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Think about the first time you heard about Bitcoin, Ethereum or Dogecoin. What attracted you to the asset? What made you buy in? Over the past years, if you assume that someone bought a crypto thinking they were about to become overnight millionaires, its a fallacy.

Every investor needs to look at the valuation and, more importantly, the problem a particular coin is solving, and if that can disrupt a sector in the coming years.

A common misconception in the cryptocurrency market is that there is no way to value a coin. In this article, we can see how traditional markets valuation metrics apply to crypto markets, a few crypto valuation metrics you can apply, and how valuation metrics of the crypto markets are more efficient than those of traditional markets.

In the traditional stock market, the three most used valuation metrics are:

To run a crypto valuation model, we replace:

1. Price to sales ratio:Fully diluted market cap divided by annualised total revenue (revenue of the past 30 days expressed for the full year). Revenue earned by a protocol is the total of the fees paid by users when using the protocol.

2. Price to earnings ratio:Fully diluted market cap divided by annualised protocol revenue (protocol revenue of the past 30 days expressed for the full year). Protocol revenue is the proportion of total revenue that is paid to the tokenholders after paying for incentives to the participants (such as liquidity providers and lenders) and fees to the network.

3. Market cap to TVL:Market capitalisation to the dollar value of all the assets locked within a protocol. This shows how the market is valuing the project, represented by the market cap, based on the actual use case of the project, represented by TVL.

How can you value crypto?During a rally or dump, valuation metrics come in handy. You can use the above metrics to see whether a coin is undervalued or overvalued relative to its fundamentals. This allows you to buy on the cheap and sell on the high if used correctly.

You can use the below data resources to measure a cryptocurrencys valuation:

That said, crypto is an evolving asset class. While there are robust valuation metrics and methodologies, more ways of evaluating a coin are coming up. Investors should adopt a holistic framework before investing in a project. Fundamentals are a key part of this framework.

Read the original:
Do cryptocurrencies have value or is it just about price? - Economic Times