The Investor’s Guide to Crypto Valuations in 2022

One of the first lessons in finance is that an asset’s value is not always the same as an asset’s price. Intrinsic value is something financial analysts can quantify through evaluating dividends, cash flows and growth rates. Because crypto assets lack these traditional and quantifiable metrics, the legacy valuation framework has evolved in an effort to make better sense of this new asset class. 

Crypto valuation in this sense is the process of determining if the fair value of a crypto asset is overvalued or undervalued by the market. These models require a high degree of nuanced understanding because digital assets exist along a spectrum of functionality — with some qualifying as commodities and others as securities. Analysts need to properly identify and apply a different set of tokenomic and regulatory standards when valuing assets across this spectrum.  

For more on this, we spoke with some of the experts at Teknos Associates.

Neil Thakur is managing director at Teknos Associates (Teknos). In Neil’s words, Teknos is “a valuation advisory services firm that works with emerging growth technology companies, with our group specifically focusing on the crypto and blockchain industry.” These services are  related to the issuance and transfer of tokens, or related assets, for investment, tax or financial reporting purposes.  

Approaches to crypto valuation

Analysts traditionally use company operations data, and often leverage market data, to derive equity valuations. An income-based model such as the discounted cash flow or a market-based model such as a comparable companies analysis are mathematical methods used to provide educated estimates of what the fair market value of a company’s stock might be.

However, given the nuances of the crypto industry, some of these traditional valuation methodologies can be difficult to implement. These examples include stock-to-flow, token velocity (based on the quantity theory of money), daily active addresses/users, and network value to transaction ratios.     

Without getting too lost in the details, it’s important to note that each of them have their various advantages and disadvantages. Furthermore, the proofing of these models really comes down to the ability to measure and test the inputs and assumptions. Given that we are still in the early stages of the crypto market, it’s still very difficult to back-test many of the theoretical constructs.

In addition to basic valuation considerations, there are also several regulatory factors to consider as there is still marked uncertainty as to whether or not some crypto assets would be considered a security under the Howey test. According to SEC Chair Gary Gensler, many protocols, such as proof-of-stake tokens, could fall under security law enforcement.

As far as Teknos is concerned, Neil noted that the methodologies considered in their analyses can vary depending on the specifics of each engagement. According to Neil, “factors such as the stage of development of a protocol, lockups, staking, market dynamics, and functional characteristics all play a role in the value and risks associated with the token. Understanding these factors allows us to assess whether an asset, market, or income valuation approach is applicable.” 

Neil added: “The purpose of the engagement also can influence methodology decisions.  As an example, for some tax and financial reporting analyses, we may not always be able to consider the effect of token lockups unless they are structured in a very specific manner.  Alternatively, for investment related engagements, we may spend more time looking at market dynamics and forward-looking analyses combined with scenario modeling.  Given that the industry is still at a very early stage, it’s important to keep an open mind and evolve our valuation methodologies as the industry, and the regulatory environment in which it operates, continues to develop.”

Recent venture capital funding in crypto

Despite bearish market sentiment for the sector and macro environment overall, venture capital funding continues to grow. Unlike crypto assets though, this type of funding primarily relies on traditional valuation models. These investors are looking at crypto companies and relevant market metrics to try and measure intrinsic value. That is not to say crypto asset valuations are not used in this process. They still apply when analysts determine that the value of crypto companies is largely dependent on a single crypto asset or even the crypto market at large. Here are a few quick highlights from the year so far:

• Mysten Labs, the developer of the Sui layer-1 blockchain, raised $300 million in a Series B funding round that values the company in excess of $2 billion – a sign that investors see layer-1 blockchains as major disruptors. 
• Decentralized exchange Uniswap Labs raised $165 million in a Series B funding round that was led by crypto-focused investment firm Polychain Capital.
• WeWork founder Adam Neumann’s Flowcarbon, a blockchain-enabled carbon credit trading platform, raised $70 million in its first major funding round.
• Crypto exchange FTX recently raised $400 million in a Series C round and could raise an additional $1 billion. If the billion-dollar fundraising goes through, the exchange would retain a valuation of $32 billion.
• Overall, capital raised in the crypto sector has soared year over year, from $6.08 billion during Q2 2021 to $8.3 billion in Q2 2022.

While some venture firms are eagerly deploying capital, others remain on the sidelines, waiting for conditions to ripen.

Who is buying and who is waiting

In a sense, everyone wants to get into crypto, but at the same time, nobody wants to get into crypto. There are large amounts of capital continuing to be deployed in the space, yet there remain large sums of money waiting cautiously for the right time to enter as a result of various macroeconomic considerations and the aforementioned regulatory concerns.

A lot of this mixed sentiment has to do with the current macroeconomic uncertainty within the global economic and financial system. Neil described it as such: “They’re all putting money out there, but it’s a little bit more cautious, right? We’re not seeing as frothy of an environment, for obvious reasons. You’ve got macroeconomic issues at play and quite honestly, there’s still a whole level of regulatory uncertainty.”

He went on to say there is somewhat of “a wait-and-see approach,” but that at some point, “there is a lot of pressure on general partners to put money to work that has been raised over the last few years.”

With regard to whether or not potential investors are waiting for clearer regulations before getting involved, Neil said “I don’t think they’re necessarily going to wait for that entirely,” after noting that we’re not likely to see full regulatory clarity in the near future.

What to consider when it comes to crypto valuations

It can be hard to identify the items investors can most benefit from observing when determining the value of a crypto asset. Depending on what model is being utilized, certain factors may play a more outsized role than others.

One thing is for certain, though: Macro matters.

Alex Salvadori of Daemon Ventures, a boutique crypto-focused angel fund, had this to say regarding one of the most important factors to keep in mind when conducting crypto valuations: “In the past, investors have assumed that BTC, ETH, and other altcoins were operating on their own cycle. As more institutional capital comes into the space, crypto early adopters are beginning to understand that those large players view the world through a top-down, macroeconomic lens. Given this paradigm shift, you need to not only understand the specific narrative within crypto that you’re investing in, but you also need to take into consideration some of the macro factors that may be driving things at the same time.”

Alex also noted an increased focus on macro content by various crypto outlets, including Blockworks’ recently launched macro-focused YouTube channel, highlighting the growing importance of this topic in crypto. 

Once upon a time, crypto was an isolated asset class, largely uncorrelated with traditional markets. But now, in a market with growing dependence on the flow of central bank credit, speculative assets like crypto and tech stocks move in tandem. If the world is in what some call an ‘everything bubble’, then analysts need a better valuation of ‘everything’ before determining one for a specific asset or security. As the teams at both Daemon Ventures and Teknos emphasized, this requires a serious consideration of macroeconomic forces in play.

This content is sponsored by Teknos.

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