A Fundamental Valuation Framework for Cryptoassets
Robert Mitchnick and Susan Athey
IMPORTANT NOTICE: This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations. Recipients of this document should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance (which are not considered in this document) before investing. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein. The views and opinions expressed herein are those of the authors and do not reflect the opinions of Ripple, Stanford University, Coincenter, or any other entity. All facts contained herein are based only on publicly available information.
DISCLOSURES: As a director of Ripple Labs, Susan Athey holds an equity position in Ripple Labs, which in turn has a large position in the cryptoasset XRP. She also holds various cryptoassets directly. All references to Ripple or XRP in this paper are based on only publicly available information.
In July 2017, we began constructing a fundamental valuation framework for cryptoassets — something we felt was absent from much industry discourse in light of the evolution and explosive growth of the asset class. We believed that the development of a widely-accepted valuation framework would represent a critical step in supporting the influx of institutional investment capital into this asset class, which is likely to be a critical step in enabling the widespread adoption and value-realization of cryptoassets.
The industry has made considerable progress in developing valuation frameworks, including (among others) Athey et al. (2016), Burniske & Tatar (2017), Pfeffer (2017), and Evans (2018). This paper produces what we believe to be the first formalized, holistic framework for assessing fundamental value in the cryptoasset space, integrating economic utility and store-of-value use cases through a traditional financial valuation perspective.
We demonstrate the application of this model for bitcoin and XRP. The framework requires a variety of parameters as inputs; different assumptions about the probabilities of different events as well as the magnitude of various “success” cases obviously lead to different expected values. We propose a range of parameters built up from fundamentals. 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.
