Today there are an increasing number of crypto valuation assets in the market that analyzes the value of existing and emerging crypto assets. Before one invests in a digital asset, they must know the value of that cryptocurrency asset.
Let us walk through the metrics available in the market for determining the value of cryptocurrencies.
Market Capitalization
Market Cap is the quintessential metric for measuring the value of crypto assets. Around 90% of investors rely on this metric to evaluate and compare cryptos.
If you check popular websites like crypto compare and coin market cap, you will notice that market cap is used exclusively to compare cryptocurrencies, and cryptocurrencies are ranked based on their market cap. Even so, the market cap has a number of serious issues. But let’s first understand how it is calculated.
Market Capitalization = Total Coin Supply * Latest Trading Price
In terms of units, the market cap can be described as : $USD = COIN * ($USD/COIN)
Here, COIN unit is the cryptocurrency in question, e.g. BTC, BCH, ETH. It’s a simple metric but has one major problem.
When new forks are created, they inherit the coin supply from their parent blockchain. As an example, anyone who can fork Bitcoin to create an altcoin will inherit the coin supply of Bitcoin and hence its market cap will become high. This scenario perfectly describes BCH, a fork of Bitcoin, which has been able to piggyback the blockchain history of Bitcoin. So despite its plummeting prices and falling volumes, BCH is in the top 5 cryptocurrencies of all major exchanges as all of them are using the market cap as their primary valuation metric. This shows how the market cap is a flawed and deceptive metric.
Because of such flaws, researchers have stopped using market cap altogether to evaluate cryptocurrencies. Instead, they have proposed alternative metrics that help to evaluate and compare cryptocurrencies in a more transparent way. If you go to coinmetrics.io, you will see that they have a plotting graph to compare cryptocurrencies using a wide range of metrics like transaction volume, exchange volume, realized cap, network value, volatility and many more. Let’s look at some of them in detail.
Network Value to Transactions Ratio – NVT
Network Value describes the total market value of all coins in circulation. The transaction element provides an estimate of the value of on-chain transaction activity drawn from block explorers and blockchains.
The Network Value to Transactions (NVT) ratio measures the dollar value of crypto asset transaction activity relative to network value.
This means a “low” network to transaction value denotes an asset which is more cheaply valued per unit of on-chain transaction volume.
NVT = Market Cap / Total Daily Transaction Throughput
In terms of units, NVT can be described as :
DAY/COIN= $USD / [($USD / COIN) / DAY]
One of the major problems with using NVT is that it uses the market cap to calculate the network value and we saw above how the market cap is a deceptive metric. Because of this reason, NVT may not be widely used by researchers. Moreover, a huge number of inter-exchange transactions may eventually shift off-chain, which will require recalibration of NVT.
Realized Capitalization
The motivation to introduce this metric comes from the fact that it attempts to reduce the impact of long lost coins, unlike market cap which takes the value of all coins ever mined, even if some coins are permanently lost and not in circulation anymore. Realized cap evaluates coins according to their actual presence in the economy.
Realized Cap = UTXO * Trading Price at date of UTXO Creation
In terms of units, the market cap can be described as :
$USD= COIN * ($USD / COIN)
The realized cap is one of the most promising cryptocurrency valuation metrics, but it has its own challenges. It is difficult to calculate as compared to other metrics as it needs to take into account deep cold storage coins, and forked coins which have never been spent on the upstart fork.
Nonetheless, the realized cap is one of the most stable cryptocurrency valuation metrics.
The above metrics are some of the new metrics proposed by researchers which are transparent and provide better information as compared to existing market cap.
When valuing a crypto asset, the investors must compare the crypto assets based on the wide range of metrics to have a better understanding and analysis of crypto assets.
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