Gate.io ブログ In-Depth Research: The Value of Platform Tokens

In-Depth Research: The Value of Platform Tokens

18 June 11:12

Abstract: Platform tokens are special cryptocurrencies. Compared to other cryptocurrencies, the price of platform tokens is closely related to the exchange. In many ways its price can be likened to a stock issued by an exchange. A pricing model can be developed to evaluate the intrinsic value of platform tokens based on pricing models used in the stock market. With the help of this model, the gap between the market value of platform tokens and the intrinsic value can be analyzed to determine whether the platform tokens are overvalued.

Keywords: platform token, cryptocurrency pricing model, price bubble

Preface
It has been hotly debated whether there is long-term investment value in cryptocurrencies. The source of this question lies in the fact that there is no consensus on whether cryptocurrencies have intrinsic value or not. In the traditional financial investment world, the value of an investment can be divided into market price and intrinsic value. Market value, as the name suggests, is the price performance of that investment in the market and is often influenced by investor sentiment and market fluctuations. Intrinsic value, on the other hand, is also known as the true value of an investment and is the present discounted value of the cash return that the investment brings to the investor. This return is not affected by market trends. For example, the intrinsic value of a stock is derived from the discounted value of the stock's future dividends, which in turn are derived from the net profit of the issuing company. Therefore, the intrinsic value of a stock can be equal to the future profitability of the issuing company.

Generally speaking, the change of the market price determines whether an investment has short-term investment value, while the growth rate of the intrinsic value determines whether an investment is worthy. Back to cryptocurrencies, since most cryptocurrency issuers do not have actual business models where they are immediately generating income, some traditional financial analysts do not recognize the intrinsic value of cryptocurrencies and fundamentally deny the investment value of cryptocurrencies exists. However, there are special tokens in the crypto coin market that are very close to stocks in terms of investment attributes and market performance. These tokens have intrinsic value even under the most stringent criteria. They are the platform tokens issued by exchanges.

Tokens and Stocks

The intrinsic value of the exchange platform tokens comes from two aspects: First, the exchange promises to buy back and burn some of the platform tokens with its own revenue or profit on a regular basis. In the process of recycling the platform tokens, the platform token price is directly linked to the exchange's profit. This process is extremely similar to the dividend distributing process of stocks. Secondly, the exchange platform tokens are mainly used for intra-platform trading. When the supply of platform tokens decreases together with high levels of trading volume and platform tokens being held for a long time, the price of the platform tokens will often increase. In this process, the price of platform tokens is also deeply bound to the exchange's operation status. In a nutshell, the price of platform tokens is highly correlated with the operation status of the exchange. People can also share the profits of the exchange through buybacks used on the platform. Thus, platform tokens can almost be regarded as the stocks of the exchange.

After clarifying that platform tokens can function similar to stocks, the intrinsic value of platform tokens can be analyzed by referring to the DCF model.

Stock valuation model:
The discounted cash flow model is chosen for evaluating stock price. The stock pricing model best meets the meaning of the intrinsic value of stocks, and determines the price of a company's stock by calculating the dividends earned.

The Evaluation Model of Platform Tokens

We can apply the discounted cash flow model in the pricing of platform tokens. Their present value can be calculated by the purchase cost of the exchange as well as what brought by the appreciation effect in the trading volume. This is because cryptocurrency exchanges get their main revenue from fees, which in turn increase with the volume of transactions. Therefore, the exchange trading volume will be the most important determining factor of the intrinsic value of platform tokens. Before deriving the platform token pricing model, the following assumptions are made about the behavior of exchanges.

First, the exchange fee revenue is a positive function that is proportional to its own platform trading volume.
Platform revenue = alpha*trading volume
The alpha here refers to the exchange's average fee rate.

Second, the exchange will take out a fixed percentage of revenue or profit to repurchase and burn the platform tokens. The money used to buy back platform tokens is a positive function proportional to the exchange's revenue or profit.
Repurchase funds = beta*exchange revenue or profit

Third, the impact of platform trading volume increase on the price of platform tokens is also linear and a positive proportional function.
Increase in trading value = rho*trading volume

Based on the above assumptions, the future appreciation of the intrinsic value pair of platform tokens in each period can be expressed as:

Platform token appreciation = (alpha * beta + rho) * trading volume

Since alpha, beta and rho are all constants, the coefficient in front of the trading volume can be simplified to:

delta = alpha * beta + rho

In this way, the intrinsic value pricing model of platform tokens can be expressed by the following equation:

Equation 1

In the above equation, “V” represents the trading volume per exchange period and “r” represents the risk-free rate.

As with the stock intrinsic value model, it is difficult to price the platform token directly from this model because the future trading volume is difficult to predict. However, the model can be used to test the degree of deviation between the intrinsic value of the platform token and the market price.

Testing Method of Platform Token Price Bubble

Based on the above pricing model, the historical price and historical trading volume of platform tokens can be used to analyze the gap between the current intrinsic value of platform tokens and the platform token market on each exchange. It is possible to analyze whether the market price of platform tokens on different exchanges is overvalued or undervalued.

