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Devin LaSarre's avatar

A few thoughts:

""Discount rate" is a financial term for the rate that investors expect to receive from an investment, or the company’s cost to borrow money."

Borrow costs would be pre-tax and after-tax cost of debt. This gets factored into WACC if you're discounting at the enterprise level. If you're discounting equity, you're going to use CoE. Of course, you can use a hurdle rate as your discount rate, which would be the required return.

"Discount rates and Belief Rates are inversely related: higher interest rates, lower belief in the future. As far as I know, there’s no formula that ties the two, but you can feel it in the sentiment shift ever since the Fed started raising rates."

'Belief Rate' can be factored in to the discount rate as a synthetic additive to the CoE beyond beta. Higher uncertainty (lower belief) can simply be expressed as a higher discount rate.

"ETH, and crypto more broadly, is even more sensitive to discount rates than the Nasdaq because its future value is so far out and speculative. "

Anything with a higher discount rate is going to be more greatly affected the further you discount. However, I'd very much argue ETH and crypto broadly are more sensitive almost entirely because of how speculative they are. When assessing, say, an equity that is 100% US-based, in USD, there is no country equity risk premium (CERP) or additional default spread (DS) to weigh into the CoE. When calculating the discount rate for say, a junior minor that primarily operates in certain African countries that are experiencing political unrest and unstable currencies, you'd certainly factor those considerations. Crypto is no different.

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Ray Mc's avatar

A very interesting article Packy. I suggest Belief = Trust (definitionally trust is a 'firm belief in the reliability, truth, or ability of someone or something') so if it's possible to measure the latter at micro and macro levels that would be a valuable input to the DCF model

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