How much is Bitcoin and Co. really worth?

Many still see no discernible value in cryptocurrencies. The boss of the American bank JP Morgan, Jamie Dimon, even recently called Bitcoin a “decentralized Ponzi scheme”.

The world’s largest issuer of exchange-traded cryptocurrency products (ETPs), 21Shares AG, shows why this is not the case. Subsidiary 21.co released the seventh edition of its State of Crypto report on October 5. Here she presents possible valuation systems for crypto assets, from which it should become clear what Bitcoin and Co. are really worth.

Objective or relative?

According to 21Shares, there are basically two ways to assess the value of a cryptocurrency, internal (intrinsic) valuation and relative valuation. The internal assessment is based on fundamental parameters such as cash flow, risk or growth. Value can be measured almost objectively.

The opposite is the case with the relative valuation of a coin or token, which is highly dependent on sentiment, narrative, or supply and demand. This counterplay results in a gap (“the gap”) in fundamental value and price. Therefore, the smaller the spread, the more realistic the price.

According to 21Shares, in the absence of objective valuation, asset prices tend to be very exuberant, comparable to the days of the dot-com or crypto-ICO bubble.

Cryptographic categorization

The authors of the report divide cryptocurrencies into five categories: Proof-of-Stake (PoS) blockchains, Proof-of-Work (PoW) blockchains, utility tokens, governance tokens, and NFTs (non-fungible tokens). ). These in turn are assigned to a “superclass of assets”.

Proof-of-stake tokens, for example, could be considered “crypto-assets” due to the recurring revenue generated from staking rewards, according to 21Shares. Proof-of-work coins, on the other hand, would be more like a “crypto commodity” due to their energy-intensive production.

The main difference between utility and governance tokens in the latter is the participation in the network embodied in the token and the right to vote. Governance tokens should therefore be attractive to large investors considering that they behave very similarly to traditional shares of a company. The decentralized exchange Uniswap community recently voted for a new fee model in which token holders participate in the trading fees incurred by the platform – crypto dividends, so to speak.

The almost totally subjective perception of the value of NFTs makes them pure collector’s items or stores of value, like a painting. They are therefore largely subject to sentiment-based valuation.

Like their counterparts in the financial world, well-known valuation methods can then be applied to these superclasses. A corresponding price for the respective crypto asset can then be determined from this. This fluctuates according to the methodology, but provides information on any under- or overvaluation.

Evaluation

Ethereum, as a PoS asset, for example, could be valued between $923 and $4,000 based on a fundamental valuation methodology, according to 21Shares. On the other hand, if you price it relatively, for example against an aggressively growing company like Tesla, an Ethereum price of up to US$16,000 per token could be calculated.

According to the authors, the fundamental price of Bitcoin “crypto commodity” would be between US$12,000 and US$20,300, given current production costs. A relative price can be determined through “market sizing”, i.e. comparing size with a target market. For example, at 20% of the gold market, Bitcoin would have a price of around $115,000 per coin.

A combination of objective and relative valuation methods would be optimal in some cases. According to 21Shares, a relative valuation is possible in almost all cases. However, the report also provides information on possible limitations.

Realistic prices?

However, the prices shown are conceivable. Especially when capital-rich institutions invest in the crypto sector. A small portion of their wallets would suffice. If the largest banks in the world allocated just 5% of their capital to the crypto sector, that would equate to an investment of nine quadrillion US dollars. The total crypto market cap tripled to all-time highs during last year’s bull market.

It is therefore not surprising that the major financial institutions do not want to pass up this opportunity. Big names like BlackRock or Fidelity have long been available with big bucks for the crypto industry. An industry-wide consensus on cryptocurrency valuation, as 21Shares suggests, would certainly help them.

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