We can establish a linear regression equation. The historical market price of platform tokens can be the explanatory variable and the exchange trading volume can be the explanatory variable:

Equation 2

Market Price represents that of the platform token, “a” represents the inherent value of the platform token, which does not change over time. “Volume” represents the cryptocurrency trading volume on the exchange where the platform token is issued, calculated in terms of trading volume. “ε” represents the gap between the intrinsic value and market value of the platform token.

The regression results of this linear equation can be used to analyze the gap between the market price and intrinsic value of platform tokens. The higher the accuracy of this linear equation to explain the market price, the closer the market price and intrinsic price of platform tokens are. The lower the accuracy of this linear equation to explain the market price, the larger the gap between the market and intrinsic price of platform tokens is.

Components of platform token price

Source: Plotted by the author

The market price of platform tokens is influenced by both intrinsic value and investment behavior. The price disruption of platform tokens by investment behaviors can be clearly divided into two types. The first type is investment during market volatility. Such an investment is influenced mainly by market price fluctuations, especially those of Bitcoin. The second type is investments based on investors’ overall judgment of the price trend of platform tokens. With such investment strategies, the platform token price can be underestimated or overestimated.

Therefore, to test whether the platform token price is undervalued or overvalued, it is necessary to exclude the part of the platform token price that is subject to market fluctuations, and then test the correlation between the remaining parts and the intrinsic value. Based on the above analysis, the equation can be extended to a set of test equations.

Equation 3

“ε” represents the portion of the platform token market price after removing the market quotes (in terms of Bitcoin price). The second equation uses the absolute value of ε as the explanatory variable and the trading volume of the platform issuer as the explanatory variable. With the above set of equations, the gap between the market price of platform tokens and intrinsic value can be calculated more accurately, and the bubble of platform token prices can be analyzed. “u” represents the impact of the second type of investment on platform token price.

*The data of platform token and exchange trading volume used in this paper are obtained from CoinMarketCap. CoinMarketCap calculates the exchange trading volume every 24 hours by calculating the trading volume of publicly traded pairs on cryptocurrency exchanges.

Test Result of the Price Bubble in Platform Tokens

Using the model described above, the prices of platform tokens from several well-known exchanges were examined in this paper. The platform tokens selected were BNB from Binance, HT from Huobi, OKB from Euronext and GT from Gate.io.

The test results of BNB are as follows.

Result 1

The above figure gives the estimation of results from the second of the equations. To observe the explanatory power of the equation, the gap between the intrinsic value and the market price of the token, we need to observe the Adjusted R-squared parameter in the fitting results. The higher the Adjusted R-squared value is, the closer the intrinsic value and the market value of the platform tokens are.

The results of the HT test are as follows:

Result 2

The results of the test for OKB are as follows:

Result 3

The results of the test for GT are the follows:

Result 4

According to the test results, the deviation of the market price from intrinsic value of platform tokens is as follows:

BNB<GT<HT<OKB

Among them, the intrinsic value of BNB is closest to the market price, which has more than 50% of the intrinsic value as the basis. GT of Gate.io follows, which has nearly 25% of the intrinsic value as support for the market price. In contrast, the market price of OKB has only 8% of the intrinsic value.

The above results can be used to analyze the gap between the market price and intrinsic value of platform tokens, but it is impossible to analyze how the gap develops. Basically, it is impossible to analyze whether the market price of platform tokens is lower or higher than the intrinsic value, and whether there is an overvaluation or an undervaluation in the platform token price. The direction of the gap between the market price of platform tokens and the intrinsic value can be analyzed with the time-varying graph of the dual residual equation.

GT, BNB, HT and OKB market prices are plotted in order against the intrinsic value over time.

The pictures above show the gap between the price of platform tokens and the intrinsic value. The difference between platform token market value and intrinsic value generally shows that the market price is higher than the intrinsic value. However, one cannot claim that there is a bubble in all platform token prices by virtue of this one result. Investor sentiment also has a very strong influence on the price of platform tokens. If investors hold a large number of platform tokens and believe that the platform tokens will grow in the future, it will also make the platform token price higher than the current intrinsic value.

In the case of BNB, for example, much of the BNB market premium may come from the popularity of the binance smart chain and the increase in on-chain applications. During the DeFi boom, investors will have had more expectations for the future development of BNB because of the popularity of BSC. Even with BSC, the gap between BNB market price and intrinsic value is minimal. And OKEx, which has not yet officially launched on OKB Chain, has the largest gap between its platform token OKB’s market price and its intrinsic value. Considering the graph, the market price of OKB is seriously deviating from its intrinsic value.

Conclusion
When taking the characteristics of stocks that are also found in platform tokens into consideration, an intrinsic value pricing model of the platform tokens can be developed. With this model, the gap between the market price and the intrinsic value of platform tokens is analyzed. The final results of the study found that the price of some platform tokens is much higher than their intrinsic value, and the premium is far above the normal market level. This premium bubble may burst in the future, causing platform token prices to dive. The market price and intrinsic value of BNB and GT are close, and both market prices are supported by a relatively solid intrinsic value. From the current test results, GT and BNB have less bubbles in their prices and show more value for stable investment.

In future research, the author will continue to analyze the causes of price bubbles in platform tokens and use mathematical models to verify the impact of repurchase by the exchanges on platform token prices.

Author: Charles F
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

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