A note on the fundamental value of $LEO

In my recent pulse ([https://www.bitfinex.com/pulse/post/a75e17d9-8a36-4d2c-b183-59ebd46fe594](https://www.bitfinex.com/pulse/post/a75e17d9-8a36-4d2c-b183-59ebd46fe594)) I developed a link between the prices of RRT and LEO and concluded that the chance to recover the stolen BTC from the 2016 hack explains around $0.075 of the LEO price. At the current price of $1.22 this leaves $1.145 unexplained. This post aims at closing the gap. An important aspect of LEO value is its buyback characteristic: 27% of all revenues of Bitfinex are used to constantly buy LEO on the open market. To estimate how much this is worth per token, we can compare it to the price of Bitfinex shares, which are currently traded at around $3.50 on Bnktothefuture (last trade at $3.13, second to last trade at $3.75, highest bid at $3.25, lowest ask at $4.5). With around 175 million shares outstanding, this amounts to a valuation of the company of 612.5 million, which reflects the value of 73% of its revenue minus the costs of operation. If we assume costs to be $20 million per year and use a multiplier of x10 (equaling a discounting factor of 0.1), this yields a valuation of $812.5 million for 73% of the revenues. The remaining 27% devoted to LEO holders are then worth $300.5 million (and 100% of the revenue stream being worth $1.113 billion). With 978.9 million LEO token outstanding, this translates into $0.333 per token. Taken together with the $0.075 of the hack recovery value this explains $0.408 or 33.4% of the LEO price. LEO Tokens also provide some benefits to its holders, especially a reduction in fees. This feature is very idiosyncratic in its value to LEO holders: It is very valuable to high frequency traders with lots of trading volume but makes not much of a difference to someone with a buy&hold strategy. So let us assume that it only brings value to those with large trading volumes – and at the same time assume that these customers make up for 80% of the total fees paid. If they, on average, save 20% in fees, that would man that the utility aspect of lowered fees is worth 16% of the fee income/revenue stream. This translates into a value of $178 million for LEO holders and thus explains $0.182 of the LEO token price. Together with the other aspects we now explain $0.59 or 48.3% of the LEO price leaving open $0.63 or 51.7%. If LEO is priced correctly, the remaining gap must be explained by the expected value of the use of 80% (net of costs) of recovered frozen funds held via Crypto Capital for buying back LEO tokens within a period of 18 months. Following the same logic as with the effect of a recovery of funds from the 2016 hack (see my last post linked above) we can value such an event at $3 per LEO token (meaning that the recovery causes the price to go up by $3). With only $0.63 of the token price left to explain, this means that the market gives an implicit probability of the recovery of such funds of 21% ($0.63/$3). Twisting this logic, we could say that someone estimating the probability of recovery at 50% (=$1.50) should value LEO at $2.09, rendering LEO a clear buy. Obviously, these numbers depend on a couple of assumptions, mainly: - A recovery of either hacked funds or CC funds each leading to a boost of LEO of +$3 (this number comes somewhat out of thin air and also the funds at Crypto Capital are worth less than the value of the stolen BTC) - Recovery is analyzed as a binary event (yes/no) and neglects partial recoveries - Bitfinex equity is fairly priced at $3.50, although the market is very illiquid - The fee rebate value of LEO is worth 16% of the revenue stream This post is much more about the thought process than about the actual result. The reader is thus encouraged to change these assumptions based on his own estimates to come up with different results.