Cryptocurrency Valuation

Cryptocurrencies are the single new financial asset class to be developed in decades.

Many new financial market participants entered investing by putting money in cryptocurrencies.

Since it is a new asset class Bitcoin and other cryptocurrencies are proving elusive to be valued correctly. Or at least a comprehensive and suitable valuation framework for cryptocurrencies still does not exist.

One the one hand, cryptocurrencies are akin to listed public company stocks in that they depend on the projects return of the particular company that has issued the cryptocurrency. On the other hand is the flagship cryptocurrency Bitcoin the intrinsic value of which is more dependent on the public's tendency to adopt Bitcoin en masse and the regulators' future treatment of Bitcoin.

In addition, the Commodities Futures Trading Commission regulates that cryptocurrencies are commodities and not money. Which is strange, in my opinion, since Bitcoin's main purpose is purportedly to become a means of exchange, unit of account and store of value or the three main characteristics that define money.

Furthermore, the actions of  famous investors and proponents of cryptocurrencies like Elon Musk, Jack Dorsey, Michael Novogratz and others do have an influence on the price and thus the value of Bitcoin and other cryptocurrencies.

In my opinion, the main factors that determine the intrinsic value of Bitcoin and other cryptocurrencies are people psychology, supply and demand, new technology developments and the central banks and other regulators' actions.

Yes, Bitcoin and other cryptocurrencies are impossible to value via the Discounted Cash Flows model since no future dividend payments coming from cryptocurrencies are envisaged in the near future. Amazon and Meta, Facebook's owner, however, also have never paid any dividends and yet both Amazon and Meta are valued at around or more than 1 trillion USD.

Actually, dividends for cryptocurrencies could be modelled/likened to the future utility people derive from cryptocurrencies. Fiat money like the USD or EUR also do not pay dividends. However, people derive many ancillary utility from holding fiat money like ease of payment, exchange of goods, security via the military and the police force and also benefits from storing and amassing wealth measured in USD, EUR, JPY, GBP or any other of the major currencies.

This, of course, could also be quantified, but for now too many unknowns, moving parts and assumptions are involved in the process so the estimate is in any case vague.

That said, according to my estimates, Bitcoin is undervalued multiple times simply because Bitcoin and the underlying blockchain algorithm are changing everything. So the value enhancement derived form Bitcoin and other cryptocurrencies could simply be limitless.