Decentral Park Advocates For A New Approach To Valuing Exchange Tokens
Research and blockchain investment firm Decentral Park suggested a new model for assigning relative value to exchange tokens in a recent report.
Exchanges are the lifeblood of the crypto world where buyers and sellers transfer tokens among themselves. Some of the largest exchanges, like Bitfinex or Binance, issue their own tokens which offer holders discounts on trading fees. Decentral Park challenges in this report that these exchange tokens should be valued based on exchange transaction volume, offering instead that they be valued using assets under custody (AUC).
AUC is a measure of the total value of assets held by a custodian, which in the case of this report would be an exchange. Researchers illustrated exchanges’ power in the crypto world, highlighting that 11% of the total supply of Bitcoin is held in exchange wallets and that 2% of the total market capitalization of cryptoassets is made up of exchange tokens.
The author argued that using only transaction volume to value exchange tokens leaves room for error, especially given repeated reports last year claiming that exchanges misreport transaction volume. One study warned that almost 90% of crypto exchanges reported trade volumes could be incorrect. In contrast, AUC can be independently verified, making it difficult to manipulate.
“Valuation is an important, yet often overlooked research area in the world of cryptoassets,” author of the study Elias Simos wrote in a tweet.
Decentral Park advocates for the use of Price-to-Assets ratio (PA) when valuing exchange tokens. This ratio is determined by comparing a token’s market price on an exchange to its total assets under custody (AUC). Simos found by analyzing on-chain data — provided by glassnode — for tokens issued by Binance (BNB), Huobi (HT), Bitfinex (LEO) and OKex (OKB) that PA is a strong indicator of whether an asset is being undervalued or overvalued. If the PA is equal to or near 1, then the exchange token is trading at the value of AUC. If PA is less than one then the token is undervalued and if the ratio is over one the token is overvalued, researchers wrote.
Simos went through valuations of exchange tokens over the past two years and found that for BNB when PA value indicated that the token was undervalued 180 days later the forward returns were up by 149.01%. For Huobi Token (HT) under the same conditions the 180 days later forward returns were up 62.52%.
While this was a compelling set of data, Simos himself noted that in theory there is no clear reason why there should be a link between assets under custody and token value. Discounts on an exchange with lots of assets isn’t worth much if there aren’t many transactions. However, he stuck by the idea that PA value is a worthwhile tool for investors looking for another way to potentially project future fair value using AUC projections.
Using the PA method of valuation, he found that Huobi Token (HT) is undervalued given it’s PA of 0.35, Binance Token (BNB) is pretty close to an accurate value with a PA of 0.82, while OKex’s token (OKB) is overvalued given its PA of 2.15. The results for Bitfinex’s LEO were inconclusive.
The author emphasized the importance of having a solid valuation criteria for cryptocurrencies if they are ever to be adopted by the masses, adding that he hoped this research would be followed by other papers to establish alternative valuation methodologies.
“If this asset class is to be adopted more broadly by the global investor base, credible and generally accepted approaches to valuation are sorely needed,” the report read.