The fact that you can mine coins gives costs and income. So there is an income stream, mainly from two sources issue of new coins which is similar to a rights issue and the transaction fees earned when coins are moved. You need to take the present value of these future income streams like an annuity, this is where the value comes from. The high capital values imply a high future growth assumption
RE: The Value Chronicles Episode 10 – Glossary
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The Value Chronicles Episode 10 – Glossary
Alright that makes more sense now, so your post are more from the perspective of a miner rather than a token holder ? If that was the case you would not need to apply or look into it as a 'crypto' asset but as a normal asset. Your revenue would be basically the coins you mine and the transaction fees generated then costs would be electricity , depreciation of equipment , other adminstrative costs, etc. Annuity would not be the best way to look at it due to the volatility of coins , the income stream would vary widely. Also hash rate would reduce in the future if there are more miners and general difficulty to mine increase. You prob would have to take into account high capital expenditures due to constant need to buy better equipment in order to compete with other miners. It can be modelled as a normal asset as it has all the requirements : income statement , balance sheet , cash flow statement
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That is right, but you must remember as a shareholder you are entitled to the profits distributed by the company. The company has expenses and income which generate the profit, of this profit they seed say 50% as dividends. In crypto the miner takes everything. Think of it like REITs, as a shareholder you indirectly own property. As a token holder you are indirectly mining.
The whole point of my posts is to transform crypto from a digital asset into the normal asset valuation framework.
The difficult is part of the cashflow assumptions. Because you need a model for the costs of generating the coins and one for the income received from coins as you have stated, the assumption I have mind in mind exponentially increases the difficult in relation to the price of the token - higher value token, more miners
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Though as a token holder if you dont earn anything and the miner takes everything how do you value it ? Ultimately if token holder gets none of the income , there is no income stream to discount and present value. In a reit, the shareholder gets the combination of rental yields from all the varying real estate assets. In crypto though , anyone can buy the token, you dont have to mine the token in order to get it. I could understand valuing it from the miners perspective, but not from the token holders. I think a modelling framework could definetly be created for miners , it should not be too hard once you have the basics down the cash flow model is not diffcult to make. The assumptions are always what most of the model is reliant on. Your assumption is a perfectly valid one as it is observable in current mining operations.
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The income stream gets discounted into the capital value of the token. You are buying coins at mining cost ($100) + profit today ($100), but tomorrow it could be mining cost ($100) + profit ($200). Think of buying a bitcoin as mining a coin at a different higher (currently) price than a miner. You could still apply the spreadsheet with assumptions to determine if the coin is likely undervalued.
Irrespective of whether you mine or buy a coin, you want to know its value. If you buy you can see it from the perspective of mining at different assumptions
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Alright now I see your point more clearly, the mining cost is basically a floor price and the price that could be described as the absolute value of the coin. Any other price above that floor price is basically pure profit . Yeah I could definetly model tokens now that I see it from your angle. Thanks for taking the time to explain ! Do you work in finance ? You seem to be very well versed in this
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I do, I basically work with cashflows model on a day to day basis. I also have a background in statistics
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An investment banker ? Anyway its a great blog, its always good to have someone promoting financial principles; especially in crypto land.
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