Intrinsic Value

Written by Evan Feng

The classic definition of intrinsic value refers to the result of a bottom-up, fundamentally-driven and mathematically quantified analysis that can be used to value a given asset based on its idiosyncratic characteristics and ability to generate and capture future economic value.

For a traditional business, this is relatively easy, as a prospective investor can leverage historically reported data and disclosures, industry-specific knowledge, and macroeconomic trends to forecast future revenues, apply variable and fixed costs, and fold in the company’s financing and capital investment structures to derive and discount the stream of future cash flow into a view on how much that company is worth today. Even though the specific drivers of a business can vary greatly, the above template is generally applicable for most organizations.

In contrast to the above example, intrinsic value is a more nebulous term to pin down in the world of digital assets, as research is still being conducted and consensus valuation methodology continues to be debated. For fiat-backed stable-coins, intrinsic value is a simple exercise of probabilistic thinking, while some other tokens such as those issued by exchanges, one might be able to construct some version of a discounted cash flow analysis. Lastly, many other digital assets, including commodity-like cryptocurrencies such as bitcoin, lack the direct value creation or capture mechanisms of a traditional business, leaving investors to seek other ways to triangulate value, such as comparing against other existing markets such as gold, or leveraging on-chain analytics to construct new multiples.

Suggested Reading

What is Valuation? by NYU Stern

Today’s Crypto Asset Valuation Frameworks by Ashley Lannquist

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