Valuation of Crypto Assets – All you need to know

As the crypto market grows, businesses that can effectively value and manage their crypto assets will be better positioned to navigate this new financial frontier. The market size in 2023 ranges from approximately USD 604.37 million to USD 1.06 billion. The market is expected to grow substantially, with forecasts suggesting it could reach between USD 4.18 billion and USD 17.19 billion by 2033 and 2036, respectively. This reflects a compound annual growth rate (CAGR) of approximately 21.35% to 24.6% during the forecast periods.

The ability to provide accurate, transparent, and compliant valuations is becoming increasingly important for businesses operating in or adjacent to the crypto space.

If you are a business owner and your business holds cryptocurrencies on its balance sheet or is considering investing in crypto assets, this article is worth reading.

Why do Crypto assets need to be valued?

Regardless of its current market price, the underlying value of a crypto asset is determined during its valuation. This aids in determining if a token is overvalued or undervalued. The fundamental study of traditional financial assets such as equities is analogous. This needs to be valued for several important business and regulatory reasons:

• Financial Reporting – Businesses holding  these assets need accurate valuations for financial statements and accounting purposes. Proper evaluation is crucial for balance sheet reporting and determining the fair value of holdings. It is especially useful at times of calculating gains/losses on crypto transactions.
• Taxation – Valuation is essential for tax compliance and reporting. Businesses must determine the fair market value of crypto assets for tax purposes and it helps in calculating capital gains/losses on transactions and report  holdings accurately on tax returns.
• Business Operations – For companies using or transacting in crypto, valuation is necessary for pricing products/services in crypto. Also it is important while determining appropriate compensation when paying in crypto. 
• Strategic Planning – Valuation helps businesses in assessment of the potential of blockchain and crypto technologies .It helps to make decisions about integrating this  into business models and evaluate potential mergers, acquisitions, or partnerships in the crypto space.

What are crypto assets?

Crypto assets are digital assets that produce a medium of exchange for financial transactions using cryptography techniques. To safeguard financial transactions, manufacture new units, and validate asset transfers, the money is encrypted (secured) using cryptography. It is considered a DeFi, or decentralized finance, as does not rely on intermediaries such as banks in order to make transactions.

Crypto Assets are only be transferred via blockchain technology, such as digital coins and tokens, as well as any other sort of digital medium of exchange, such as Bitcoin, Ethereum, and Ripple. In DeFi,these are recorded in a public ledger.

Why do crypto assets need a valuation?

Valuing crypto assets encompasses a range of considerations that impact taxation, financial reporting, investment decisions, and regulatory compliance. As the market grows and matures, establishing robust valuation frameworks will be essential for participants across the ecosystem.

There are three key reasons why it’s important to perform a valuation for crypto assets: taxation, financial reporting, and investment considerations. Most often,these are used as compensation for any goods or services rendered.

When making crypto transactions, it’s advised to have a valuation to find the value of the assets relative to goods or services exchanged. It’s also important to consider the supply and demand dynamics within the economy.

Types of crypto assets that need a valuation

The nature of a crypto asset determines its value, with the most important distinction being whether the asset offers its owner the right to a stream of future cash flows or not. This has been demonstrated on three different types of tokens: security tokens, utility tokens, and cryptocurrencies.

Security tokens

Represent ownership in underlying assets, similar to traditional securities. They are subject to regulatory frameworks and often provide rights to dividends or profit-sharing.When you purchase a security token, you are effectively becoming a major shareholder, and the amount you invest is directly influenced by the company’s valuation.

Considerations

• Future cash flows from the underlying asset can be estimated and discounted.
• Valuation can be benchmarked against similar securities in traditional markets.

Utility or MAG tokens

Utility tokens are the most popular type of token issued in an ICO. Rather than reflecting a share of the company’s ownership, they’re more akin to “golden tickets”. They provide holders with unique services or preferential treatment, such as a discount when a start-product up’s line is launched.

