A Comparative Approach to Crypto Asset Analysis

A Sensible Method for Evaluating Crypto Assets

Crosspost: This was original posted by Jay (aka “@Norupp”), here. It was reposted to BlockChannel with their permission.

For the purpose of evaluating companies and stocks, one of the popular methods is “The Comparable Approach”. Companies with the same characteristics are compared on a number of ratios such as Price/Earnings and Price/Book Value. A similar method can be used when assessing the potential of crypto assets.

The following framework was used for analysis of the crypto asset Basic Attention Token. The method uses target market value, projected market share and a ratio for comparing price/utility with another crypto asset.

Two inputs is used:

  • Target market and potential market share (Online advertisement for this example)
  • A ratio in line with P/E, P/BV ratio used in stock markets (Daily Transaction Velocity)

Three steps:

1. Select a reasonable protocol/network for comparison and get the ratio Daily Transaction Velocity (DTV). USD Daily transaction volume divided by the USD market value of the protocol. The daily transaction velocity ratio tells us the relationship between the USD value of the daily transactions on the network and the USD value of the network. So basically: what is the daily utility (USD value of daily transactions) in relation to the market value of the network (USD Network value).

2. Determine market size and market share as a percentage to get the projected share of the market in USD. Get the daily share by dividing the market share with 365. This is done for compatibility with the DTV.

3. Use the Daily Transaction Velocity ratio of the compared protocol by multiplying it’s inverse relationship (market value divided by daily transactions) with the projected market share. Now we have an estimated protocol value based on a selected daily market share and comparison with another protocol via Daily Transaction Velocity or the relationship between market value and use of the protocol.

Basic Attention Token (BAT) Example

1. Since it is the most established protocol, I’m using Bitcoin for comparison. Daily transaction velocity for Bitcoin: Daily transaction volume / Market value. ~500,000,000 / ~20,000,000,000 (New year to April/May resistance levels) = ~0,025 = 2.5% of the bitcoin market value circulates per day. That is, the market value of the protocol is 40x greater than the value transmitted over the protocol per day. It is worth noting that in general, there is more optionality in 1st layer crypto assets such as Bitcoin, than in 2nd layer crypto assets such as BAT. Bigger optionality justifies higher network value in relation to transactions. This is not taken into account in this example.

2. BAT is targeting the market of online advertising. The revenue of this industry is projected to hit $260 billion in 2020 by PwC. This gives a market potential of $ 712 million a day. A market share of 1%, 5%, 10% and 20% in 2020 is used to get an overview of the potential. A BAT penetration of the online advertising market of 1%, corresponds to a daily market share of $ 7.12 million (712 * 0.01). A penetration of 5% $ 35.6 million. 10% of $ 71.2 million and 20% of $ 142.4 million.

3. The Bitcoin Protocol and the Daily Transaction Velocity ratio are now used to calculate the comparative network value. The daily transaction volume must be multiplied by 40 (DTV) to arrive at the network value. $ 7.12 million is flowing through the BAT network every day at a 1% market share. Using Bitcoin and the DTV metric, a BAT penetration of 1% of the market for online advertisement will result in a network value of $ 284.8 million (712 * 0.01 * 40). A penetration of 5% $ 1,424 billion, 10% at $ 2.85 billion and 20% at $ 5.7 billion.

Disclaimer: The inputs used in this analysis isn’t entirely up to date as the analysis was made before the BAT launch in May 2017. BlockChannel reminds you not to consider this investment advice, and to always perform you own due diligence.