"Gold is natural.
Nation states conjure value for Fiat.
The intrinsic value of crypto-assets is defined by their Attributes.
By their fruits ye shall know them."
Cryptocurrencies provides an efficient means of peer-to-peer transaction. Peer-to-peer transactions is facilitated by a decentralised network that runs across the internet and is secured by cryptography. The technology stack is often referred to as the Blockchain. The decentralisation aspect simply means that no single person, corporate entity or government controls it and is therefore censorship resistant. Thus a global, free and perfectly competitive market for currency is borne.
Because cryptos are created and live mostly on self-sovereign networks, there has been a lot of talk about their status within a legal socio-economic governance framework. What happens if they collapse? Who owns what and who is accountable to whom? And most significantly - how does one establish the economic value of these cryptocurrencies running on top of the Blockchain?
The Financial Conduct Authority (FCA) have advised that "Consumers should be cautious when investing in such crypto-assets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value."
In other words, the UK financial regulator has serious concerns about an asset class whose value may or may not real. If crypto-assets have no value beyond the sentimental, such warning from financial regulators will endure perhaps until such a time when it is possible to establish a comparative intrinsic value analysis that can help differentiate between the good, the bad, and the ugly. With the launch of RDA Index, that time has come!
Because cryptos are typically not backed by any rigid asset, their value moves at the speed of speculation. Although they may solve the problems of cross-border payments and peer-to-peer transaction, the mobility of their value (volatility next level!) continues to unsettle investors and regulators alike. But the question to ask is whether all crypto-assets are volatile in the same way? Are all cryptocurrencies of the same speculative stock?
Before we explore the RDA Index framework that enables intrinsic value analysis of cryptocurrencies, let's first clarify a few assumptions:
Intrinsic value does not necessarily equate to price. Intrinsic value can be measured on any scale. RDA Index measures intrinsic value on a scale of 0 to 1 where 0 indicates no intrinsic value and 1 indicates a high intrinsic where intrinsic value is defined by a set of value drivers referred to as Real Digital Asset (RDA) Attributes.
Trivially, RDA Attributes gives value to cryptocurrencies.
Crypto value drivers or RDA Attributes must be capable of producing measureable effects (e.g. transaction speed can be measured by how long it takes for a payment to be confirmed) to enable differentiation say between [efficiency of the] cryptocurrencies [blockchain].
Crypto-assets Intrinsic Value Analysis
When asked "what gives Bitcoin its value?" - we get answers ranging from the blockchain, decentralisation, miners, developers, censorship resistance, the speed of the network, shops that accept digital coins. As we aggregate these responses, we see that some of them have a stronger effect on the perception of value than others. Collectively however, they give rise to a base intrinsic value and/or perception of intrinsic value of the cryptocurrency. The combination of the base intrinsic value and the sentiments they evoke together produces a measure of how much value the market [should] place on a cryptocurrency and subsequently other socio-economic value streams are borne.
The RDA Index framework aggregates all cryptocurrency value drivers into four broad groups known as Real Digital Asset Index (RDA) Attribute Groups, namely: Business Ecosystem Stability, Digital Utility, Technology Efficiency, and Market Sentiments.
Business Ecosystem Stability: How stable is the asset's business environment?
This is a component representing resilience and the capability to maintain a stable state of socio-economic equilibrium that keeps the project alive and sustainable. This attribute reflects the value brought to the token by the strength of the team, suppliers, investors, partners, customers and the influence of competitors and regulators. The existence of this attribute is evaluated to establish a corresponding intrinsic value.
Digital Utility: How useful is the asset in accessing products and services?
Much of the speculation around the value of digital assets stems from their promise as investment vehicles, and this area is subject to intense regulatory scrutiny from securities agencies. However, for other tokens, at least a proportion of their value is intrinsic to their actual use case within a payment or software application ecosystem. A pure utility token may still rise in value if the ecosystem for which it is developed undergoes growth and demand increases, however this attribute examines the extent to which the token has inherent value due to its use-case.
Technology Efficiency: How efficienty is the asset's underlying technology?
All cryptocurrencies may be regarded as innovative technologies, however with a 10 year history now to draw upon, different technologies may be regarded as having distinguishable track records of effectiveness. As a range of different consensus mechanisms and mainnets proliferate at this time, our algorithms compare a diverse range of indicators to yield evaluations of how efficient and secure are the specific technologies in use.
Market Sentiments: How much sentiments in favour of the asset's stability, utility, and underlying technology?
In an era when hype has had far too much influence on pricing, the RDAi is keen to ensure sentiment is viewed with the appropriate lenses as another important factor alongside the core RDA attributes above. The role of sentiment on price cannot be downplayed particularly in smaller marketcap coins. The credibility of influencers varies considerably in terms of their long-term predictive relevance, and our algorithms distinguish between their speculative impact on asset value vs. their endorsement of asset's intrinsic worth. Hence, RDAi tracks the market sentiments related to Business Ecosystem Stability, Digital Utility, and Technology Efficiency of each asset in scope.
Given prevailing market conditions, the first three groups of RDA Attributes are assigned a weighting of 30% each, thrice a 10% weight for Market Sentiments which reinforces the intrinsic value and social proof. The sum of RDA Attribute scores across all four group is the RDA Score - which is a reliable measure of the intrinsic value of a cryptocurrency. This measure of the intrinsic value can be translated into any other value scale based on an agreed-upon conversion matrix.
The Problem with Current Cryptocurrency Valuation Approaches.
Since December 2011 many organisations include Wall Street have issued cryptocurrency valuation guidelines. In doing so, comparisons are often made between the market capitalisation of cryptocurrencies and that of traditional assets. These sorts of comparisons are unreliable for many reasons: first and foremost, unlike Companys' market capitalisation value- the market capitalistion value of cryptocurrencies are not driven by industrial economic activities that coin creators are mandated to execute. Rather the factors or RDA Attributes that drive the value of cryptocurrencies are multi-faceted, cross-domain and highly fluid. This is not a weakness, it is the strenght of an asset class that is built on a regulation-free market.
There are several other cryptocurrency valuation approaches. Most of them utilise demand and supply side economics to arrive at an equilibrium price for cryptocurrencies. The problem with these approaches compared to RDA Index is that they are invariably rooted in the polarity between demand and supply. They tend to miss the intrinsic value question. Unlike traditional assets, the value of cryptocurrencies especially those with a preponderance of digital utility attributes are tied to the value of the digital product or service they were created for. The intrinsic value of such cryptocurrencies is less susceptible to basic demand and supply cycles. This phenomenon occurs because digital utility tokens/coins are tokenisation of a digital product or service hence predisposed to retain a minimal/intrinsic value in line with the value of their backed product or service.
The proposed RDA Attributes-weighting of cryptocurrencies hence serves as a flexible and dynamic approach to determine the intrinsic value of cryptocurrencies. RDA Attributes-weighting is also a mechanism to arrive at objective prices of cryptocurrencies (through translation of their intrinsic value measure to FIAT currency value). The next time we think about the intrinsic value of cryptocurrencies, think about a set of RDA Attributes that can evaluated and rated in order to arrive at a measurement on an appropriate value scale.
By Kazeem Adio
Kazeem is a co-founder/CEO/CTO at Xtant Real where he provides leadership for the architecture of company’s Real Digital Asset Index product. You can reach Kaz by submitting a request at Contact Us page.