Considerations

• Their value is often tied to the popularity and utility of their platform.
• Metrics like transaction volume or total value locked (TVL) can indicate demand.

Cryptocurrencies

Cryptocurrency is any type of digital or virtual currency that uses encryption to safeguard transactions. Cryptocurrencies operate without a central issuing or regulating authority, instead of relying on a decentralized system to track transactions and create new units. Examples are Bitcoin (BTC) and Ethereum (ETH).

Considerations

• Often assessed through market price multiplied by circulating supply.
• The value can be influenced by its use case, such as transaction fees or smart contract capabilities.

Approaches to Value Crypto Assets

Fundamental analysis, which uses financial statements to examine publicly listed companies, is used to make equity investments. We can’t use information like that in the case of cryptocurrency because there isn’t any. As a result, we must either modify our valuation perspective to a cost perspective or adopt comparable value methodologies.

• Financial reporting – Financial reporting is a typical accounting procedure in which financial statements are used to reveal a company’s financial information and performance over a specific time period, usually annually or quarterly. When your company buys bitcoin, you should record the asset on your balance sheet at its fair market value on the day it was bought. This is accomplished by debiting the asset’s account.
• Taxation – Tax experts have been debating whether cryptocurrencies should be classified as a ‘currency’ or an ‘asset’. However, describing it as a ‘currency’ requires government legal backing; without this, it is safe to consider it an asset/property. Because the tax implications would arise regardless of legality, designating them as “assets” would be a better method than waiting for a government explanation.
• Investment considerations – Regulatory agencies, tax officials, and central banks worldwide are attempting to determine what digital currencies are and what they represent. Individual investors can make a lot of money investing in cryptocurrencies, but they risk breaching the law when they buy and sell them. Much of the ambiguity surrounding cryptocurrency’s legal status stems from its relative youth when compared to other currencies and payment systems.

How to value each type of crypto assets?

The type of decision-making and distribution rights connected with security token ownership vary, but all share one fundamental aspect: the right to future distributions. Under the market and income approaches, this allows for the use of classic valuation methodologies. Each method helps determine the accurate valuation of crypto assets, yet they have various different processes.

• Market Approach – The market approach’s value mechanism for a given token is determined by its liquidity and level of development. The scenarios that are relevant range from a token with no liquidity and no directly observable price at the time of launch to a token with continually updated prices in a direct trading pair against a fiat currency.
• Income Approach – From the standpoint of determining intrinsic value, an income strategy based on cash flows to the security token’s holder is logically the ideal solution. It can be especially beneficial in guiding investment decisions in markets where inefficiency, sentiment, and speculation play a large role. It may, however, be incompatible with the value bases required by financial reporting and tax valuation rules, which favor more directly market-based measurements.
• Cost Approach – Opportunity costs can give an observable proxy for value when secondary transaction pricing is unavailable or liquidity is insufficient to rely on the price. The utility token’s role as a medium of trade is revealed. Participants in the utility token network will quote prices in terms of the utility token for items or services they offer for sale. As a result, these mentioned prices may be compared to the prices paid in fiat currency for different ways of acquiring the same number of products or services.
• Quality Theory of Money – Utility tokens serve as a medium of trade, or to put it another way, the only “legal tender” within their particular networks, drawing comparisons to fiat currencies. The tiny economy metaphor is useful because it allows you to look at the price of utility tokens through the lens of the QTM. Suppose the level of real output remains constant and the velocity of money remains constant. In that case, the overall price level of goods and services is proportional to the money supply in an economy. The same dynamics that affect the supply and demand of any product also affect the supply and demand of money: a rise in the money supply.

Get experts to help to value your business with Eqvista

If you want to discover how much your company is worth, you should seek the advice of a professional. This is accomplished through a business valuation, which is a procedure for estimating a company’s economic value.

A business valuation will assist you in determining the value of your company, assets, incurred income, and other factors. Our highly trained valuation team at Eqvista can assist you in determining the value of your company. Obtaining value has become a vital part of growing your company. To learn more about our valuation services, please contact us.