## Working towards the correct approach to Cryptoasset Valuation – part 1

This post marks the start of a series on cryptoasset valuation. The purpose of this series is to assemble,  in small steps, the correct approach to cryptoasset valuation.

I will be learning as I go along. Hypotheses stipulated in some post might be rejected  again in a later post of the series. Whenever I have clarified some issue related to cryptoasset valuation myself, I will add a new post to the series.

The series is going to end with a post presenting the approach to cryptoasset valuation I regard as the correct one and which might have been arrived at by myself or by somebody else.

So let’s start.

In this first part of the series I merely want to write down a couple of thoughts on the equation of exchange as it relates to the issue of cryptoasset valuation.

When I started researching on cryptoasset valuations I came across two texts (one by Chris Burniske, the other by John Pfeffer) which made several interesting points regarding the topic of cryptoasset valuation. In particular, they made some remarks on the relation between the equation of exchange (MV = PQ) and cryptoasset valuation, pointing out that a given protocol is analogous to a simplified economy.

What (if anything) can we infer from the equation of exchange for the issue of valuing cryptoassets?

One thing we can infer from

MV = PQ

is that the price of a crypto-coin is inversely proportional to velocity. Given M and Q, an increase in V (the velocity) implies a corresponding increase in P (the price level in the protocol economy). Please note that an increase in P means inflation, i.e. a decrease of the value of the crypto-coin.

This inverse relationship between velocity and coin-value, which is pointed out by both Pfeffer and Burniske, means that store-of-value and medium-of-exchange uses of a cryptoasset are in opposition.

The interesting question regarding cryptoasset valuation is what is the “GDP” (PQ) of the protocol economy? Is it really just ‘the aggregate cost of the computing resources necessary to maintain the blockchain’, as John Pfeffer asserts?

This question is to be examined.