There is a healthy degree of skepticism when it comes to the ability to apply traditional valuation techniques to crypto-assets.
This has been heightened over the past year in light of the extreme volatility of bitcoin and other cryptocurrencies. In our view, a focus on determining fundamental value, based on traditional valuation techniques and principles, remains appropriate and applicable to these assets. Such techniques should consider the inherent volatility or riskiness of these assets, and are never more important than in times when market exuberance (and the emotions of greed and fear) drive pricing.
There are also practical reasons for performing valuations. From our conversations with clients, regulatory authorities, ICO issuers and market participants, we note three key drivers of the need for a rigorous approach to crypto-asset valuation:
- Financial reporting
- Investment considerations
This paper draws attention to the fact that each of these valuation purposes may require a different basis of value, which will influence the judgment regarding the most appropriate valuation method to be adopted.
In light of the above, we consider valuation principles for each of three main types of crypto-assets:
- Security tokens
- Utility or MAG tokens
Ultimately, the appropriate approach will depend on the specific facts and circumstances of each case, the time available for the analysis, the purpose and the required level of reliance to be placed on the valuation. We believe that a rigorous analysis helps provide insight into value creation itself, and that quantitative analysis based on realistic assumptions can give investors a useful sense-check against more directly market-based inputs in their decision making. Token valuation will inevitably require careful sensitivity analysis and a sense of realism about one’s confidence in the concluded value range. However, we believe that should not be seen as encouragement to forgo a quantitative analysis altogether in favor of a purely qualitative one.