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When it comes to asset valuation, digital assets like cryptocurrencies require a unique approach due to their decentralized nature, inherent volatility, and reliance on blockchain technology. Conducting a fundamental analysis of crypto can be challenging for portfolio managers who may not be familiar with metrics like network value to transactions (NVT) ratio.
The good news is that many of the concepts used in traditional valuation models can be adapted to digital assets with the right modifications and access to comprehensive, on-chain data. Portfolio managers can leverage the following valuation frameworks to evaluate blockchain-based assets:
Discounted Cash Flow (DCF) Model
Rather than focusing on traditional cash flows, the DCF model can be adapted to consider crypto-specific revenue streams, like transaction fees and staking rewards. The model involves identifying how a token or other digital asset accrues value from a particular protocol, forecasting future value accruals, choosing a discount rate that suits the appropriate risk level of the token and protocol, and discounting the future value accruals back to their present value. The DCF model is best used with protocols that generate recurring revenue or show value accrual in a predictable way.
Network Value to Transactions (NVT) Ratio
NVT is comparable to the price-to-earnings (P/E) ratio used to determine whether an asset is over- or undervalued. However, unlike P/E, which looks at revenue, NVT considers transactional volume. Investors can assess whether a digital asset's market capitalization — in other words, its network value — is supported by the actual activity on its blockchain, or the transaction volume. With NVT, investors can determine quickly if a digital asset is undervalued, which would be represented by a low NVT, or overvalued, represented by a high NVT.
Market Value to Realized Value (MVRV) Ratio
Although MVRV is specifically designed for cryptocurrency analysis, it provides a framework similar to traditional asset valuation ratios, like Tobin's Q. It involves dividing an asset's market capitalization by its realized capitalization. Like NVT, MVRV helps investors gauge whether an asset is undervalued or overvalued, which can be useful for identifying potential entry points. MVRV can be applied to essentially any protocol with a public blockchain, such as Bitcoin or Ethereum.
Stock-to-Flow Model
Stock-to-flow leverages the concept of scarcity and supply-side economics, commonly applied in traditional commodity valuation. When applied to digital assets, usually Bitcoin, it involves treating the cryptocurrency as a scarce commodity such as gold or silver. The stock-to-flow model looks at the existing total supply of Bitcoin, or “stock,” and the amount of Bitcoin mined each year, or “flow.” Comparing stock to flow helps investors forecast Bitcoin's future scarcity and potential price.
Why Trust Amberdata?
Amberdata empowers financial institutions to make informed, confident decisions in the digital asset space. We transform raw data into clear, actionable insights, enabling the application of familiar frameworks to a new asset class. Leading financial firms, like Nasdaq and Citi, trust us for reliable, secure on-chain intelligence.
Implement Token Valuation Methodologies With Amberdata
Digital asset valuation is crucial for making strategic investment decisions and managing risks. With Amberdata's insights and analytics at your fingertips, your team members can feel confident analyzing crypto assets, making the transition from traditional to digital more streamlined. We provide enterprise-grade historical and real-time data across centralized and decentralized exchanges, helping portfolio managers establish defensible assessments of digital assets.
Ready to move beyond speculation toward a deeper understanding of your digital assets? Explore our Enterprise Data Solutions or request a demo today.