[Web3] BAT Series #4: What is The Fair Value of BAT Tokens?

October 7, 2023
Disclaimer: This post is for informational purposes only, and the author is not liable for the consequences arising from any investment or legal decision based on the information contained in this post. Nothing contained in this post suggests or recommends investing in any particular asset. Making any decisions based only on the information or content of this post is NOT advised.

This article is part 4 of the BAT series. If you would like to read other parts, please check the links below. Since the articles are related to one another, we recommend that you read them sequentially from the beginning

Part 1: Introducing the Brave Browser for Privacy Protection

Part 2: The War Between Browsers, Will the Brave Browser Overtake Chrome?

Part 3: Brave Browser Valuation — Comparison with Opera/Firefox

Part 4: What is the Fair Value of BAT Tokens?


1) The value of BAT tokens and the value of Brave, the company operating the Brave browser, are distinct. BAT serves as the token used within the Brave browser ecosystem, while Brave itself is the entity responsible for managing and developing the Brave browser.

2) The valuation of BAT is explored using economic models such as Fisher’s Equation of Exchange and Friedman’s Modern Quantity Theory of Money. While an exact valuation is challenging, the article aims to derive some understanding of the token’s value.

3) The intrinsic value of BAT is estimated to be significantly lower than its current market price of $0.25. The limited revenue generated by the browser contributes to a relatively low distribution of BAT. Additionally, the absence of measures to regulate the token’s distribution may not align with the growth of Brave as a company or the token itself.

In part 3, we estimated the value of Brave at around $500 million. The current market capitalization of BAT is about $400 million. Does this mean that BAT tokens are currently undervalued?

Brave Stocks and Bat Are Different

Understanding the relationship between Brave Software and BAT is crucial when assessing the value of BAT. Brave Software is the developer and operator of the Brave browser, while BAT is the token used on the browser. Unlike other cryptocurrencies, BAT does not grant holders any governance voting rights. Instead, it functions solely as tokens on the Brave browser. While other cryptocurrencies may distribute profits to token holders, either by incinerating tokens or through treasuries, Brave Software does not offer any such rewards to BAT holders. Even if sales are generated on the Brave browser, BAT holders do not receive any share of the profits. Instead, 70% of Brave’s ad sales are paid to users who viewed the ad, while the remaining 30% goes to Brave Software. While Brave’s success may positively impact the usage and value of BAT, the token’s worth does not directly reflect the financial success of Brave Software.

How Can We Evaluate the “Value of Money?”

How can we assess the value of BAT, which only functions as tokens on the Brave browser? Since BAT does not have the characteristics of a stock, conventional stock valuation models cannot be used. BAT holders do not have decision-making power within the Brave browser nor receive any dividends. Burning BAT is also not currently being considered. Given these monetary characteristics, how can we evaluate the value of BAT tokens?

One way to estimate the value of a fiat token is to use Irving Fisher’s Equation of Exchange. Token valuation using Fisher’s Equation of Exchange has often been discussed in the past when tokens had only the characteristics of money. Vitalik also presented a valuation model based on the Equation of exchange, and Kyle Samani of Multicoin Capital also wrote an article on token velocity, one of the variables of the Equation of Exchange. However, the limitations of this model are apparent. As most crypto assets now grant voting rights for governance, the discussion on the Equation of Exchange has significantly reduced compared to earlier times.

Nevertheless, there is likely not yet a better model for understanding the value of fiat tokens than the Equation of Exchange. Hence, in this article, even though achieving a definitive and precise valuation is unattainable, our aim is to approximate the value of BAT using the Equation of Exchange and interpret its meaning.

Fisher’s Equation of Exchange

(Irving Fisher is one of the founders of econometrics. He is famous for his economic results but also for his remarks before the Great Depression in 1929 that “Stock prices have reached what looks like a permanently high plateau.” | Source: Wikipedia)

Fisher’s Equation of Exchange, which is the fundamental equation of the quantity theory of money in economics, can be expressed as MV=PY. The quantity theory of money postulates that the price level is directly proportional to the quantity of money in circulation. For instance, according to the quantity theory of money, the price level will also double if the money supply doubles. In the equation utilized here, MV=PY, M represents the quantity of money, V represents the velocity of money circulation, P represents the price of goods, and Y represents the quantity of goods produced.

  • Monetary Quantity M: the amount of all money in circulation. More specifically, depending on the characteristics of the currency, it can be divided into narrow money M1 (cash + demand deposit) and broad money M2 (M1 + savings deposit). The amount of crypto assets circulating in the market can be thought of as a form of currency, particularly as credit expansion is not yet a significant factor in the crypto market.
  • The velocity of money circulation V: an indicator showing how much money is circulated annually. For example, if a particular currency is in circulation three times a year on average, that currency’s circulation velocity is three.
  • The price of an object P: refers to the amount of money required to purchase an object, and is typically used in reference to goods or services traded within a particular economic system.
  • Yield Y: refers to the amount of goods or services produced within the economic system covered by P over one year.

