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 are used:
- Target market and potential market share (Online advertisement)
- A ratio in line with P/E, P/BV ratio used in stock markets (Daily Transaction Velocity)
1. Select a reasonable protocol/network for comparison and get the ratio Daily Transaction Velocity (DTV: Velocity = Price*Daily Transaction Volume/ Supply of Money). Calculate it by dividing USD Daily transaction value 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 percentage market share 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 of the compared protocol by multiplying it’s inverse relationship (Network Market Value divided by Daily Transaction Value) with the projected market share. Now we have an estimated protocol value based on 1: A selected Market and daily market share and 2: A protocol for comparing via the 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 value / 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, 1st layer crypto assets such as Bitcoin have more optionality than 2nd layer crypto assets as BAT. Large optionality justifies a 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 potential daily marketshare 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 ratio, 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.
Note: Inputs used in this analysis aren’t entirely up to date as the analysis was made before the BAT launch in May 2017. Don’t consider this investment advice. Article update: Spelling, links. I recently discovered that Willy Woo did similar work. See the post here.