We break down the methodology used to determine the value of cryptocurrencies.

Decoding cryptocurrency valuation: Uncovering Bitcoin’s true value through methodical analysis

Peer into the depths of Bitcoin’s valuation maze. In this article, we employ the methodology to assess its worth as a currency and store-of-value, uncovering the crucial factors that unveil the true potential of this digital asset.

This article is part of Sygnum’s Valuing crypto assets investment research report.

After estimating the fair market capitalisation of a cryptocurrency, the token supply model is used to translate it into an estimated fair value for the token.

Although the supply models of cryptocurrencies are transparent, they can be complex in some cases. Their transparency is valuable relative to fiat currencies where the money supply can be altered at a whim and is often influenced by political considerations.

The complexities involve the formula that determines the amount of new supply created vs the supply to be destroyed (if such a mechanism exists for the token) and the distribution of the new supply. Cryptocurrencies are still experimenting with the ideal monetary policy.



It is also important to keep in mind that the self-custody in crypto led to a portion of tokens being permanently lost, and they need to be excluded from the supply for valuation purposes. This portion is particularly significant for Bitcoin due to its longevity and the relative carelessness of holders in the early days when the token had very little value.

The translation to fair value per token is the easiest for protocols with a supply cap or a fixed supply. For cryptocurrencies that base the minting and/or burning of tokens on the level of activity on the network, the supply also needs to be forecast.

There are also cryptocurrencies that are designed to be permanently inflationary. The purpose of such models is to incentivise participation in the network, with the inflation used to effectively reallocate value from those who participate in validation at the expense of other tokenholders. The rational investor would choose to participate in the network, and the token should be valued from the perspective of the rational tokenholder.

Finally, there is an additional risk that the supply model of a token may be changed. In the case of decentralised Proof-of-Stake protocols, this is an upside risk, as only changes that benefit the value of the token will be approved. But when the protocol is not sufficiently decentralised or when the decision-making power lies with other parties (such as miners), it is possible that the interests driving the decision will not fully align with the interest of tokenholders. In the case of miners, there is still significant – although not perfect – alignment. But in the case of centralisation, the economic interests can diverge significantly.

The valuation of cryptocurrencies as store-of-value assets involves an assessment of the overall demand for safe-haven assets and any expectation of the cryptocurrency taking market share from other store of value assets.


This document is purely for educational purposes and has been issued by Sygnum Bank AG. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Bank AG, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalised investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Bank AG uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.

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