The equation MV=PY describes the relationship between the money supply, velocity of money circulation, and the production of goods and services within an economy. PY on the right side represents the GDP, calculated as the price of goods times the quantity produced. MV on the left side refers to the amount of money in circulation and how frequently it’s traded. If GDP is $10 million and currency in circulation is $2 million, the velocity is 5.

Applying the Exchange Equation to Fiat Tokens

Consider how the value of the token can be calculated through Fisher’s Equation. What values should be substituted for each variable in the equation MV = PY?

  • Currency quantity M: is the issuance quantity of tokens. The current token issuance volume and future token issuance plans are recorded on the blockchain so that they can be easily found. Since most blockchain projects are likely to have higher future sales than current sales, it is sufficient to estimate the expected future currency volume and reflect it in the currency quantity M. Importantly, locked-up tokens cannot be actually circulated, so they should be excluded from the estimation of the currency supply.
  • The velocity of money circulation V: This is the most difficult part, and it is also the limitation of the exchange equation. V contains some degree of randomness. The speed of money circulation refers to the rate at which money changes hands. When the value of money becomes less stable, its usefulness diminishes as a store of value, causing the circulation speed to increase. For instance, in places like Venezuela, where inflation is high, people tend to spend the currency they receive as soon as possible.
  • Similarly, most fiat currencies are less stable than the US dollar, so their velocity of circulation tends to be faster. Over the last four decades, the velocity of circulation of M1, which is a measure of the money supply that includes cash and checking deposits, has fluctuated between 5 and 10 for the US dollar. Assuming that the velocity of circulation of tokens is higher than that of the US dollar, we estimate it to be between 10 and
(Velocity of circulation of US dollar M1. Moving between 5 and 7 | Source: FRED)
  • PY representing GDP: In the context of a blockchain service, PY represents the GDP for the portion of economic activity that is transacted using a specific token. For instance, 70% of advertising sales in the Brave browser are conducted through tokens, which can be counted towards the browser’s GDP. If the total annual compensation for advertising to customers is $10 million, then the PY for this activity would also be $10 million.

BAT Valuation Using Fisher’s Equation

Similarly, we can use the exchange equation to estimate the value of BAT tokens. The market price is around $0.25 per token. Is this reasonable? While it’s difficult to determine a precise valuation, we can use Fisher’s equation can gain insight and interpret its implications.

  • Monetary volume M: The total amount of BAT tokens issued is 1.5 billion. During the initial coin offering (ICO), Brave released 1 billion of the 1.5 billion BAT into the market, with 200 million going to BAT Development Pool and 300 million to the User Growth Pool. Based on the analysis of BAT wallets on Etherscan, most of the BAT held by Brave has been distributed into the market. Thus, we consider the total quantity of money M to be 1.5 billion tokens.
(Top 10 BAT addresses. The wallet address presumed to be owned by Brave is not visible. | Source: EtherScan)
  • Currency circulation velocity V: Brave does not employ any specific measures to regulate the distribution velocity of BAT, such as staking. As a result, the velocity of circulation for BAT is likely to be approximately 10 to 20 times faster than that of the US dollar. However, it is challenging to establish a clear basis for predicting the circulation speed of BAT due to the need for more available data. The process of the foundation purchasing BAT and distributing it to users occurs off-chain, and the on-chain distribution speed data does not accurately reflect the actual distribution speed. Additionally, it is difficult to anticipate whether users who receive BAT tokens will hold onto them or sell them immediately upon receiving their compensation.
  • PY representing GDP: As we learned in part 3 of the series, the Brave browser is projected to capture 55% of Firefox users within five years, resulting in an estimated 114 million monthly active users (MAUs). Under the assumption that 20% of these users leverage Brave’s proprietary search engine, which operates twice as efficiently as Firefox’s, we can estimate that the sales generated by the Brave browser in 5 years will be $170 million, calculated as follows: Firefox’s sales of $780 million * 55% * 20% * 2 = $170 million. Assuming that 70% of the revenue (excluding the 30% attributed to Brave) is distributed via tokens on the Brave browser, the GDP will be $120 million, which is 70% of $170 million.
  • Of course, the monetary value of future sales is realized at that time arrives, so the discount rate associated with the risky asset must be applied to convert it to its present value. However, this component will not heavily affect the valuation at this stage. Therefore, let’s temporarily exclude it and proceed with the calculation.

The $120 million of Brave Browser’s GDP is based on a distribution velocity of 10 to 20 of 1.5 billion BAT. In this case, the price of BAT is estimated to be $120 million / $1.5 million / (10 to 20) = $0.004 to $0.008. In other words, when calculating the estimated value of BAT using the exchange equation, it indicates that the actual value of BAT is significantly overpriced.

