When a valuation of a company is made, it is done by modelling future cash flows and discounting them to the present-day value in a discounted cash flow model. Fundamentally, this relies on the estimates of future cash flows to accurately determine what the current valuation for a company should be. All sorts of assumptions need to be made to accurately determine this competition in the marketplace — future demand for the product or service, and technological innovations all among them.

Another factor that has to be accounted for is monetary policy, which is something we’ve seen largely increase the value of equities as a result of looser monetary policy, cheap debt and pulling back future cash flows. So even though a discounted cash flow model is severely flawed, it can give us a starting point through which to value a company because there are fiat cash flows associated with it.

Looking at this through the lens of bitcoin, it has no fiat cash flows, so trying to determine a fiat valuation the same way we do for a company is entirely flawed. A better way to understand it is looking at it through the lens of “What problem does this solve?” Not only does this eliminate the issues presented earlier in the discounted cash flow model, but it also gives a relative framework through which to evaluate it relative to other assets.

One of the questions you should ask when evaluating any product is functionally, “What problem does it solve?” That’s the first question you should ask when evaluating a product; but functionally this is more important when evaluating an asset.

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