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Thinking about crypto valuation

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If you are asking yourself this question on how to value a crypto asset then these slides provide some framework for thinking about it. If you are not yet familiar with blockchain, bitcoin or ethereum then refer to masterclass in blockchain https://www.slideshare.net/rajan/masterclass-on-bitcoin-ethereum-cryptoassets/1

Published in: Technology
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Thinking about crypto valuation

  1. 1. Thinking about Cryptovaluation Thiyagarajan M (Rajan), twitter.com/mtrajan October 2017
  2. 2. Why should you care about blockchain now ?
  3. 3. $100 in 2009 in bitcoin will be $500 million in 2017 5-6X 7% of 1 cent (1/100 $) in 2009 to $5000 on Oct 15 2017 Fastest growth of anything known to humans As 20 Oct 2017
  4. 4. Google Search Trends - Bitcoin Bitcoin Rises from $30 to $230Gawker Article About Silk Road $10 to $30 Passes $1000 first time All time at $5000 China bans ICO exchanges https://trends.google.com/trends/explore?date=2009-01-01%202017-10-15&q=bitcoin
  5. 5. Ethereum is the new Java $150b $30b All cryptocurrency Ethereum All India Internet Startups $60b All India B2B Software Startups Startups $8b In 10 yrs In 10 yrs In 4 yrs In 10 yrs
  6. 6. In 3rd Stage, hitting escape velocity Prototype Stage Sin Enterprise (Gambling, Black Markets) Legitimate Enterprise The Evolution of the Bitcoin Economy: Extracting and Analyzing the Network of Payment Relationships - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808762
  7. 7. Bhajan, Gita & Veda level of thinking (Metaphor, Mental Model, First Principle)
  8. 8. Understanding - Bhajan, Gita & Veda Level ‘BHAJAN’ LEVEL ‘GITA’ LEVEL ‘VEDA’ LEVEL ‘Repeatable Metaphors’ ‘First Principle Thinking’ ‘Simple Formula/ Mental Models’ F= ma
  9. 9. Level of understanding per user type Tech Legal Business Home User Miner Trader/Investor Entrepreneur Engineer F= maF= ma
  10. 10. Crypto Assets There are about 800 crypto assets so far and new ones coming every month
  11. 11. Should bitcoin be valued like $ or gold or other other commodity ? If bitcoin does not serve the payment use case as anticipated, why is it trading at $6000 ?
  12. 12. Should an ICO token be valued like IPO stock or startup angel investment ?
  13. 13. Bitcoin like money, ICO like IPO is only a metaphor “Never confuse brains with a bull market” - Warren Buffett “All models are wrong, some are useful but some dangerous ” - NN Taleb “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” - Mark Twain
  14. 14. Popular mental models break down F= ma “Never forget the six-foot tall man who drowned crossing the stream that was five feet deep on average.”- Charlie Munger Modern Portfolio Theory (Standard Deviation, Sharpe Ratio, Correlation) have several limitation already
  15. 15. Many mental models are creaky F= ma Source - Howard Marks, Oaktree Capital Volatility is not risk
  16. 16. What is value ? Use Value, Exchange Value, Symbol Value, Store Value Marx Talks about
  17. 17. Value arises from imagination of future Fear and Hunger
  18. 18. Money is story with highest belief coefficient that help in survival against both fear and hunger in the future
  19. 19. Belief/trust on Nation state as custodian of the money story is broken Alternates ? Gold, Distributed Consensus ?
  20. 20. “Bitcoin will be a store of value when everyone believes it is. The price is the current probability. Fundamental analysis is impossible. “ @naval
  21. 21. What is valuation ?
  22. 22. Estimating / forecasting the future
  23. 23. ”We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know. ” - Kenneth Galbraith
  24. 24. Startup valuations are 80% story, 20% data Startrek Journey
  25. 25. Public company valuations are 20% story, 80% data Everest
  26. 26. Innovation Accounting tracks journey of a startup to well functioning company Uncertain & Non repeatable Value Probability distribution Unknown Certain & Repeated Value Probability distribution Known Idea/Startup Large Company Takes 7-11 year journey Pivots P/M fit Power law, 1 in 10,000 succeed
  27. 27. Valuation Intrinsic Valuation Relative Valuation Early Startup Growth Startup Large Company Value using DCF (With adjusted rate of return) Value as ‘Options’ Value like DCF, (replaceCashflow with Growth rate) Use Comparables Uncertainty Risk DCF - Discounted Cash Flow Source - Aswath Damodaran
  28. 28. About Price (aka Relative Valuation) “Can’t estimate or predict the outcome of the collective based on individual action, markets are emergent” - NN Taleb “Markets can remain irrational longer than you can remain solvent” - John Maynard Keynes
  29. 29. Relative Valuation is arbitrage or pyramid scheme ? Idea/Startup Public Company 7-11 years P/M fit Angel Investors Venture Investors PE, Hedge Funds & Public market Traders Crypto Token ICO
  30. 30. ICOs possibly best treated like angel investments
  31. 31. Error in your mental model is my opportunity - Value investing Value is different from Price, Picking mispriced, Invest out of cycle
  32. 32. Arriving at an intrinsic value still need lot of assumptions For a given supply & velocity of token, what is the GDP (measured in $) of the use case need to be supported F= ma
  33. 33. MV = PQ F= ma M = size of the asset base, V = velocity of the asset , P = price of the digital resource being provisioned, Q = quantity of the digital resource being provisioned
  34. 34. INET Valuation, Example from Chris Burniske https://docs.google.com/spreadsheets/d/1ng4vv3TUE0DoB12diyc8nRfZuAN13k3aR R30gmuKM2Y/edit#gid=1912132017 F= ma
  35. 35. New Markets in early stage, must watch out for Speculation of Crowds , Bubbles, Ponzi Scheme & Scams, Cornering , Pumping & Dumping.
  36. 36. Appendix

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