Introduction to Blockchain | Valuation Models for Blockchain Industry and Its Disadvantages

Author: Wayne

Produced: vernacular blockchain (ID: hellobtc)

Investors and financial analysts have been looking for a simple and useful indicator to assess stock and commodity prices. In recent years, cryptocurrency or pass has become the latest focus of this attempt. The indicator is best to help investors judge whether the price of the encrypted asset or the certificate is overvalued or undervalued relative to its fundamentals.

For example, if the indicator determines that the price of an encrypted asset is undervalued, then the investor has reason to buy it and expects its price to return to a level commensurate with its fundamentals. Today we will talk about the valuation model of the blockchain industry.

01 Traditional financial valuation method

To understand the valuation model of cryptocurrency, let's first understand the valuation of traditional financial industry. Take stocks as an example. One of the most commonly used indicators for stock investors is the price-to-earnings ratio . The P/E ratio uses the company's annual income (dividends distributed to shareholders) as the fundamentals of the company's stock. This is a simple but effective proxy indicator. The P/E ratio compares the stock price to its earnings per share by dividing the current share price by its annual earnings per share.

For example, Amazon's share price on December 31, 2018 was about $1,500, and its earnings per share for the year was about $20, with a price-to-earnings ratio of 75. The P/E ratio indicates how much US dollars investors are willing to pay for today's $1 annual EPS. The P/E ratio measures the market value of the company relative to the annual return and clarifies the valuation of the company's stock. Typically, analysts compare the P/E ratios of various stocks, suggest buying them when the ratio is low, and recommend selling when the ratio is high.

Although P/E ratio is an established tool that has long provided investors with financial market insights, it still has limitations. Earnings per share are based on the company's earnings for the past 12 months. This indicator does not consider the growth of the company. Nonetheless, P/E ratio provides a simple and practical way to quickly assess stock prices.

In general, the P/E model does not apply to the cryptocurrency field. P/E ratios serve the stock market very well, but in the cryptocurrency market, due to fundamental differences between listed companies and blockchain projects, it is either not fully applicable or leads to false implications.

02 What are the more popular methods of cryptocurrency valuation?

1. Metcalfe's law

Many researchers use Metcalfe's law to study the basic value of Bitcoin. Metcalfe's Law is a law proposed by George Gilde in 1993 on the development of network values ​​and network technologies.

The content is: the value of a network is equal to the square of the number of nodes in the network, and the value of the network is proportional to the square of the number of users connected to the network. The number of Bitcoin users can be replaced by the number of unique Bitcoin addresses. Metcalfe's Law captures the long-term value of the certificate by measuring its number of users.

However, Metcalfe's law does not take into account the transaction volume of each unique address. The number of users reflects the long-term value of the certificate, and the transaction volume of each unique address can be used to explain the short-term price change of the certificate.

2, network value transaction ratio

Cryptographic currency analyst Willy Woo suggested that the Network Value Volume (NVT) ratio can be used as the price-to-earnings ratio for the analog encryption market. The NVT ratio is defined as the ratio of the network value (ie, the market value of the pass) to its trading volume in the past 24 hours.

The limitation of the NVT ratio is that the basic value of the cryptocurrency is assumed to be derived only from its function as the exchange medium represented by the speed of the pass. The model completely ignores the use of cryptocurrency as a value store.

To illustrate this point: the increase in the NVT ratio does not necessarily mean an overestimation of the pass due to the reduction in trading volume. This may also be the result of a decline in trading volume due to the accumulation of more passes by long-term holders. In other words, the NVT ratio allows you to understand a rough idea, but it is not particularly useful in buying and selling decisions.

Willy Woo himself admits that the NVT ratio is not an effective tool for finding price bubbles in advance. Instead, it is better suited to retrospectively identify price collapses and price consolidation.

3, the price utility ratio

General validity = (pass rate of circulation * pledge ratio) / dilution rate, dilution rate to measure the annual growth rate of the supply of the certificate. Assuming no other differences, a high dilution rate would reduce the attractiveness of the pass, resulting in a lower pass effect. The dilution rate of Bitcoin has been greatly reduced over the past decade. As of May 2019, the dilution rate was approximately 3.8%.

BTC supply is expected to be halved in one year. By then, the dilution rate will drop below 2%. The Circulation Speed ​​is a measure of the percentage of escrow transactions in the past 24 hours relative to the supply of proviso. A higher circulation rate indicates that the use and demand of the certificate is increasing, which will lead to the utility of the Qualcomm.

As for Bitcoin and some other major cryptocurrencies, quite a few passes are not active for more than a year. These inactive certificates are used as value stores and can be referred to as “pledge certificates”. The activity pass can also be called “mobile pass”. The high pledge rate indicates that more users have long-term beliefs about blockchain projects.

In short, the combination of low dilution rate and high pass rate and high pledge rate results in high pass validity. Comparing the P/E ratios of stocks in different industries is like comparing apples and oranges, as is the price utility ratio in the encryption market. Blockchain projects address different issues and provide diverse services to different user groups. For example, Bitcoin has two main functions: it acts as a decentralized peer-to-peer payment system and storage tool. In contrast, the value of Ethereum is mainly reflected in the daily use of its smart contract platform.

03 Summary

There is no single indicator that provides a comprehensive overview of the valuation of the certificate. The price utility ratio is not intended to detect signs of market prosperity and collapse, but it can work when comparing the valuation of a certificate with similar blockchain capabilities. Do you know any other valuation models? Feel free to share your opinion in the message area.


『Declaration : This series of content is only for the introduction of blockchain science, and does not constitute any investment advice or advice. If there are any errors or omissions, please leave a message. The copyright and final interpretation of the article are owned by the blockchain chain.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!


Was this article helpful?

93 out of 132 found this helpful

Discover more


From Telegram to the Crypto Top Ten Toncoin (TON) Shoots to Stardom with Massive Gains!

Fashionista Alert Toncoin (TON), endorsed by Telegram, is currently making waves as one of the top 100 digital assets...


JPMorgan CEO Threatens Crypto: A Criminal’s Best Friend or Innovation’s Gateway?

In a recent statement, Dimon expressed his belief that cryptocurrency companies should undergo the same AML regulatio...


Astar integrates Polygon's AggLayer, making it the first blockchain to do so.

Astar Network has successfully integrated with Polygon's AggLayer protocol, marking a significant milestone in Polkad...


YieldMax’s Creative ETF Proposal: Dancing with MicroStrategy Derivatives

YieldMax has submitted a request to the SEC for approval of an ETF that provides monthly income based on MicroStrateg...


Binance Welcomes BLUR Token with Open Arms and a Seed Tag

Fashionista, you'll be excited to hear that Binance has recently declared their support for BLUR token! This means th...


The Bitcoin Halving: What You Need to Know

Investors eagerly anticipate the upcoming fourth BTC halving as the potential catalyst for the next bullish market su...