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How To Value Cryptocurrency Conference Call #2, October 23rd 2017

Ari Paul
CIO, Managing Partner
BlockTower Capital

Valuation Frameworks

Cryptocurrency valuations need to be considered entirely within the context of their economic
purpose and structure. For now, nearly all cryptocurrencies fall into one of the following buckets, and
each bucket requires a unique valuation approach. The current buckets are:

1. Censorship resistant store of value digital gold or swiss bank on your phone

2. Utility token amusement park tickets or paid API keys

3. Tokenized security a cryptocurrency version of a traditional asset ownership interest

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Store of Value

Valuation Method: Addressable Market

Offshore bank accounts hold roughly $20 trillion (source: Tax Justice Network). Much of this is held
in judgement resistant trusts and complex corporate structures provided by large global banks. We
can think of offshoring wealth as a service that:
Reduces taxes paid via legal tax arbitrage
Reduces taxes paid via illegal hiding of assets
Protects high net worth individuals and large companies against asset freezes and seizures.

This last point is critical Amazon cant allow their entire global business operation to be shut down
by a single judge in one legal jurisdiction freezing all their assets.

This is a floor for the addressable market. Lower friction and reduced costs raise demand.
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Utility Tokens

Valuation Framework: Hot potatoes.

In the previous conference call, Chris Burniske presented excellent work on valuing utility tokens using the
equation of exchange (MV=PQ). Utility tokens are hot potatoes that no one wants to hold. A relatively
low token value can support a high network value if they can be transferred quickly. As velocity rises
towards infinity, token value falls towards zero. This suggests that developers must slow velocity via
methods like staking or vesting of tokens, or to have tokens be burned (aka destroyed) in the course of
network activity.

Butcryptocurrency is generally open source and networks can be forked. Users may not want to be
forced to lock capital up in utility tokens. The real answerwe dont know.

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Tokenized Security

Valuation Framework: Traditional

Any asset can be tokenized just as any asset can be securitized. For example, real estate mortgages can
be traded on a stock exchange via REITs. Exchange listing of real estate mortgages retains their economic
properties but may effect valuation at the margin via changing the liquidity profile and reducing regulatory

These same real estate mortgages can also be tokenized, with ownership recorded on a blockchain,
potentially further increasing liquidity and further reducing regulatory costs.

To value a traditional asset token, look at the underlying economic ownership and then adjust for liquidity
and regulatory effects.

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Thanks For Joining Us!

Ari Paul

CIO, Managing Partner

BlockTower Capital

@aridavidpaul on Twitter