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The Quantity Theory of Money: A Framework for Valuing Crypto Tokens

Updated: May 8, 2023

The Quantity Theory of Money is a widely accepted economic theory that relates the money supply in an economy to the price level of goods and services. It is based on the idea that there is a direct relationship between the amount of money in circulation and the level of prices in an economy. This theory can also be applied to the valuation of a crypto token.


In the case of a crypto token, the Quantity Theory of Money suggests that the value of the token is directly proportional to the amount of tokens in circulation, multiplied by the velocity of those tokens. This relationship can be expressed mathematically as follows:


MV = PQ

Where:

M = the total amount of tokens in circulation

V = the velocity of those tokens (i.e., the speed at which they are exchanged for goods and services)

P = the average price level of goods and services in the economy

Q = the total amount of goods and services exchanged for tokens


This equation suggests that if the total amount of tokens in circulation (M) increases while the velocity (V) and the total amount of goods and services exchanged for tokens (Q) remain constant, then the average price level of goods and services denominated in tokens (P) will increase. Conversely, if the total amount of tokens in circulation (M) decreases while the velocity (V) and the total amount of goods and services exchanged for tokens (Q) remain constant, then the average price level of goods and services denominated in tokens (P) will decrease.


Using the Quantity Theory of Money to value a crypto token requires a few additional considerations. First, the velocity of tokens is influenced by the level of adoption of the token within the relevant ecosystem. This adoption can be influenced by a variety of factors, including the utility of the token within a specific application or platform, the ease of use of the token, and the level of trust in the underlying technology.


Second, the total amount of goods and services exchanged for tokens (Q) can be difficult to estimate, particularly in the early stages of a token's life cycle. In many cases, the value of a token is largely speculative, based on expectations of future adoption and use cases. As a result, early-stage valuations of crypto tokens may be highly uncertain.


Despite these challenges, the Quantity Theory of Money can be a useful framework for valuing crypto tokens. By estimating the total amount of tokens in circulation and the velocity of those tokens, it is possible to make a reasonable estimate of the average price level of goods and services denominated in tokens. This estimate can then be used to value the token based on its expected level of adoption and potential use cases.


For Web3.0 startup founders, understanding the Quantity Theory of Money can be an important tool for valuing crypto tokens and making informed decisions. By considering the total amount of tokens in circulation, the velocity of those tokens, and the potential use cases for the token, founders can gain a better understanding of the underlying value of the token and its potential for long-term growth. Additionally, founders can use this framework to estimate the potential value of their own tokens and make strategic decisions about token distribution and pricing.


Overall, the Quantity Theory of Money provides a valuable tool for valuing crypto tokens and making informed investment decisions. By considering the relationship between the total amount of tokens in circulation, the velocity of those tokens, and the average price level of goods and services denominated in tokens, founders can gain a deeper understanding of the underlying value of the token and its potential for long-term growth.


How can Eton help?


At Eton Venture Services, we were founded by veteran Silicon Valley lawyers and include a team of CFAs who were trained by the Big Four. Our singular focus on valuation, lack of conflicts, and thousands of valuations under our belt, make us the valuation provider of choice for private companies, venture capital firms, and their advisors. With our extensive experience with Web3 companies and all types of crypto assets and related transactions, we can help you assess the rarity of any NFT and how that trait may affect the NFT’s fair market value through a detailed quantitative analysis of your NFT’s value. Contact Eton today.

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