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Preface

Exchanges are central nodes in the blockchain ecosystem. These are the venues where buyers of cryptoassets meet sellers, where liquidity lives, and ultimately where the price of a cryptoasset gets decided. Abstracting away the complexity of an exchange’s operation, we can view these ecosystem building blocks as pools of capital that generate value by putting that capital to work. Without capital living in and flowing through the exchange, the construct creates (and therefore captures) no value.  As such, the value created and the fraction of that captured by the exchange,  should be proportionate to the amount of assets that live under an exchange’s custody.

In the paper we present here we build on this idea and  propose a novel relative valuation approach for tokens issued by cryptoasset exchanges, based on their Price-to-Assets ratio (PA hereon). The PA ratio seeks to compare an exchange token’s market price, to its total Assets Under Custody (AUC hereon) - such that a PA ratio average of ~1, implies that over the long term, the token is trading at the value of AUC.

The exchange tokens examined in this paper are those issued by Binance (BNB), Huobi (HT), Bitfinex (LEO) and OKex (OKB).

All the on-chain data relating to the AUC calculation is provided by Glassnode.

Key findings

  • Among the assets explored, the PA ratio has historically been a good litmus test in uncovering whether a token is over- or under- valued, as outlined by forward returns for varying states of over- or under- valuation.
  • By the methodology, we conclude that Huobi Token (HT) is currently strongly undervalued (PA: 0.35), Binance Coin (BNB) trades closer to fair value (PA: 0.82), while OKex’s token (OKB) is strongly overvalued (PA: 2.15). No clear signal was derived for Bitfinex’s LEO.
  • Further, we explore how the PA ratio might be useful in forecasting the future “fair value” of an exchange token, based on an estimate of the future value of AUC.
  • In the Discussion section, we outline our view on the mechanism that links an exchange’s AUC value to token price and propose various possible future directions for enhancing the PA ratio’s signal.

We believe that the PA ratio approach is extensible to all assets and protocols that require AUC in order to create value, and subsequently distribute it to token holders - especially those in which the relationship between value creation and value distribution is intermediated by a protocol (e.g. DeFi lending facilities and AMM driven exchange models), rather than a firm with discretion over the distribution mechanism.

While the PA approach might miss nuances that some of the proposed extensions and alternative approaches to valuation attempt to capture, we firmly stand behind the approach because of its simplicity and generalisability.

Thanks to Charles Edwards, Dimitriy Berenzon, Joel John, Mika Honkasalo, Rafael Schultze-Kraft, Roy Learner, Ryan Youngjoon Yi and Tara Tan for their invaluable feedback and ideas.

Disclaimer: Decentral Park Advisors, LLC (‘Decentral Park’) has prepared this material for informational purposes only. This material does not constitute trading strategy or investment advice, or an offer to buy or sell, or a solicitation of any offer to buy or sell, any security or other financial instrument. Decentral Park Capital holds HT tokens. For ethical reasons, Decentral Park Capital abides by a ‘No Trade Policy’ for the assets listed in this report for 3 days (‘No Trade Period’) following its public release. No officer, director or employee shall purchase or sell any of the aforementioned assets during the No Trade Period.

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