, the risk-free rate should represent the return investors can earn
on guaranteed investments. The risk-free rate is currency-specific, which means that investors that
conduct their analysis in US dollars will likely use Treasury bills as a proxy. In the long term, however,
some cryptoassets such as ETH, or even BTC through the derivatives market, could have their own
risk-free rate. It wouldn’t make sense today to call the staking yield of ETH a “risk-free” rate as most
investors would denominate the analysis in dollars or another fiat currency. Thus, a risk exists that the
value of ETH itself falls even though it pays a guaranteed yield.

Risk premium. One of the biggest challenges when valuing PoS cryptoassets is estimating the risk
premium. For equities, investors tend to use the historical premium, meaning the excess return that
stocks historically have earned over riskless securities. In this regard, some investors use nearly eighty
years of data to minimize the standard error of the risk premium. Here again, the necessity of historical
data becomes a problem in the context of cryptoassets, as most of them are less than five years old. A
possible solution is to devise a more intuitive measure of risk. For instance, we know that the annualized
volatility of the largest PoS cryptoassets is well above 80%, whereas the annualized volatility of the S&P
500 sits around 20%. Hence, a creative investor could assume that the risk premium for cryptoassets

S TAT E O F C RY P TO, I S S U E 7

53

will be at least four times higher than the S&P 500. Another more sophisticated solution would be to
use bottom-up betas, which don’t require historical data but rely on a large sample of cryptoassets
to minimize the standard error.

Challenges relative to traditional equities. The cash flows that PoS networks generate are not paid
in fiat currency but rather in the native tokens of the network. This situation is as if Apple charged
its customers in Apple shares instead of US dollars. This unique feature creates a reflexivity problem
because the dollar-denominated value of the dividends is directly dependent on the value of the
cryptoasset.

PoW Cryptoassets – Cost of Production. Although the marginal cost of production is vital for
commodities, there are some crucial differences between crypto-commodities and their physical
counterparts that could theoretically refute this valuation metric. For instance, with physical
commodities, if the price is below cost, then production slows down. In contrast, Bitcoin is on a
predetermined path to 21 million units, and one block is proposed every 10 minutes on average. Most
importantly, the difficulty adjustment could potentially create a death spiral in the cost of production.
This being said, the cost of production has empirically proven to be a key level for BTC in multiple
market cycles.

Relative Valuations

“Multiples’’ limitations. Investors have developed multiples in the equities market to gauge the
probability of a crisis or financial correction based on decades of historical data. For instance, Nobel
Prize recipient Robert Shiller estimated a weighted average of the market’s PE ratios from 1871 to
the present to come up with the so-called Shiller’s CAPE (Cyclically Adjusted Price Earnings), which
investors use to gauge if the market is overvalued and due for a correction. As most cryptoassets
have less than five years of data, this type of multiple is not yet possible to formulate.

Market sizing limitations. Investors should interpret the results of market sizing valuations with
caution. First, the market capitalization of both the cryptoasset in question and the total addressable
market (TAM) is a moving target. In addition, the investor could overestimate the percent share the
asset will capture. Another factor to consider is that investors usually use this approach in the context
of SoV assets. In this regard, market sizing omits relevant variables such as the impact of fiat supply
inflation. Store of value assets should appreciate as central banks keep increasing the money supply,
and fiat currencies lose purchasing power.

Finally, it is worth mentioning that a way to enhance the credibility of relative valuation approaches is
via “triangulation”, which in the context of research means using multiple approaches to address the
same question. Performing multiple valuation methods forces investors to undergo a “sanity check”.

54

S TAT E O F C RY P TO, I S S U E 7

It is appropriate to conclude this section with a timeless remark from Damodaran, who states that the three
“sins” of valuation frameworks are bias, uncertainty, and complexity. In the context of cryptoassets, these
factors are exacerbated:

Bias. Investors will always have a preconception of the cryptoasset before valuing it. The valuation can
yield disparate results when prejudices are set, especially in DCF methodologies. Because the inputs
are difficult to estimate, investors can manipulate them to show the desired outcome and confirm their
bias.

Uncertainty. This paper attempts to provide investors with the right tools to value this asset class as
there is no objective measure of value for cryptoassets today. However, it is worth remembering that
the more uncomfortable an investor feels when valuing an asset, the greater the payoff of doing the
valuation. Another factor that adds to the uncertainty is the ultra-high-growth stage in which most
networks and protocols are, which makes it difficult to estimate their future growth correctly.

Complexity. The core principle of Damodaran concerning valuations is to be parsimonious: “If you can
do something with three inputs, don’t be looking for five .” In most cases, simpler valuations do much
better than complex ones. Throughout this paper, we have attempted to adhere to this principle.

S TAT E O F C RY P TO, I S S U E 7

55

State of Crypto

Conclusion
We have proposed a general framework to value different types of cryptoassets. Below we summarize the
key takeaways:

When it comes to valuation frameworks, we can distinguish between two approaches – intrinsic and
relative valuations. Intrinsic valuation relates the value of an asset to its capacity to generate cash
flows. On the other hand, relative valuation (also called “pricing”) estimates how much to pay for an
asset based upon what others are paying for comparable assets.

We propose a taxonomy of cryptoassets at the blockchain and application layer. At the blockchain
layer, we can distinguish between Proof-of-Work (PoW) and Proof-of-Stake (PoS) cryptoassets.
The core difference from a valuation standpoint is that in PoS networks, the internal asset is one
of the block production inputs, making it a Capital Asset. In contrast, we describe PoW assets as
“crypto-commodities.” Furthermore, we distinguish between governance, non-fungible, and utility
tokens at the application layer.

A discounted cash flow (DCF) valuation is appropriate for PoS cryptoassets and governance tokens.
Governance tokens are analogous to common stock in traditional finance, as they yield voting rights
on the platform and have the potential to accrue a percentage of the protocol’s future profits. Most
cryptoassets in the infrastructure layer (smart contract, interoperability, and scaling protocols) are
shaping to be capital assets, as is the case with most cryptoassets in the application layer.

Investors can use the mining cost of production as a fundamental metric to gauge the lower bound
value of PoW cryptoassets like Bitcoin.

Investors can apply relative valuation approaches to any cryptoasset via “multiples’’ and market
sizing. Multiples provide a standardized price estimate and help determine whether a given asset is
undervalued or overvalued relative to its peers. On the other hand, market sizing tends to be more
appropriate for “store of value” assets. This approach involves establishing a total addressable market
(TAM) and a percent share the cryptoasset could capture.