Crypto valuation metrics – How to value crypto?
This article discusses different crypto valuation metrics, how to value crypto and crypto valuation calculation.
Crypto valuation is more complicated than comparing prices, as most knowledgeable investors are aware. The market has recently begun constructing crypto metrics like a P/E ratio for assessing the relative value of various digital assets, which presents a significant difficulty for cryptocurrency investors. Market capitalization, a traditional metric from the stock market uncomfortably fitted to a whole new instrument, was almost all investors had to rely on throughout most of this asset class’s lifetime.
New valuation methods are a must to provide crypto investors with efficient frameworks for the fundamental study of coins and tokens. With several new crypto metrics, economists have developed increasingly complex standards for crypto valuation. This article discusses different crypto valuation metrics, how to value crypto, crypto valuation calculation, and determining the value of crypto.
Crypto metrics and crypto valuation
There is a widespread fallacy claiming that there is no way to evaluate a coin in the world of cryptocurrencies. This article explains how standard market valuation measurements apply to cryptocurrency markets, some different crypto valuation metrics investors may use, and how specific crypto metrics are more effective than traditional market valuation metrics for crypto valuation.
A cryptocurrency is a digital asset or virtual money that uses encryption to protect against counterfeiting or duplicate spending. Blockchain technology, a distributed ledger maintained by a dispersed network of computers, is the foundation of many cryptocurrency-decentralized networks. The fact that any central authority does not establish cryptocurrencies makes them potentially impervious to intervention from or manipulation by governments.
Understand the valuation of the cryptocurrency
Crypto assets are an intrinsically distinct asset class from equities. Therefore traditional business valuation methods like Discounted Cash Flow (DCF) and the Dividend Discount Model (DDM) cannot be employed to value them. To provide investors with a basis for carrying out a fundamental examination of cryptocurrencies and crypto tokens, new Crypto valuation models are required.
Numerous digital asset valuation techniques and crypto metrics have arisen to provide investors with mathematical formulas to identify investment opportunities as crypto investors become increasingly savvy.
Why is it important to value crypto?
Since cryptocurrencies are unregulated, many variables, such as demand, usefulness, competition, and mining, impact their value. There are no apparent causes for cryptocurrency’s value to vary since no central organization, such as a government entity, can oversee it. The primary idea underlying the value of cryptocurrencies is that if enough people believe they are valuable, their value will increase. In the absence of regulation, demand may fluctuate, and the shifts may sometimes be drastic, depending on other elements like supply, utility, and competition.
How is crypto valuation more effective than valuing stock?
The revenue and profit of a corporation, and hence its stocks, are necessary to calculate its value. These are taken from the financial and quarterly or yearly financial statements. However, such accounting information does not exist for cryptocurrencies. What crypto metrics are available, then, and how can we do a value analysis?
Run a crypto value model by substituting:
- Fully diluted market capitalization (FDV) for the prices
- The total revenue that has been annualized instead of the general revenue
- Protocol revenue for earnings
- Total locked value for book value
Since crypto valuation is determined by data gleaned from daily payments made or overall locked value, it is much more effective than stocks.
How does crypto valuation work?
Cryptocurrency values are typically volatile, frequently setting new peaks and lows. Understanding bitcoin values will clear up any misunderstandings about their actual value.
Since no government or other centralized institution backs cryptocurrencies, they cannot be compared to the United States dollar or the Euro. There are no clear reasons for the value of a cryptocurrency to vary in the absence of a specified regulatory agency.
The core principle of cryptocurrency valuation is that its market price will rise as its significance increases. When the government doesn’t intervene, market forces like supply, usefulness, and competition can cause demand to fluctuate, sometimes considerably.
Key metrics to value crypto
We arrive at the following crypto valuation measures by substituting these crypto metrics for the stock valuation metrics as stated above:
- Price-to-sales ratio – Price to sales ratio is the total annualized revenue (revenue from the previous 30 days stated for the whole year) dividing the fully diluted market cap. The sum of users’ payments to utilize a protocol is the protocol’s revenue earned.
- Price-to-earnings ratio – Market capitalization after diluting by annualized protocol revenue is the 30-day protocol revenue stated annually. After compensating rewards to participants (such as financial intermediaries and lenders) and networking fees, protocol income is a fraction of the total revenue allocated to token holders.
- Market cap to TVL – Market capitalization is the financial worth of all the assets held within a protocol. This demonstrates how the project’s market value, represented by the market cap, is determined based on the project’s actual use case, indicated by the TVL(Total Value Locked).
- Network value to transaction ratio (NVT) – The market capitalization-based network value to transactions (NVT) ratio tracks the dollar amount of digital asset transaction activity concerning the network value. A coin or token’s market capitalization is divided by its most recent 24-hour transaction volume to get the NVT Ratio. The result is the NVT Ratio, which may be used to contrast different digital assets. As a result, the NVT Ratio is a measure of relative value.
