How Does the Cost of Equity Differ from the Cost of Debt in Crypto Financing?
The cost of equity in crypto is the required return for token holders, which is extremely high due to the volatile and speculative nature of the asset. The cost of debt is the interest rate a protocol pays for borrowing, often through decentralized lending platforms.
Most crypto projects are equity-financed (token sales), making the cost of equity the dominant factor in the Weighted Average Cost of Capital (WACC). Debt is often less prevalent, but its cost is also high due to smart contract and counterparty risk.
Glossar
Cost of Equity
Calculation ⎊ Cost of equity represents the expected return required by investors for holding a company's stock, reflecting the risk associated with that investment.
Weighted Average Cost
Calculation ⎊ Weighted Average Cost (WAC) is a financial calculation method used to determine the average price paid for an asset, where each purchase price is weighted by the quantity acquired at that price.
Debt
Liability ⎊ The concept of debt within cryptocurrency, options trading, and financial derivatives fundamentally represents a legal or contractual obligation to transfer assets or provide services to another party.
Cost of Debt
Leverage ⎊ Cost of Debt, within cryptocurrency and derivatives, represents the weighted average rate of borrowing utilized to finance positions, often expressed as an annualized percentage.
Weighted Average Cost of Capital
Calculation ⎊ Weighted Average Cost of Capital (WACC) is a financial metric used to calculate the cost of funding for a project or company, adapted for crypto to reflect the cost of different capital sources.
Equity
Account Value ⎊ In the context of derivatives trading, equity represents the net value of a trader's account, calculated as the total value of assets minus total liabilities.