How to Value a Cryptocurrency
With double and sometimes triple digit gains and losses within a day, determining the actual (true) value of a cryptocurrency is an important calculation for any cryptocurrency investor.
If you are investing in cryptocurrency, having the ability to compare its current market (trading) value to it’s intrinsic value is an important measure in determining when to buy in (undervalued) or sell in (overvalued) markets.
However at first glance calculating the intrinsic value may seem complicated, highly subjective and a time consuming task.
Yet, it doesn’t have to be.
At the conclusion of this article I offer a simple, Quick and Dirty Method to calculate the intrinsic value for actively traded cryptocurrencies.
But first, let’s take a look at what intrinsic value really means and why it is seen as such a complicated and subjective value to determine.
What is Intrinsic Value?
Lets unpack what we mean by Intrinsic Value
In finance, intrinsic value refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its marketvalue. It is also frequently called fundamental value. — Wikipedia
In cryptocurrency the Intrinsic value can be defined as the actual value of the cryptocurrency based on an underlying perception of its true value which includes all aspects of the business; both tangible and intangible factors.
This would include such factors as market demand for the product or service, the belief in the executive team and their ability to execute the idea, the belief in the developers and quality code as well as community size and support including gauging the value of industry support that occurs through partnerships and various funding mechanisms.
Given that many cryptocurrencies, especially ICO’s (Initial Coin Offerings) are nothing more than an idea and willingness to turn that idea into a reality, intrinsic value determination is highly subjective.
The calculation of “real” intrinsic value may very well be an near impossible calculation without taking into account all the pertinent factors.
Let’s take a look at a few of the factors…
Determinants of Intrinsic Value
The composition of intrinsic value is made up of a number of factors and four major areas every investor should ask important questions include:
Market / Use Case
Is there an actual market or use case for this product? How big is the market potential? How does the revenue model work?
How large, active and dedicated is the community? Is the community growing in size? Are they supportive and values aligned with the project? Is there descent or factions within the community?
Are the developers accomplished enough to code the project. Is the executive team experienced enough to successfully lead the project. How effective is the marketing team?
How is this project funded? If ICO, is there enough money to support development for the time-frame given? Is there a mechanism in place to generate funding internally. What is the revenue model once live — will it generate enough to support the future development of the project?
It’s a Rabbit Hole of Analysis…
Analysis paralysis…There is no shortage of data to sift and collate to determine intrinsic value and the overwhelming amount of information and data can cause many investors to lose sight of the main objective — to invest profitably. Not to be overwhelmed in research.
If this were not enough, there is another major undercurrent of influence (especially within the cryptocurrency markets) which are the irrational / emotional factors at play.
FUD & FOMO
We’ve all heard it before —Fear, Uncertainty and Doubt (FUD) as well as the Fear Of Missing Out (FOMO).
It’s been said that the cryptocurrency market is +90% speculative in nature. Which means people buy not for the value of the company they believe they are investing in, rather for the opportunity to make a profit.
This type of mentality leads to wide market swings in price and volatility. Especially when matched with rumor which runs wild in this space.
Combine this with a large part of the participants considered to be uneducated investors (not familiar with investing) and you’re in for an emotional roller coaster of a ride of ups and downs.
Needless to say, although determining intrinsic value and comparing that against current market value is an important metric, it does seem very hard indeed to calculate without an army of analysts at your disposal.
Fortunately, there is a quick and dirty way to determine intrinsic value.
Quick & Dirty Method: Determining Intrinsic Value
There is a simple approach to determine the combination of all the factors that make up intrinsic value - this method smooths out the highs and lows caused from emotional and anomalous trading and provides the investor with a rough and dirty but highly effective method to determine intrinsic value (over the long-term).
This method doesn’t need any fancy computer programs or complicated analysis.
It’s simply applying a linear line against the average price over a period of time.
When you have to run through a list of multiple cryptocurrencies to see “by sight” which ones are trading above or below their intrinsic value…
This method gives you a quick and easy method to perform (at a glance) which ones are worth looking at in more detail.
More Advanced Methods:
Although this linear approach may seem rudimentary, there are more involved moving average calculations that include the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These calculations also help to identify the direction of the trend and help to define support and resistance levels.
But this is intended to be a quick and dirty calculation — you can do with sight when reviewing a large list of cryptocurrencies.
How it Works: Do You See the Opportunities?
Looking at the chart below, you’ll see according to this method this cryptocurrency was overvalued between December to February and subsequently undervalued in the month of April (based on the one year trend line).
This chart of Bitcoin shows how this Quick and Dirty method can be easily applied. Do you agree?
As a cryptocurrency investor, you need quick and fast analysis methods for determining when and what coins or tokens to consider.
There are already over 1,500 different cryptocurrencies actively traded and another +1,000 ICO Projects set to enter the market in the near-term.
So there is no shortage of daily opportunities. What there is a shortage of is time and fast and simple analysis tools to help you zero in on the winners.
Markets change in the blink of an eye and for the cryptocurrency investor, it’s important to build out your toolbox with skills and techniques to help for quick market analysis.
This is one such method and for many new investors entering the scene, this is a good starting point for their initial analysis.