In this post I will show you how to value blockchain assets with an example, and also how to expand the example to get a more accurate valuation.
In order to value a blockchain, it is necessary to understand what a blockchain is. The blockchain is a technology with a ton of potential that could really change the world.
In just a few years, Bitcoin has become more popular and more valuable than ever. But what does it mean when a Bitcoin is worth $50,000, $100,000, or $1 million? What makes Bitcoin valuable? What makes it currency? What makes it money? …And what makes it a good investment?
Warren Buffett, one of the most successful investors of our time, is the man on the left. Who is the cat on the right, though?
Benjamin Graham is the man who taught Warren Buffett how to invest.
Anyone who wishes to become financially independent should read Ben Graham’s famous book, The Intelligent Investor. He laid out the foundations for what is now known as “Value Investing,” and much of our work at Bitcoin Market Journal has been devoted to applying those concepts to the “block market” of bitcoin, cryptocurrencies, and digital assets.
Warren Buffett is well-known for his disdain for bitcoin. We’ll persuade him to alter his mind.
Here’s how to evaluate the new world of bitcoin, cryptocurrencies, and digital assets using Graham and Buffett’s time-tested value investing ideas. It’s a good time to invest in blockchains.
The Value Investing Principles
The fundamental idea of value investing in the conventional stock market is to discover excellent companies at a reasonable price. These ideas are followed by successful value investors because they work.
Consider yourself a business owner: When you purchase a stock, you’re really purchasing a piece of a company. You become a part-owner in the Tesla company when you purchase TSLA. Is this a fantastic company with fantastic goods, fantastic financials, and a fantastic management team? Would you be willing to purchase the whole company?
Analyze thoroughly: You use both quantitative (statistics) and qualitative (judgment) analysis to assess and compare a variety of companies. Most companies get a huge “no,” but a few super-valuable ones get a big “yes.”
Find bargain stocks: You search for companies that are undervalued, or at the very least, you attempt not to overpay. Ideally, you’re searching for a great company at a reasonable price (or lower).
You diversify your assets, don’t put all your eggs in one basket, and don’t take YOLO-style risks to prevent losses.
Consider the long term: As a value investor, you want to accumulate money over time. You don’t think “become wealthy fast,” but rather “get rich and keep it.”
Our main notion is that similar concepts may be applied to blockchain investment as well.
To put it another way, we may consider blockchain initiatives to be “businesses.”
I’m going to use the word “companies” in quotation marks since most blockchain initiatives aren’t businesses. Let’s look at some of the distinctions.
Businesses are not blockchains…
You become a shareholder of a business when you purchase a conventional stock. We call it a “share” because you now share ownership with everyone else who owns stock in that business.
As a shareholder, you now have specific legal rights since the business is a legal entity. If the business falls bankrupt, the residual assets may be distributed to the shareholders. Dividends may be paid if the business makes a profit. You may also vote on major choices.
When you purchase a blockchain token, however, you do not own anything other than the token. The token represents a claim to a part of the blockchain project’s value. To put it another way, if you hold 1 ETH out of 117 million total ETH and Ethereum’s total value (market cap) is $275 billion, you may redeem (or sell) your 1 ETH for $2,350 (or $275,000,000,000 / 117,000,000).
Of course, most investors just say, “The price of ETH is $2,350,” just as most investors simply say, “The price of TSLA is $675.” We may conceive of the “price” of both companies and blockchains as the “price per share,” or the entire value divided by the number of shares.
Isn’t this a force to be reckoned with? We now have a standard framework that can be used to both conventional and blockchain investments. The concepts of value investing — discovering excellent companies at a reasonable price – may be applied to blockchain.
Perhaps the most significant distinction between the stock market and the block market is that the stock market has existed for a longer period of time: about 100 years in the United States. Although the stock market is turbulent, it is more mature than the blockchain industry, which is still in its hormonal teenage years.
This is one of the reasons why the price of bitcoin and other cryptocurrencies fluctuates so often. The greater the risk, the greater the (possible) return.
Blockchains, on the other hand, are similar to businesses.
Despite the fact that blockchains are not companies, investors clearly see them as such. Why?
Businesses and blockchains both have a “product” to sell (i.e., a service they provide). Ethereum is a software development platform. Uniswap is a company that exchanges tokens. Chainlink is a service that links blockchain to the rest of the world.
Customers exist in both companies and blockchains (i.e., users). A great blockchain has a big number of users who are rapidly expanding, much as a successful company draws consumers.
A market exists for both companies and blockchains. A company may operate in the healthcare or IT industry, while a blockchain may function in the financial or supply chain market.
Businesses and blockchains are both up against one other. Some companies have a long-term competitive advantage: a “moat” that makes it difficult for intruders to storm the castle. A moat may be seen on certain blockchains.
Management teams exist in both companies and blockchains. The team has official titles in the business world (CEO, CFO, etc.). The titles may be looser with blockchains, but there is still a core staff that is responsible.
Finally, “market value” exists for both companies and blockchains (i.e., market cap). We utilize outstanding shares x share price for companies, and outstanding tokens x token price for blockchains. This market value, at least in principle, represents the factors mentioned above.
