A Fundamental Valuation Framework for Cryptoassets

[PunishmentOfLuxury 1,468]

I find it hard to believe that this wasn't posted yet, but I searched and couldn't find it:

https://s3-us-west-1.amazonaws.com/fundamental-valuation-framework-for-cryptoassets/A+Fundamental+Valuation+Framework+for+Cryptoassets_June+2018.pdf

By Susan Athey (on the board of Ripple) and Robert Mitchnick.

Quote

We have demonstrated the practical application of the model on two leading cryptoassets, BTC and XRP, and arrived at a fundamental value range today for BTC of $13,600-28,100 and for XRP of $1.59-8.23.

 

[Raz 655]

That’s a valuation as of today correct?

[PunishmentOfLuxury 1,468]

1 minute ago, Raz said:

That’s a valuation as of today correct?

The paper is dated June 2018.

[Raz 655]

7 minutes ago, PunishmentOfLuxury said:

The paper is dated June 2018.

Gotcha, so I wonder what the valuation is as of today???

[aavkk 1,262]

Interesting.  Having just read through it focusing on XRP I noticed they attempted to valuate the storage demand IF they pull off the cross-border payments and even FX trading use case using todays numbers.  What they missed though was the incredible inertia of Metcalfe's Law and Jevons Paradox.  Not to mention the myriad of other use cases which when you consider the possibilities of Xpring and Coil I'd say have equal or even more value to their current core use case.  I'm no math expert but even if their math is correct they certainly haven't accounted for even close to the complete picture of variables involved.  Also, to place a 75% failure rate on XRP from June of 2018 in my view is overly conservative.  Their upper end estimate of $32 before the 75% discount is wrong in my view for the reasons stated above but I see it more like a 30% chance of failure of gaining widespread adoption of XRP based on my gut and current info.  

[XRPboi 489]

"This exercise produces an implied expected value range today for bitcoin of $13,600–28,100 and for XRP of $1.59–8.23 on a probability weighted, present value basis.

These are ranges of expected values; the range of potential realizations is much wider, and in particular, we believe there is a significant probability of a near-zero long-term value for both assets (and the industry more broadly), as well as the potential to realize significantly higher valuations than those reflected in these ranges. Nonetheless, these outcomes provide support to the notion that the price levels reached by major cryptoassets over the last year may prove to be well-founded by the long-term fundamentals of this asset class."

[xrphilosophy 1,753]

--And add speculative value in the interim and things start to get interesting...

41 minutes ago, XRPboi said:

"This exercise produces an implied expected value range today for bitcoin of $13,600–28,100 and for XRP of $1.59–8.23 on a probability weighted, present value basis.

These are ranges of expected values; the range of potential realizations is much wider, and in particular, we believe there is a significant probability of a near-zero long-term value for both assets (and the industry more broadly), as well as the potential to realize significantly higher valuations than those reflected in these ranges. Nonetheless, these outcomes provide support to the notion that the price levels reached by major cryptoassets over the last year may prove to be well-founded by the long-term fundamentals of this asset class."

"We emphasize that the “Success Case” is not intended to be a “most optimistic” scenario, but rather a realistic or even conservative scenario where the cryptoasset achieves some of the potential as it is understood today."

[xrphilosophy 1,753]

54 minutes ago, aavkk said:

Interesting.  Having just read through it focusing on XRP I noticed they attempted to valuate the storage demand IF they pull off the cross-border payments and even FX trading use case using todays numbers.  What they missed though was the incredible inertia of Metcalfe's Law and Jevons Paradox.  Not to mention the myriad of other use cases which when you consider the possibilities of Xpring and Coil I'd say have equal or even more value to their current core use case.  I'm no math expert but even if their math is correct they certainly haven't accounted for even close to the complete picture of variables involved.  Also, to place a 75% failure rate on XRP from June of 2018 in my view is overly conservative.  Their upper end estimate of $32 before the 75% discount is wrong in my view for the reasons stated above but I see it more like a 30% chance of failure of gaining widespread adoption of XRP based on my gut and current info.  

To your point they state repeatedly that their entire methodology is based upon moderate estimates based upon partial use in only certain corridors.  To their point if ONLY that happens then their valuation is probably somewhere in the neighborhood --before speculation and whatever network effect is in play.  I find this a very encouraging estimate frankly.  Everyone should read through this as much as possible to understand what it is they are saying if you're interested.  Thanks for posting PunishmentofLuxury!

[Guest]

56 minutes ago, xrphilosophy said:

To your point they state repeatedly that their entire methodology is based upon moderate estimates based upon partial use in only certain corridors.  To their point if ONLY that happens then their valuation is probably somewhere in the neighborhood --before speculation and whatever network effect is in play.  I find this a very encouraging estimate frankly.  Everyone should read through this as much as possible to understand what it is they are saying if you're interested.  Thanks for posting PunishmentofLuxury!

Agree.  Very interesting paper from authors at the absolute coal face of crypto and with access to the best financial minds in the world. 

[Trickery 4,862]

While it was a good try, even they admit that the variables outweigh the constants by a considerable margin.

[madToo 639]

One of the authors is on the ripple board of directors and stated the valuation is based on public info. I wonder if she was more conservative because she knows confidential info. Ie over compensate for what she knows especially with the probability of success. 

Also as stated the 75% discount doesn't make sense anyway. It's either a success or it's not. It's either worth the value of success without discount or $0.

[aavkk 1,262]

50 minutes ago, madToo said:

 

Also as stated the 75% discount doesn't make sense anyway. It's either a success or it's not. It's either worth the value of success without discount or $0.

Again I’m no expert but I believe the point of including the discount of 75% was an attempt at placing a risk adjusted return.

[Lamberth 1,351]

Great analysis. Hopefully it’ll be used as a reference in the future by the Forum members instead of creating their own models.

Quote

In the “XRP Success Case,” XRP could secure an estimated 15-30% market share of the total storage demand value for cryptoassets, equivalent to ~$1.6- 3.2tn. Note that while this estimate for storage demand value for XRP is higher than that for BTC, it is contingent on realizing the “XRP Success Case”, which has a lower probability than the 30% assigned to the “BTC Success Case.”

 

Edited September 25, 2018 by Lamberth

[ajsexton 7]

2 hours ago, aavkk said:

Again I’m no expert but I believe the point of including the discount of 75% was an attempt at placing a risk adjusted return.

Whilst I agree, I think it might be seized upon as a Headline grabber if XRP price does grow significantly "even ripple exec estimates max price of $8.23" despite them actually saying "with this model, if its a success, on our low ball assumptions, the value range is $6.37 to $32.91"

[aavkk 1,262]

What I don't understand is that if she is on the board why not speak with David Schwartz first before publishing?  He and countless others have been very vocal about being careful to consider Metcalfe's Law and Jevons Paradox into any valuations.  Have they considered the performance advantages and possibilities that Cobalt will provide once released?  Perhaps I'm reading it wrong but I take her $32 valuation as being at the very top end and includes widespread global adoption of XRP (total success on cross border payments use case) AND those speculatively holding XRP.  Putting my most conservative hat on I find this ridiculously low.  We nearly got to $4, albeit very briefly, with something like 3-6% of the globe investing in crypto, without any institutional $ and with zero utility driven demand.