Since the launch of the first decentralized cryptocurrency, Bitcoin, in 2009, blockchain technology has developed a wave of innovations and the rise of cryptocurrencies tokens as a new asset class. Initial coin offerings (ICOs) have developed as a new method for entrepreneurial finance, with parallels to initial public offerings, venture capital, and presale crowdfunding (Howell, Niessner & Yermack, 2020). Today, cryptocurrencies market capitalization hovers around 1.6 trillion dollars, and there are four main types of tokens: payment, utility, security, and non-fungible. Utility tokens are the most popular form today and serve as the media of exchange on the associated blockchain platform. At this point, cryptocurrencies would not need any further introduction. However, there is still widespread scepticism and a lack of comprehension of the fundamentals that underpin the value of tokens, especially utility tokens. This is largely because traditional security valuation techniques do not easily apply to their complex nature, and the overall crypto market has become notorious for its large price volatility, scams, jokes, and frauds.

Over the last two years, Covid-19 triggered an enormous wave of retail investors with little to no expertise pursuing the opportunities of a bull cycle on stocks, as well as the crypto market. This social media-investing revolution has generated a lot of self-proclaimed investing and crypto gurus, which have made it easier for people to follow blindly and gamble money into the crypto market without prior due diligence. I do believe theirs some content creators out there who bring excellent “not financial advise” to the crypto-space and provide a thorough analysis to their viewers. But, this buzz has fueled a wave of getting-rich quick novice speculators rather than investors, and most cannot even explain what their crypto holdings even do.

While speculation is not necessarily a vice, it is a short term game, and it can be very profitable during bull markets. However, it is unlikely to provide a lifetime of sustainable income or returns. Investors deciding on factual data plays a central role for healthy functioning markets, and better and widely adopted valuation methods will help the crypto-space to mature into one.

Recently the market has stumbled, with Bitcoin around the $29,000 mark and many altcoins have double-digit drops. Phases of contraction and expansion of an emerging asset class are natural regardless of which page we turn in the calendar. I believe this is a great ‘cooldown’ period where projects are able to consolidate, and newcomers and speculators who got ‘reckt’ by trying to time the market to learn and reassess their strategies. For this reason, I thought it was a great time to start writing a three-part series to share a simple, not simpler due-diligence framework for valuing cryptos combining outstanding research papers on the field that I’ve scrutinised during my economics studies at the University of Queensland and my own takes on the subject.

Since the launch of the first decentralized cryptocurrency, Bitcoin, in 2009, blockchain technology has developed a wave of innovations and the rise of cryptocurrencies tokens as a new asset class. Initial coin offerings (ICOs) have developed as a new method for entrepreneurial finance, with parallels to initial public offerings, venture capital, and presale crowdfunding (Howell, Niessner & Yermack, 2020). Today, cryptocurrencies market capitalization hovers around 1.6 trillion dollars, and there are four main types of tokens: payment, utility, security, and non-fungible. Utility tokens are the most popular form today and serve as the media of exchange on the associated blockchain platform. At this point, cryptocurrencies would not need any further introduction. However, there is still widespread scepticism and a lack of comprehension of the fundamentals that underpin the value of tokens, especially utility tokens. This is largely because traditional security valuation techniques do not easily apply to their complex nature, and the overall crypto market has become notorious for its large price volatility, scams, jokes, and frauds.

Over the last two years, Covid-19 triggered an enormous wave of retail investors with little to no expertise pursuing the opportunities of a bull cycle on stocks, as well as the crypto market. This social media-investing revolution has generated a lot of self-proclaimed investing and crypto gurus, which have made it easier for people to follow blindly and gamble money into the crypto market without prior due diligence. I do believe theirs some content creators out there who bring excellent “not financial advise” to the crypto-space and provide a thorough analysis to their viewers. But, this buzz has fueled a wave of getting-rich quick novice speculators rather than investors, and most cannot even explain what their crypto holdings even do.

While speculation is not necessarily a vice, it is a short term game, and it can be very profitable during bull markets. However, it is unlikely to provide a lifetime of sustainable income or returns. Investors deciding on factual data plays a central role for healthy functioning markets, and better and widely adopted valuation methods will help the crypto-space to mature into one.

Recently the market has stumbled, with Bitcoin around the $29,000 mark and many altcoins have double-digit drops. Phases of contraction and expansion of an emerging asset class are natural regardless of which page we turn in the calendar. I believe this is a great ‘cooldown’ period where projects are able to consolidate, and newcomers and speculators who got ‘reckt’ by trying to time the market to learn and reassess their strategies. For this reason, I thought it was a great time to start writing a three-part series to share a simple, not simpler due-diligence framework for valuing cryptos combining outstanding research papers on the field that I’ve scrutinised during my economics studies at the University of Queensland and my own takes on the subject.