Author: @CryptoScott_ETH , @RealResearchDAO
In traditional finance, the construction of valuation models is one of the most important steps in investment and financing decisions, providing a basis for the rationality of the target price. In the crypto context, tokens are similar to the publicly issued shares of the protocols. It has certain governance rights over the protocol, and has the opportunity to receive dividends from the protocols’ income. Therefore, when people make investment and financing decisions on tokens, they can also build a valuation model to judge the reasonableness of the token prices. This article first introduces the construction of traditional financial valuation models, draws out the problems that valuation models can solve, and finally discusses how to apply traditional financial valuation model construction methods to token valuation.
The first step in the valuation model is to divide the company’s revenue performance. The company’s revenue is generally driven by multiple businesses. For the main business, further price-volume divisions are required. For the other businesses, it’s simply needed to take a loot at the performance growth rate. Performance divisions can be done in either bottom-up or top-down approaches.
① Bottom-Up: For companies with limited production capacity, that is, all products produced can be sold, and the company’s future revenue is driven by production capacity. Such companies use a bottom-up model to estimate future revenue by estimating the company’s future capacity. For example, a power plant company can sell all the electricity it generates, and its future performance and income are determined by its production capacity.
② Top-Down: Most companies use the top-down valuation method, which predicts the company’s future revenue by predicting the macro environment - industry growth rate - penetration rate - company market share. First, determine the impact of the macro environment and policies on the development of the industry to give an assumption of industry growth. If a new paradigm appears in the industry, we need to make a penetration rate assumption. Based on the company’s share and competition barriers, we can make an assumption of the future market share, and finally calculate the company’s future revenue. For example, valuing new energy vehicle companies, predicting the future growth of the auto industry based on the macro environment, predicting the penetration rate of new energy vehicles in the future based on policy objectives and historical data to obtain the market share of new energy vehicles, and predicting the company’s future market share to estimate the company’s future revenue.
After the revenue is determined, other items in the income statement are forecasted according to the ratio of history to revenue. After the income statement is obtained, the changes in the future balance sheet and cash flow statement can be predicted according to the relationship between the financial statements.
After filling the three tables, balance the balance sheet. The next step is to value the company based on the predicted financial statements. The valuation includes two methods: Absolute Valuation and Relative Valuation.
①Absolute Valuation
② Relative Valuation
Find companies that operate the same business, compare these companies’ valuation multiples, such as P/E, and find the median or average of comparable companies’ price multipliers.
The valuation range is derived by adjusting the target’s price multiplier based on the median.
③ Comprehensive Valuation
Determine the weight of each valuation method to deliver the final valuation
① Price transmission mechanism: From fundamental analysis to technical analysis, professional institutions find Alpha by analyzing fundamentals, the process of opening a position drives changes in the underlying price and volume, and technical analysis dispatches to capture the changes in price and volume to open a position. At present, the currency circle is mainly dominated by the retail market, resulting in low information efficiency. With the improvement of the investor structure, the price discovery mechanism will be more efficient.
② Judging the overvaluation and undervaluation of the target, and making investment decisions.
③ Immediate valuation adjustments based on actual changes compared to assumptions or expectations. If the actual situation is better than the consensus expectation of the market, it is bullish; if it is lower than the consensus expectation, it is bearish.
① Debating valuation reasonableness with investors and adjusting valuation assumptions to arrive at final valuation.
② Bet on the performances with investors, and if the performance required by the valuation assumption is achieved in the future, you can get more money.
① DEX
② Lending
There are differences in the utility of tokens and value capture capabilities of different economic models. Therefore, the same set of models cannot be used to compare valuations. It is necessary to determine the rights and interests of each token. The more rights and interests, the higher the valuation. For example, the initial tokenomics of BNB used 20% of the profit for buying back and burning tokens, while OKB and HT used 20% of the fee income for buying back and burning tokens, and there was a profit margin between the profit and the fee income. In addition to dividends, there are also IEO value, fee reduction value, and public chain value.
At present, the market is in the early stage, and there is no consensus on the confirmation of the discount rate. It is not easy to use DCF for valuation, so the Relative Valuation method is often used.
During financing negotiation, the Absolute Valuation method can be used, and the selection of r is based on the investor’s necessary rate of return.
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