How to Value Crypto Assets, Explains Willy Woo inNew Theory
Davit Babayan | December 19, 2018 |11:00 am
Willy Woo on Monday laid out a “dry” theory that couldevaluate the real value of crypto assets.
The analyst and coder, known for innovativephilosophies on cryptocurrencies, found that the fundamentalvaluation of a crypto asset is equal to the sum of its utilitycomponent and store-of-value component. Algebraically, the equationlooks like as follows:
M = PQ/Vu + I/Vi
where M = fundamental value; P = price of asset; Q = quantity ofasset; Vu = circulation of utility; I = the valuebeing moved in the network for store of value purposes; Vi =circulation of investment (store of value).
Integrating Utility and Store Value Components
Woo derived three major aspects behind the valuation of both fiatand crypto assets: utility(u), investment(i), and speculation(s). Inthe case of Bitcoin, he derived utility as the volume of BTC used topay for goods and services and investment as the volume of BTCpassing between users on-chain (after filtering out transactions madebetween two wallets of a single user). He also considered thatspeculation is the difference between investment and utility.
In the case of fiat, Woo derived utility as GDP, investment as themoney flowing between medium/long term cash accounts for storage, andspeculation as forex volume minus foreign trade components ofinvestment and utility.
Woo found that economists so far evaluatean asset by its utility, the component of monetarycirculation. In the case of fiat, they divide the GDP of an economyby its money supply to derive what he called a “utility velocity.”However, in reality, the fiat is not just used to pay for goods andservices, but it is also stored as a speculative asset. That said, toget an accurate valuation, the fiat asset’s investment side cannotbe ignored.
“When all the markets crash, the only thing that goes up isfiat. That’s because the value is flowing out of the global marketsand to FIAT, it’s an illusion that everything is going down, FIATis going up, but the unit of account does not reflect it as USD isour unit of account.
Applying the same on Bitcoin, Willy Woo stress that Bitcoin’svaluation cannot be derived alone from its utility as a spendableasset; it also requires the store of value component to reach thenearest exact number. Excerpts:
“Traditionally we calculate the future utility value ofcoin networks with MV=PQ (Quantity Theory of Money), this is only formature utility networks and completely IGNORES their ability to storeinvestment value. For crypto-assets in the real world, we need toexpress a new equation. I call this new equation Quantity Theory ofInvestment. It opens the way to gauge under/overvaluation of coinnetworks based on their use as a store of value.”Relating Store of Value with NVT
To describe the store of value component further, Woo defined anequation that related the total investment made into an asset withits total supply and its percentage change over a given time frame.It looked something like the following:
I = M * Vi
Upon rearranging, it looked like the following:
M = I * (1/Vi), where 1/Vi is a roughapproximation of NVT, the popular method to calculate the value ofcrypto assets. Thus, we get.
M = I * NVT.
“NVT is not exactly (1/Vi), as it’s derived from raw valuemoving between wallets, not between investors,” Woo reminded. “We’dneed to filter out the multi-hop steps of value moving betweenwallets controlled by a single investor to arrive at (Vi). This wouldbe a better metric than NVT.”
NVT, in general, helps derive whether the asset is overvalued orundervalued.
Heading Back to Valuation
As explained, Woo sums two utility components, which is derived bythe equation PQ=MV.
So, for utility, the equation becomes, M * Vu= PQ. And for a store of value, it becomes: M * Vi =I. Upon combining, we get:
M = PQ/Vu + I/Vi.
“Fundamental valuation for crypto-assets can be calculatedherein, but still hinges on what someone will pay for the asset,”Woo added. “This sounds circular, but we can use it to test fordeviations of market value as determined by investor and utilitydynamics.”
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Tags: bitcoin,crypto, willywoo
