The Quest for Cryptoasset Valuation: The Pricing Power

Updated: Apr 17, 2019

This article is the first part of the 'Cryptoasset Valuation' Series published by Aaron Zhang, the founder of CRC, on July 22, 2018. It is a reflection on the valuation of blockchain projects by traditional investors through the traditional VC experience.

The secondary market life cycle of a cryptoasset is very long, and the price of the cryptoasset often fluctuates in the secondary market. Many investors are thinking about how the blockchain project is valued? and trying to come up with different valuation models. We all know that the value should be determined by fundamentals, and prices fluctuate on the basis of intrinsic value; in the long run, prices will be consistent with the value.

The reason for the skyrocketing price of cryptoassets is that there is no unified valuation logic or 'consensus' on the valuation for these cryptoassets in the market. Many cryptoassets are early projects and there is no such thing as fundamentals: There are no assets, so we can't use P/B valuation; There are no profits, so we can't use P/E valuation; if there is no income, then P/S also fails.

The traditional method of equity valuation does not necessarily fit in the context of the valuation of cryptoassets. First, let's understand the famous P/E valuation method in the textbook. The general understanding of the P/E valuation is that for companies with stable earnings growth, you will estimate 1*N times the valuation as an intrinsic value for every dollar you earn. We are too accustomed to this because textbooks are taught this way when we go to school. The intrinsic value calculated by the P/E valuation is not necessarily reliable. But it is only the "consensus" created by the investment bank Goldman Sachs. I will first excerpt a paragraph from "The Partnership: The Making of Goldman Sachs":

Goldman Sachs was unable to break into what was the major part of the securities business in the early twentieth century—underwriting the new bond and stock issues of the rapidly expanding, cash-hungry railroads. J.P. Mor­gan, Kuhn Loeb, and Speyer & Company operated an effective underwriting oli­gopoly, and these dominant investment banking firms warned Henry Goldman that they would do whatever it took to prevent his firm’s getting any part of this large and lucrative business. Goldman was not intimidated; he was angry and keen to fight his way in, but he couldn’t find an opening. His only choice was to retreat and look for other opportunities, such as retail...

In 1906, Goldman Sachs and Lehman Brothers successfully underwritten the largest initial public offering (IPO) at that time – a large-value mail-order retail company, SeaRoebuck & Co., which was worth $10 million at the time. It is in this IPO that Henry Goldman proposes a new concept of ‘price-to-income ratio’ (i.e., price-earnings ratio) by suggesting that the company's profitability should matter more than the company's physical assets when judging the company's value. This concept brought those companies with few physical assets but more intangible assets to the fore. P/E ratio is still widely used in stock valuation. The JP Morgan did not expect it, but decades later, with the establishment of the highway network, the railway sector had fallen in the United States, and the railway securities underwriting business had no market.

It can be seen that Goldman Sachs, as a new entrant of investment banks, focused on the “new economy” such as the retail industry, and created a new valuation method. After a few years, everyone felt that this method is a good measure for the valuation of businesses, based on the multiple of profit. However, when we think about it, why is a company valued at 30 yuan a year if it earns 1 yuan (assuming P/E is 30 times)? The anchoring of this value is not necessarily reasonable in itself.

If any investment bank can create a new “consensus” in the valuation of cryptoassets, then this institution will have the pricing power.

The Blockchain industry is the most popular new economy in the world. If any investment bank can create a new “consensus” in the valuation of cryptoassets, then this institution will have pricing power. Many of the projects in the blockchain are early projects, early projects that are listed in advance or fully circulated, and how are early projects valued? Traditional VCs actually have a lot of ideas to draw on. In the next second part of our 'Cryptoasset Valuation' Series, I will present some opinions on the valuation of cryptoassets.

Feel free to comment on this article and let's build the consensus on the valuation of cryptoassets together!

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