Introducing Binary Adjusted BDD, VOCD and Reserve Risk: An Exploration of Bitcoin Days Destroyed

Introducing Binary Adjusted BDD, VOCD and Reserve Risk: An Exploration of Bitcoin Days Destroyed

Reserve Risk in 2019 has recently hit a low near what was seen in 2011, but not quite as low as in 2015. Binary Adjusted BDD, VOCD and Reserve Risk give us conviction the market bottom is behind us, and give us clues to what the future may look like.

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Doubts about the Long-Term Viability of Utility Cryptoassets by John Pfeffer

Highlights the Velocity Problem for utility tokens, makes the comparison of utility tokens to working capital and proposes that any crypto asset that is not viewed as a store of value will have a difficult time accruing value over the long-term.

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An Equilibrium Valuation of Bitcoin and Decentralized Network Assets

We address the valuation of bitcoins and other blockchain tokens in a new type of production economy: a decentralized financial network (DN). An identifying property of these assets is that contributors to the DN trust (miners) receive units of the same asset used by consumers of DN services. Therefore, the overall production (hashrate) and the bitcoin price are jointly determined. We characterize the demand for bitcoins and the supply of hashrate and show that the equilibrium price is obtained by solving a fixed-point problem and study its determinants. Price-hashrate “spirals” amplify demand and supply shocks.

Pagnotta, Emiliano and Buraschi, Andrea, An Equilibrium Valuation of Bitcoin and Decentralized Network Assets (March 21, 2018). Available at SSRN: https://ssrn.com/abstract=3142022 or http://dx.doi.org/10.2139/ssrn.3142022

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LPPLS

We develop a strong diagnostic for bubbles and crashes in bitcoin, by analyzing the coincidence (and its absence) of fundamental and technical indicators. Using a generalized Metcalfe's law based on network properties, a fundamental value is quantified and shown to be heavily exceeded, on at least four occasions, by bubbles that grow and burst. In these bubbles, we detect a universal super-exponential unsustainable growth. We model this universal pattern with the Log-Periodic Power Law Singularity (LPPLS) model, which parsimoniously captures diverse positive feedback phenomena, such as herding and imitation. The LPPLS model is shown to provide an ex-ante warning of market instabilities, quantifying a high crash hazard and probabilistic bracket of the crash time consistent with the actual corrections; although, as always, the precise time and trigger (which straw breaks the camel's back) being exogenous and unpredictable. Looking forward, our analysis identifies a substantial but not unprecedented overvaluation in the price of bitcoin, suggesting many months of volatile sideways bitcoin prices ahead (from the time of writing, March 2018).

arXiv:1803.05663 Spencer Wheatley, Didier Sornette, Tobias Huber, Max Reppen, Robert N. Gantner. Thu, 15 Mar 2018 09:47:25 UTC

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Metcalfe’s Law as a Model for Bitcoin’s Value

This paper demonstrates that bitcoin’s medium- to long-term price follows Metcalfe’s law. Bitcoin is modeled as a token digital currency, a medium of exchange with no intrinsic value that is transacted within a defined electronic network. Per Metcalfe’s law, the value of a network is a function of the number of pairs transactions possible, and is proportional to n-squared. A Gompertz curve is used to model the inflationary effects associated with the creation of new bitcoin. The result is a parsimonious model of supply (number of bitcoins) and demand (number of bitcoin wallets), with the conclusion bitcoin’s price fits Metcalfe’s law exceptionally well. Metcalfe’s law is used to investigate Gandal’s et.al. [2018] assertion of price manipulation in the Bitcoin ecosystem during 2013-2014.

Peterson, Timothy, Metcalfe's Law as a Model for Bitcoin's Value (January 22, 2018). Alternative Investment Analyst Review, Q2 2018, Vol. 7, No. 2, 9-18.. Available at SSRN: https://ssrn.com/abstract=3078248 or http://dx.doi.org/10.2139/ssrn.3078248

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Productive Valuation

It’s striking how similarly most “good” token models operate. They are fundamentally productive assets, some of which resemble securities. Discount tokens, profit sharing tokens, work tokens, and burn and mint tokens are built on an assumed margin or fee that is distributed to the service provider or token holder. With these value accretive tokens, simple net present value formulas can be used to reasonably estimate a token price.

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Tokeconomics

Despite the incredible amount of attention and material written about cryptocurrency tokens, there hasn’t been a good mainstream definition of what they are. In the technical realm of the blockchain, the concept of a cryptocurrency token is well understood. It represents a programmable currency unit that is bolted to a blockchain, and is part of smart contract logic in the context of a specific software application. But in the non-technical arena, what is a token, really?

A token is just another term for a type of privately issued currency. Traditionally, sovereign governments issued currency and set its terms and governance; in essence directing how our economy works with money as the exchange medium for value. With the blockchain, we now have new types of organizations (and soon, more of the existing type) who are issuing their own currency in the form of digital money as cryptocurrency, and they are setting their own terms and rules around its operations, in essence creating new self-sustainable mini-economies.

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Lou Kerner - 7 Things About Crypto Valuation Conference Call

On September 7th, in partnership with Geektime, we held an hour long conference call with four cryptocurrency valuation thought leaders and over 400 participants. Each speaker shared their perspective on valuing crypto, for about 10 minutes each, and then the call was opened for questions from the audience. It was reiterated, time and again, that this talk was not meant for the purpose of investment advice, but as a discussion of valuation frameworks. A video replay of the call can be seen below. The slides from the call can be found on SlideShare (except Chris Burniske’s slides).

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Multicoin - New Models For Utility Tokens

There are three types of cryptoassets: stores of value, security tokens, and utility tokens. General-purpose stores of value should be valued using the equation of exchange because these currencies are independent monetary bases. Examples include BitcoinBitcoin CashZcashDashMonero, and Decred.

Although some may disagree, I also include the native tokens of smart contract platforms such as EthereumEOSDfinity, and Kadena in this category. Why? Because there’s a real chance that the native token of a smart contract platform that becomes sufficiently useful will emerge as an independent store of value.

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Vitalik On MoE Token Valuations

One kind of token model that has become popular among many recent token sale projects is the “network medium of exchange token”. The general pitch for this kind of token goes as follows. We, the developers, build a network, and this network allows you to do new cool stuff. This network is a sharing-economy-style system: it consists purely of a set of sellers, that provide resources within some protocol, and buyers that purchase the services, where both buyers and sellers come from the community. But the purchase and sale of things within this network must be done with the new token that we’re selling, and this is why the token will have value.

If it were the developers themselves that were acting as the seller, then this would be a very reasonable and normal arrangement, very similar in nature to a Kickstarter-style product sale. The token actually would, in a meaningful economic sense, be backed by the services that are provided by the developers.

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Blockchain At Berkeley - Crypto Valuation Methodologies Overview

Crypto markets are very new with limited data history pertaining to crypto asset behavior, returns, and correlations. Many of today’s models are simplistic or limited, whether intrinsically (due to difficulty defining and measuring variables such as velocity and its counterparts, for instance) or extrinsically (due to limited applicability to different types of tokens, as seen with NVT and privacy coins, for instance).

In the future when the markets mature and asset relationships and behaviors are more discoverable, valuation models and ratios should be more predictive and informative. However, because of the very diverse nature of crypto assets, which can have different features, structures, payouts, etc., we may never have metrics and models as universal as the P/E ratio and DCF analysis for public equities.

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