Trading signals are not valuations

The state of quantitative measures for digital assets

There are two styles of questions to ask about coin prices:

  1. What should the coin price be?

  2. Is the coin price more likely to go up or down over a given time period?

They may seem like the same question but they represent two very different approaches to the asset class.

If you ask the first question, you likely assume the existence of an intrinsic value. That means there’s a way to determine that value. So a valuation method must exist and work.

You can ask the second question without assuming there’s an intrinsic value that can be determined.

For the last month, I’ve been studying Professor Damodaran’s valuation course and a one thing has become very clear to me: we are constantly conflating trading (pricing) with investing (valuing).

The problem with valuing coins is that you need exogenous cashflows to value something. Like rental income from a home. Or dividends from a company.

A coin network doesn’t have exogenous cashflows. The native coin is used for transaction fees and block rewards. So these data are not useful for determining a “fair value” for the network.

They can however be used to develop interesting and useful indicators to answer questions like:

  1. Are we nearing a bottom or top of a market cycle? Comparing “realized cap” with market cap has worked well for some.

  2. Is a given asset over- or under-priced compared to its peers?

  3. Is a miner getting a better or worse deal today than last year?

Digging into these topics has helped me unlearn some assumptions about assets. First that all assets have an intrinsic value. And second that the market will bring prices to that intrinsic value.

Thinking in terms of coins being under- or over-valued subjects you to both faulty assumptions. What might appear to be just semantics at first glance can actually lead to dangerous reality distortions.

I’ve had a lot of conversations about these topics over the last couple days and not everybody agrees. So curious for your takes. Is there a way to perform a valuation on BTC? ETH? What

Related posts (in chronological order):

  1. Revisiting cryptoasset valuation

  2. What is valuation?

  3. The implicit assumption of valuation