Putting a Price on Ethereum’s “Business”
Let’s take one of the easiest examples: Ethereum. If we look at Ethereum as a “business,” we might compare it to a technology platform business, like Windows or Android. People build apps on Android; people build dapps on Ethereum.
As I said in my post on Blockchain Sector Investing, technological platforms tend to cluster around one or two major winners in the long run. There is either a clear winner (a monopoly, such as Google in the search industry) or two major winners (an oligopoly, like Apple and Windows in the OS market).
So, will Ethereum continue to be the most popular blockchain development platform in the future?
Ethereum has a sizable development community. More developers equals more developer tools, which equals more developers. There will be more applications if there are more developers. There are more users when there are more applications. More users bring in more money, which in turn brings in more developers, and so on.
It’s a positive feedback loop.
The virtuous cycle on Ethereum, commonly known as the “snowball.”
Ethereum has a huge competitive moat, making it difficult for competitors to catch up in the blockchain development platform industry. Even if Amazon created its own “Ethereum assassin” tomorrow, Vitalik and his Stoner Cats would be difficult to take down.
I could go on, but I’m sure you get the picture. Ethereum is a “business” in the sense that its future prospects are valued, which means it may be compared to conventional businesses like Microsoft and Amazon to some extent.
To do so, we use the concept of comparables, or “comps” if you’re a savvy real estate agent.
“Thank goodness they didn’t demand to see the comps.”
Comparables (“Comps”) are used to value blockchains.
Let’s suppose you’re looking for a new home and have discovered the ideal location in a charming neighborhood: three bedrooms, two bathrooms, and a state-of-the-art rumpus room. What should you expect to pay?
Most real estate brokers will advise you to look at comparables (“comps”), which means “look at similar 3BR-2BA homes that have recently sold in the same area, and make sure you’re in the same ballpark.”
Valuing by comps is far from perfect (maybe everybody in this neighborhood is overpaying), but often it’s the best we’ve got. So we have to look at comps as a “squishy statistic,” because we’re comparing things that are similar, not identical. (Maybe your comp doesn’t have a rumpus room.)
Returning to the blockchain, which conventional businesses are the competitors if Ethereum is a platform business?
Microsoft (Windows) and Apple (macOS) spring to mind, but they do a lot more than just provide operating systems. Alphabet is the company behind the Android operating system, as well as Google and a number of other companies. Facebook, too, is a platform company, although of a different sort.
These aren’t exact counterparts, which is why we call them “comparables” rather than “equivalents.” Here’s how they compare:
Comparables are mushy by nature since no two things are identical. (Otherwise, they’re the same thing.) The goal is to obtain a rough estimate rather than an exact price.
We can use a common-sense test from here. We’d know Ethereum was enormously overpriced if it was worth more than these tech firms. We’d think Ethereum was tremendously undervalued (and I’d be purchasing a lot more of it) if it were priced at a few million dollars.
Using comparisons, we can observe that ETH’s overall market value is roughly a tenth of the value of these sector giants. This value seems reasonable when I consider Ethereum’s long-term potential and the rapid rate of innovation I observe on the network today.
Let’s switch the comps now. Let’s pretend Ethereum is in the financial services industry rather than the platform business. It becomes even more probable when we look at this collection of comps:
Market capitalization isn’t the only metric to compare: we can also look at Value Per User to see how much we’re spending per user when compared to other network businesses like Facebook or Twitter. (Learn more about VPU here.)
We want to conduct a variety of comparisons, much as you would compare your ideal house to a number of recent home sales. Then, to see how excellent the Ethereum “business” actually is, we’ll combine this quantitative research with our qualitative study. We utilize our Blockchain Investor Scorecard for this, which you can get for free.
Investing in Blockchain for Profit
We’re bringing value investing into the contemporary era, thanks to Ben Graham and Warren Buffett.
We can apply the time-tested concepts of value investing to bitcoin and cryptocurrencies by seeing blockchains as “companies”:
Consider yourself a business owner when purchasing a digital asset. You become a part-owner in Ethereum when you purchase ETH. Is this a fantastic project with a fantastic product, a fantastic business plan, and a fantastic management team? Would you purchase all of Ethereum if you had the opportunity?
Analyze rigorously: Evaluate and compare numerous blockchain initiatives using both quantitative (numbers) and qualitative (judgment) analysis, utilizing “comps” to continuously sanity-check them against the stock market. Say “no” to the majority of chances and “yes” to a select few.
Look for cheap blockchain projects, or at the very least, avoid overpaying, while looking for digital assets for sale. Ideally, you’re searching for a fantastic project at a reasonable cost (or lower).
Diversify your assets and don’t put all your eggs in one basket to avoid losses. For a plug-and-play method to creating a diversified crypto strategy, see our Blockchain Believer’s Portfolio.
Consider the long term: In crypto, there are a thousand get-rich-quick scams. Don’t pay attention to them. Instead, concentrate on accumulating money over a long period of time. Don’t think “become wealthy fast,” but rather “get rich and keep it.”
Over time, the stock market and the block market will converge. It’s easier to conceive of them as two different versions of the same thing these days.
Do your research, look for high-quality companies and blocks at a reasonable price, and invest for the long term. That is value investment, regardless of where you invest.
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