Venture capitalism isn’t just about evaluating startups anymore. With the ever-turbulent crypto market, the same tools used by venture capitalists can be leveraged by the common investor to understand, predict, and profit from crypto projects’ price trends.
Let’s dive into the world of cryptocurrency, where volatility meets opportunity, and uncover how you can stay ahead of the curve. Buckle up and join us as we navigate through the thrilling investment waters of crypto protocols.
Quantitative Indicators
Quantitative indicators are measurable data points used to gauge the performance or trends of an asset. These indicators may include transaction volumes, hash rates, the number of active wallets, and of course, the price. These numerical values provide concrete, objective information about the market and can help investors identify patterns, anticipate potential price movements, and make informed decisions.
For instance, a sudden increase in transaction volumes could signify an impending price change. By continually monitoring these indicators, investors can stay attuned to the pulse of a protocol’s market.
Amount of Users
The number of users or user count is a reliable qualitative indicator of a crypto project’s potential and overall health. A robust user base signifies a higher degree of market adoption and indicates that the project’s offerings resonate with the audience, both crucial factors for a project’s sustainability.
It’s similar to how the BTC price is influenced by its buyers’ volume. In the world of cryptocurrency, where volatility is the norm, a growing user count can represent stability and trust. Moreover, user count can also hint at the network’s potential growth, following Metcalfe’s law, which states that the value of a network is proportional to the square of the number of its users.
Total Value Locked (TVL)
Total Value Locked (TVL) is a useful metric to measure the usage and product-market fit of a particular protocol in decentralized finance (DeFi). TVL represents the total monetary value of all tokens held in the protocol. A high TVL indicates that users have a high degree of trust in the protocol and its security.
However, while TVL can give a good snapshot of a project’s current state, it shouldn’t be the only metric used for evaluation. This is especially true in the context of fluctuating BTC prices, which can impact the dollar value of the TVL. It’s also worth noting that not all TVLs are created equal.
For instance, a protocol with a large amount of its own token locked up should be scrutinized more than a protocol with a diversified TVL.
Price/Sales (P/S)
The Price/Sales (P/S) ratio is another crucial quantitative indicator to consider. This ratio is calculated by dividing the market capitalization of a coin by the revenue it generates over a specific period. It provides a relative valuation metric, helping to compare different cryptocurrencies.
For instance, a lower P/S ratio could indicate undervaluation, while a higher P/S ratio might suggest overvaluation. However, you should use this ratio in conjunction with other metrics. Additionally, take the specific context into account.
Price/Fees (P/F)
The Price/Fees (P/F) ratio is another essential metric to evaluate a project’s economic health. It is calculated by dividing the fully diluted market cap by the annualized fees generated by that company. This ratio contrasts the project’s market price with the fees it generates. It’s a crucial index of the project’s capability to generate sustainable revenue.
A low P/F ratio might suggest that the project is undervalued relative to the revenue it’s generating, whereas a high P/F ratio could indicate overvaluation. This ratio is especially significant when comparing projects within the same industry. For instance, comparing the P/F ratio of a DeFi project with another DeFi initiative can offer insights into relative value.
Discounted Cash Flow
This method is used to estimate the value of an investment based on its future cash flows. The future cash flows are predicted and then discounted back to the present value, hence the term discounted cash flow.
This approach is particularly applicable for projects with predictable future income and can provide insight into the long-term financial viability of a project. However, given the high volatility and unpredictability of cash flows in the blockchain sector, the DCF should be used with caution.
This valuation method is used in TradFi. But it isn’t common in DeFi. With the increasing sophistication of DeFi investing, it’ll be more common.
Fully Diluted Valuation/TVL
FDV to TVL (FDV/TVL) is another important metric for assessing the value of a protocol. This ratio compares the protocol’s total market value if all tokens were in circulation (FDV) to the total value of tokens in the protocol (TVL). A lower FDV/TVL ratio can imply undervaluation given the amount of value it secures. However, it’s crucial to consider the inherent risks and volatility associated with the crypto market.