How Is the Capital Asset Pricing Model (CAPM) Adapted for Cryptocurrency Valuation?
CAPM is adapted for crypto by using a modified beta coefficient that measures the token's volatility relative to a broad crypto market index (like the total crypto market cap or a large index fund) instead of the traditional stock market. The high-risk nature of crypto also necessitates a higher market risk premium.
The resulting required rate of return is then used as the discount rate in a DCF model.
Glossar
Modified Beta Coefficient
Coefficient ⎊ The Modified Beta Coefficient, within cryptocurrency derivatives and options trading, represents an enhanced measure of systematic risk relative to a benchmark index, typically a cryptocurrency index or a basket of assets.
Capital Asset Pricing Model
Risk Valuation Model ⎊ Capital Asset Pricing Model, when adapted for crypto assets, attempts to linearly relate expected asset return to its systematic risk exposure, quantified by beta relative to a defined crypto market portfolio.
Total Crypto Market Cap
Total Crypto Market Cap ⎊ The cumulative market valuation of all publicly traded digital assets across all blockchains, representing the overall size and financial scope of the entire cryptocurrency sector.
Required Rate of Return
Definition ⎊ The required rate of return represents the minimum return an investor expects to receive from a crypto asset or project to compensate for the associated risk.