With the rise of crypto tokens as a new asset class, the question of the fair evaluation of a cryptocurrency token has become a question of increasing importance.
Thus investors desire timely, open information about how fair value is measured, its impact on current financial statements, and its potential to impact future periods. The current trend of the financial world has been set in crypto, thus growing the importance of understanding such values in the industry.
So, what is fair market value in crypto, and how do you calculate it?
What is Fair Value
Fair market value (FMV) is the price a product would sell for on the open market assuming that both buyer and seller are reasonably knowledgeable about the asset, are behaving in their own best interests, are free of undue pressure, and are given a reasonable time period for completing the transaction.
Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth.
You can assess rather than calculate fair market value in a few different ways. First, by the price the item cost the seller, via a list of sales for objects similar to the asset being sold, or an expert's opinion.
For example, a diamond appraiser would likely be able to identify and calculate a diamond ring based on their experience.
In Crypto, the fair market value of a crypto asset would be the price to sell crypto in a transaction between market participants at the date and time, which are determined by current quoted prices observable on a spot exchanges platform that handle crypto trading.
How do you Calculate Fair Value?
When it comes to digital currencies, there have been several methods to approach valuation. Most of these approaches differ in how one views the nature of a digital "coin."
Expected-Value Based
For instance, if one views crypto as equivalent to stocks or bonds, pricing models appraise its expected value. Expected value is the discounted value attributed to an investment's payoff in the future.
Since crypto does not pay dividends or interest, the expected value would be due to a strong belief in the underlying technology and its potential to be disruptive or even revolutionary.
Supply and Demand-Based
We can can alternatively approach crypto using the principles of supply and demand. Like any other market, the market for any coin achieves price discovery through the interactions of a multitude of buyers and sellers.
If there is a high demand that outpaces the number of new bitcoins that are mined, this pushes up the fair price for crypto.
How is it Important in crypto?
It provides information about what an entity might realize if it sold an asset or might pay to transfer a liability.
Final Thoughts
The value of crypto tokens is always changing, based on the demand for the cryptocurrency as well as the public perception of how much the coin itself is worth.
Even if we can spot fair value, investing in cryptocurrency remains one of the most volatile investments, meaning, any potential investors must do their due diligence.
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