March 28, 2020 Arca’s Jeff Dorman highlights the evolving nature of cryptoasset valuation

Jeff Dorman, chief investment officer for Arca, a Los-Angeles based cryptoasset asset management company, outlines the emerging valuation frameworks for cryptoassets, stressing that the industry is still discovering how to best perform fundamental analysis for the nascent asset class. In his article, Dorman points to how long commonly-accepted models took to emerge for traditional asset classes, such as the publication of Graham’s & Dodd’s seminal book, “Security Analysis” in 1934 that paved the way for equity valuations and Frank Fabozzi’s foundational work for fixed income securities. Given that cryptoassets have existed for just 12 years, Dorman argues that the lack of valuation consensus to-date should not be a reason for traditional investors to discount the asset class, especially considering the wide range of proposed and intensely-discussed models and frameworks that have emerged in recent years. In Dorman’s opinion, valuations for exchange tokens should focus on discounted cash flow (DCF) analysis, while smart contract networks are best suited to network value to transactions (NVT) ratios and earlier-stage cryptoassets can be best-valued according to estimates around total addressable markets (TAM) and Metcalfe’s Law which measures network effects. Once the industry does reach a consensus on the most accurate and informative models, then Dorman believes markets can find price support and ceilings determined by fundamental analysis.

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