The Value of BAT as Seen by Friedman’s Modern Quantity Theory of Money

(Milton Friedman is a representative neoliberal economist and the founder of monetarism. | Source: famouseconomists.net)

Fisher’s quantity theory of money, which was used earlier, is based on the notion that money is utilized solely as a medium of exchange. However, in actuality, money serves not only as a medium of exchange but also as a store of value. In contrast, Friedman contended that money demand ought to be regarded as an asset selection rather than an implicit response to changes in money supply, thus promoting the modern quantity theory of money.

Depending on the characteristics of money, the quantity theory of money or the modern quantity theory of money may be more appropriate. Which theory will be more useful to explain to BAT? Unlike the KRW currency, which is mostly used as a medium of exchange, BAT has Brave, a company that manages BAT, which can increase the use of BAT or add BAT features. Because of this possibility, BAT is more likely to be used together for investment purposes rather than simply as a medium of exchange. Therefore, BAT may better follow the assumptions of the modern quantity theory than the quantity theory of money.

If BAT follows modern quantity theory, the expected circulation velocity of BAT could be lower than the circulation velocity of US$ 5–7. If the velocity of BAT is 2–3, half of the velocity of the USD, the estimated value of BAT would be $0.027-$0.040. This is higher than the price of BAT as estimated via Fisher’s Equation but still much lower than the current price. Investors either seem to be confused between the values of Brave and BAT or invest in BAT with the expectation that BAT will be used for governance in the future.

Why Is the Value of BAT So Underestimated?

Compared to the current price of BAT of $0.25, why is the value of BAT estimated to be as low as $0.004-$0.008 to $0.027-$0.040? There are three primary reasons:

1. To begin with, the browser industry is not typically known for generating substantial revenue. According to Fisher’s Equation, a currency’s GDP or sales must be high to achieve a high valuation. However, when comparing market capitalization and sales, the browser industry has a relatively larger market capitalization than sales. Businesses with higher sales, such as distribution businesses, can gain a significant advantage when certain cryptographic assets are valued as currency. While it is not a perfect analogy, if a company like Emart, a Korean supermarket conglomerate with significant sales volume, were to issue a cryptocurrency and conduct transactions using it, the value of the cryptocurrency would be expected to be substantial. The above BAT valuations did not factor into a creator ecosystem. Once the creator ecosystem on Brave browser is activated and individual transactions are active, the value of BAT may increase.

(Emart financials. Compared to expected sales of 29 trillion KRW in 2022, Emart’s market cap is only 2.8 trillion KRW. | Source: Naver Finance)

2. Brave has not implemented any policies to impede the distribution velocity of BAT. Decreasing the distribution rate confers specific advantages to BAT holders. Typically, blockchain companies implement various strategies, such as staking, burning, or offering additional benefits to incentivize holding their tokens. There are currently no benefits to holding BAT, so users are likely to sell their BAT once the accumulated BAT reward surpasses a particular threshold.

3. There may not be a direct correlation between the growth of Brave and the growth of BAT. BAT was created primarily to serve as a token on the Brave browser, and Brave’s profits are not directly linked to BAT. As a result, Brave has no compelling reason to implement policies aimed at increasing the value of BAT. Brave could adopt policies aimed at reducing the value of BAT to benefit itself. For instance, if the current 70% share of advertising revenue is deemed excessive, and the revenue share is lowered to 60% or 50%, the revenue earned by Brave would increase. Still, the amount of circulating BAT on the Brave browser would decrease, leading to a drop in the price of BAT.

Concluding the BAT Series

Throughout the four parts of the series, we have examined the various features and benefits of the Brave browser, the market strategies utilized to gain market share by different browsers, the Brave browser’s value, and the BAT token’s value. Undoubtedly, Brave browser holds a competitive advantage in terms of safeguarding personal data compared to other browsers and offers users a unique opportunity to earn money while browsing the Internet. However, as BAT is solely used as a token within the Brave browser, it is inevitably evaluated at a significantly lower value than the Brave browser.

The rationale behind Brave browser’s use of crypto assets is apparent. Using conventional payment systems would enable identifying individuals visiting the site, leaving user data vulnerable to tracking and exploitation. Brave acknowledges the significance of cryptographic assets in preserving “privacy” and “security.” Nevertheless, observing Brave’s declining growth rate over time has led me to believe that privacy is no longer a priority for many individuals. The immediacy of convenience appears to outweigh the need to protect one’s privacy.

Undoubtedly, the BAT reward model is innovative. The concept of earning money while using a browser that is already free is a fresh approach. Nonetheless, this model is not commonly adopted among internet users because it adds an additional hurdle of learning how to comprehend and monetize a new token called BAT. If Naver Pay points were issued instead of BAT tokens, it could attract millions of Korean customers. While the BAT token is advantageous for privacy, it can have a detrimental impact on the user experience.

We estimate the valuation of BAT as lower than its actual current price, but it is evident that Brave is establishing a usage case for blockchain technology. This is a noteworthy achievement in terms of providing a clear answer to the question of “Why Blockchain?” and I highly commend the direction that Brave is taking.

- All for Web Ecosystem

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