What Is the Appropriate Discount Rate for a Crypto DCF Model?
The discount rate for a crypto DCF model must be significantly higher than traditional finance rates due to extreme volatility and regulatory uncertainty. It should reflect the project-specific risk, the general crypto market risk, and the time value of money.
Often, a high-risk-adjusted rate, sometimes exceeding 20% or even 30%, is used. Some analysts adapt the Capital Asset Pricing Model (CAPM) using a proxy for beta, while others use the Weighted Average Cost of Capital (WACC) with high-cost-of-equity estimates.
Glossar
Crypto DCF Model
Model ⎊ The Crypto DCF Model is an adaptation of the traditional Discounted Cash Flow valuation methodology, used to estimate the intrinsic value of a digital asset by projecting and discounting its expected future cash flows or utility-derived value streams.
Discount Rate
Valuation ⎊ The discount rate, within cryptocurrency and derivatives markets, represents the time value of money applied to future cash flows, crucial for pricing assets like perpetual swaps and assessing the fair value of illiquid tokens.
Discount
Valuation ⎊ In financial derivatives, a discount refers to a situation where a security trades below its theoretical or intrinsic value.
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.
DCF
Valuation ⎊ Discounted cash flow, or DCF, within cryptocurrency and derivatives markets represents a projection of future free cash flows of an underlying asset or protocol, discounted to present value using a risk-adjusted rate.
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.