What Is an Appropriate Discount Rate for a DCF Model Applied to a Volatile Crypto Asset?

An appropriate discount rate must reflect the high systematic and unsystematic risks of crypto. It is typically much higher than traditional equity discount rates, often ranging from 15% to over 50%.

Investors often use a modified Weighted Average Cost of Capital (WACC) or build up a rate based on a risk-free rate plus various risk premiums: market risk, project-specific risk, and illiquidity risk. The high volatility of the asset necessitates a significant volatility premium in the discount rate to account for the risk of capital loss.