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FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets

An analyst explains why unbacked crypto assets are hard to value using traditional approaches. Which statement is most accurate?

Unbacked crypto assets produce no cash flows and represent no claim on assets, so standard valuation anchors like discounted cash flows or net asset value do not apply. Prices are driven by sentiment and speculation, producing high volatility.

  1. AThey generate no cash flows or claims on assets, so there is no fundamental value anchor such as discounted cash flowsCorrect
  2. BTheir value equals the cost of mining, which is fixed by regulation
  3. CTheir price is mechanically set by the central bank policy rate
  4. DThey are valued at par to the underlying fiat reserve

Explanation

Without cash flows, a reserve or an issuer's obligation, discounted cash flow or net asset value methods have no input. Prices rely on speculation and network sentiment, which contributes to high volatility. Mining cost, policy rates and par reserves do not fix the price.

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