Original compilation:
Original compilation:H.Forest Ventures, CryptoOcean
Recommended reason:
Recommended reason:The author of this article is the head of the encryption investment department of the former Ark Fund and is now a partner of Placeholer. This article applies the discounted cash flow method of traditional stocks to provide a set of valuation methods for cryptocurrencies. Starting from the use value and discounted expected use value, it expounds the value composition of cryptocurrencies.
Text begins:
As the cryptoasset market evolves, we will continue to see booms and busts as enthusiasm ebbs and flows. The ups and downs are all part of taking a rocket to the moon.
Bitcoin has gone through several boom-bust cycles, most notably entering the late 2013 boom. This coincided with Bitcoin breaking through $1,000 for the first time, but then began a painful subsidence that lasted until January 2015, when Bitcoin bottomed at $175. Yet with Bitcoin now approaching $4,000, having nearly quadrupled in 2017 alone, we are once again entering a period of heightened enthusiasm.
For crypto assets with real utility value, this ebb and flow pattern will create a price chart that resembles a familiar pattern: the J-curve.
In private equity, the J-curve refers to the cash flows of a portfolio, while in economics it is often used to describe the effect of currency depreciation on national deficits. In cryptocurrencies, a new J-curve has also been born.
The basic concept of the cryptocurrency J-curve stems from the market's long-term valuation of encrypted assets. As I explained at Token Summit, I think the price of a crypto asset consists of two forms of value."current value in use"(CUV) and"Discounted expected value in use (DEUV)", some like to call the latter speculative value. (Note: only after acknowledging that most high-growth stocks are priced primarily by"speculative value"The term speculative value can only be derogated if it is constituted).
Enthusiasm for cryptoassets in trading is high, and it usually lasts for a while. At this stage, the CUV of the asset is minimal and does not exist without an agreement. The asset then became primarily composed of DEUV, exposing it to the whims of Mr. Market. This initial period of high enthusiasm is the first (small) peak of the cryptocurrency J-curve, as shown in the chart below.
Note that in the figure above,"High %DEUV, low %CUV"Translator's note:
Translator's note:From the price structure of high DEUV and low CUV, the author theoretically explained the principle of "buy expectations and sell facts".
As crypto assets progress over time, it is inevitable that development teams and crypto networks will encounter unforeseen roadblocks. Building distributed systems is hard, and so are the people who manage them. With roadblocks like this, the market's enthusiasm will wane, with implications for DEUV. Mathematically, compression of DEUV can be thought of as any one of many variables.
Inflates the discount rate because the chances of success are considered to be small and therefore the asset is riskier
The asset’s target market penetration drops amid fears that the protocol won’t win as many users as initially thought
The total market size was slashed as roadmap components and planned features were deemed unrealistic
No matter how you explain it, when the going gets tough, speculators will opt out, DEUV will be crushed, and the price of the token will be crushed due to its current low utility value. Ask any Bitcoiner about 2014 - it wasn't an interesting year.
However, a dedicated development team will hush up, lower their profile, and remain indifferent to Mr. Market's whimsy. As a result, the protocol improves and more users (not speculators) come in.
As usage increases, the CUV of crypto assets is quietly growing.
Even if a token’s DEUV continues to compress, there will be a case of CUV growth. If the market is bearish enough, asset prices could squeeze DEUV all the way to zero, leaving only CUV and a sharply lower price. The market may even discount the asset below the CUV, somewhat similar to a stock trading below book value.
However, often between developers, users and the wider"practical community"In addition, there is a group of die-hard investors who are holding on, representing a small part of what used to be DEUV (pictured below). I believe and can see this is what happened to Bitcoin based on the low $200s in the first three quarters of 2015. This is the bottom of the J-curve for cryptocurrencies.
The ascent from the bottom of the J-curve can be a slow one, with a long uphill. The curve will start to steepen when Mr. Market wakes up to the asset's growing CUV, injecting more DEUV into the price. Such a process is the inverse of the three above, perhaps because the discount rate is lowered, or the expected penetration of the target market is expanded, or optimism about the total manageable market grows. No matter how you slice it, DEUV expands on top of CUV growth in anticipation of future utility value. The following shows the development of Bitcoin from the beginning of 2013 to the present.
Since 2013, the speed of market change and the differences have become very large. Ideally, CUV and DEUV will expand in sync, finding a healthy balance. However, in a strong bull market, DEUV tends to start growing rapidly and outperform CUV. In this case, speculators will start to flood back in, accelerating the expansion of DEUV and making CUV out of reality. This is why the J-curve of cryptocurrencies usually steepens in later stages.
Usually at this point, a full cycle has already played out. A crypto-asset that went from being primarily composed of DEUV at launch, fell into the depths of a bear market, bottomed out on the back of CUV, and finally expanded again to consist mostly of DEUV. The price composition percentages of cryptoassets during this period are shown below:
The J-curve is the price performance of the shift in market sentiment and utility value described above. When the initial expectation is high, the price will be higher, but it is often mainly composed of DEUV; however, as the expectation weakens, even if the CUV increases, the price will decrease; finally, with the increase of DEUV Expanding again, and with support from more CUVs, the asset should exceed its previous price high.
In other words, the magnifying effect of the discounted expected utility value can be greater when the current utility value is high. Expect an even more intense bull market in the coming years.
Thereafter, the cycle will play out again, over and over again. In the macro and micro patterns, I expect there will be many J-shaped curves, the difference lies in the time scale. And by macro-patterns I mean on a decade-long time scale. Each previous peak will pale in comparison to the next DEUV peak, forming a constantly refreshing J-curve. The J-curve will consist of many miniature J-curves, the periodicity of which is still being determined.
Ultimately, at steady state, a cryptoasset should consist mostly of CUV, with a little bit of speculation at the margin. At this point, the decades-long J-curve should start to shrink, eventually resembling an S-curve as the years of utility increase. Ongoing quantitative speculation around future utility will depend on how much of the target market is captured, and how much of the protocol has ossified. Of course, this is all theory, so don't expect perfect patterns to exist in reality. However, as long as utility increases in the long run, we can reach the full moon (perfection).
Our twitter:
Follow us:
Our twitter:@Forest_Ventures
Official account: H ForestH.Forest
Official account: H Forest