- Realized cap – Realized capitalization, often known as a realized cap, is a subset of market capitalization that values each transaction output that has not yet been spent. The value of the last transfer is utilized as the foundation rather than its current value. Therefore, rather than representing the market worth of all the coins in the network, it reflects their realized value. The realized cap, which measures coins based on their actual existence in a chain’s economy, lessens the effect of lost and long-dormant currencies. The realized cap is raised by the same amount each time a coin previously transferred at a much lower price is used.
- MVRV – Market Value by Realized Value (MVRV), determined by splitting the market capitalization of a digital asset by its realized capitalization, is the ratio between the two. The MVRV ratio is utilized to determine whether a price is below or over the “fair value” when analyzing these crypto metrics, assisting in identifying market tops and bottoms.
Crypto valuation principles to follow
Here are a few valuable lessons for assessing and examining cryptocurrency during crypto valuation using crypto metrics:
- Use a liquidity risk discount – The sensible course is to apply a discount ranging from 0 to 90% on thinly traded cryptocurrencies owing to the low volume and high volatility – characteristics of most digital assets. Riskier cryptocurrencies get a more significant discount since you might not be able to sell them when you want to. You should be alright for the top 10 coins on CoinMarketCap, but remember fees.
- Keep the valuation model consistent – It might be difficult to compare various crypto asset classes since, for example, an NFT and an exchange token are incredibly different. As a result, you need frameworks to compare comparable items.
- Price on intrinsic value rather than short-term volatility – Cryptocurrency assets should be evaluated as long-term investments, much like traditional investments. We search for initiatives expected to dominate their industry, much like conventional value investors, and then we wait.
Methods to use in the crypto valuation
Let’s look at a few methods that investors can use for crypto valuation:
- Store of value thesis – According to the store of value hypothesis, a digital asset’s worth depends on its capacity to serve as a repository for clients’ and investors’ money. Therefore, a cryptocurrency or crypto-token should gain more value over time if its utilization as a store of value increases.
- Potential price per token = Potential total store of value/number of outstanding tokens.
- Metcalf’s law – We utilize Daily Active Address (DAA) as the number of active users and market capitalization as the network value to compute Metcalfe’s Ratio (MET) to evaluate the worth of a digital currency network. Metcalfe’s Ratio is calculated by dividing the market capitalization by the square of the Daily Active Address.
- Met = Market cap/(DAA)²
- Token velocity – The average network value and transaction volume, which are typically assessed yearly, determine token velocity. A high token velocity indicates that even while a token sees a lot of trading activity, the value of the underlying blockchain may rise at a different pace. Token velocity is measured by dividing a digital currency or token’s total volume of transactions by its annualized average network value.
- Token velocity = overall transaction volume / Average of Network value
- INET model – The Monetary Equation of Exchange (MV=PQ), often known as The Quantity Theory of Money by economists, is used by the INET model, a thorough financial model, to estimate a token’s worth. The price of tokens is further divided into two elements in the INET model. These are the Discounted Expected Utility Value (DEUV) and the Current Utility Value (CUV) (DEUV). While DEUV reflects the token’s value linked with speculative investments, CUV represents the value related to the token’s existing usefulness and usage.
- DAA – Daily Active Addresses (DAA), also known as Daily Active Users, measure how many users transact daily on a blockchain network. The DAA crypto metric, also known as DAU in this context, is often used to determine the number of users of a technology platform and may provide a wealth of information about network users. This information is complementary to Metcalfe’s law and the Network Value to Transaction (NVT) ratio in that it may be used to identify new and enduring trends.
- Stock to flow – To value rare commodities like platinum and gold, stock-to-flow models are utilized. This approach may be used with digital assets since, owing to its constrained supply, bitcoin fulfills the “scarce” criteria. Stock is a token’s current supply, such as the total amount of bitcoins created. The yearly rate of production, or the quantity of tokens mined annually, is known as flow. Stock-to-flow (S2F) is the ratio between the two. The rarity of a material increases with value.
The evaluation of the crypto market
Fourteen million Bitcoins are in use, showing cryptocurrencies and Bitcoin’s relevance. Investors who bet on this newest innovation have pushed most market value, and this trend is expected to continue until price constancy, and market acceptability are reached. Investors in cryptocurrencies tend to depend on variables other than “inherent value”. This comprises the infrastructure, system, decentralized network, and encryption code.
There is some uncertainty over the applicability of conventional valuation techniques to crypto-assets. This has worsened over the last year due to the extreme fluctuation of bitcoin prices and other cryptocurrencies. However, getting a crypto valuation is essential for accounting, taxes, and investment purposes. Due to the uncertainty surrounding the valuation process with the crypto metrics, it is a job better left to qualified professionals and valuation experts.
Why choose Eqvista for your crypto valuation?
Using crypto metrics to value cryptocurrencies presents many dangers and unknown factors. For all of your valuation needs, you can count on Eqvista. With their comprehensive knowledge of the financial sector and the cryptocurrency market, the team at Eqvista has developed reliable tools and solutions that help provide an accurate crypto valuation. Find out more about the worth of cryptocurrencies and get assistance when needed. We’ll determine a reasonable value for your crypto assets using the correct methods. Contact us to get a free consultation from an expert as soon as possible.