Valuation is vital to comprehend the true worth or value of a chosen asset. If you are aspiring to invest in a particular asset you need to have a basic idea about both its present and future worth to ensure the potential returns. Valuation is more than crucial when it comes to digital assets such as cryptocurrency given their Wild West volatility. The crypto market surged up to over $3 trillion in 2021 but plummeted to below $1 trillion in less than a year. This extreme and frequent fluctuation makes crypto a risky and unpredictable asset. Thus, when a company or individual is aspiring to put money on crypto digital assets, it/s/he should invest some time in asset valuation.
The post below offers a brief on the valuation of crypto digital assets.
Top reasons for valuation
According to crypto pundits, as of now, there are three key factors that call for valuation of crypto digital assets.
It is an accounting procedure that works with financial statements to derive a clear picture of financial performance and details of a specific company. When a firm buys BTC, the asset must be recorded at fair market-value data on the balance sheet, on the date of purchase.
If you have been studying about crypto, you know by now that crypto activities fall under the purview of taxation at present. However, tax experts are yet to come to the conclusion whether to classify cryptos as “asset” or “currency”. Now, as taxation implication would apply despite the “legal” status of cryptos, it’s safer to tag crypto coins and tokens as “assets”.
You need to develop a fair understanding of the true valuation of your chosen crypto digital assets to derive informed decisions about investment. Put simply, the valuation part would help to decide whether or not it would be profitable for you to proceed with the investment part.
Evaluating crypto digital assets
Market capitalization, supply, and price
This is the primary equation for evaluating the worth of crypto digital assets. There is a formula that helps you to derive valuation of crypto digital assets through market cap. But, before getting into that, you need to have a basic understanding of the concept of market cap- as well as supply and price of digital assets.
Market capitalization refers to the overall value of the entire gamut of coins mined of a particular cryptocurrency. To calculate market capitalization, you will have to multiply the price of chosen crypto by “supply”.
It refers to the agreed transaction rate from sellers and buyers in the crypto market. Now, when it comes to crypto, the price would fluctuate often given the extreme volatility of these digital assets. But, then, stablecoins assure more stability as these are pegged to stable commodities such as fiat.
With regard to the crypto sphere, some coins could come with inflationary supply. In this case, new coins are being issued via crypto mining. Then, you also have coins with deflationary supply. In this case, tokens are destroyed through the coin burning process. For example, BTC is a coin with deflationary supply. This is one among the many reasons behind the coin’s dramatic rise in price over the years.
Evaluating crypto through market cap data
The market cap data of crypto digital assets offer a fair picture of the worth of the cryptos.
The equation goes like this-
Market Capitalization = Price of token multiplied by token supply
This is another process to evaluate the true worth of your chosen crypto asset.
NVT ratio stands as the acronym for “Network-Value-To-Transaction ratio”.
You calculate the NVT ratio of a crypto by dividing its market cap by transaction value- based on a set course of time.
It refers to the ratio between market cap of your chosen crypto to value of those tokens that are abandoned or stuck in non-functioning wallets. In fact, MVRV stands for a basic relative value, indicating whether a digital asset is undervalued or overvalued.
Check the fundamentals
The evaluation of crypto assets is not limited to the methods discussed above. Rather, if you are planning to make investment in these digital assets, you need to take care of other factors as well. The primary aspect that you need to consider here is the fundamentals of your chosen digital assets.
What to check?
You need to get a clear idea on the team behind the crypto asset, the potential of the asset, the use case it’s going to fulfil, and the roadmap. Even if the coin or token is showing a high market cap at the moment, it might not be reliable for a long-term investment. For example, Dogecoin might boast a great market cap in comparison to a new altcoin. But, DOGE is not suggested for long-term investment. It’s because DOGE was developed mostly based on hype and serves no real purpose. The coin is estimated to lose out on its value over the next few years. On the other hand, the new altcoin might show a sustainable growth in coming years if it comes with a solid use case.
Thus, based on this example, the new altcoin probably holds more value for long-term investment in comparison to already-established DOGE.
Your chosen crypto asset must be backed by a highly knowledgeable and expert team, especially from fintech and crypto worlds. A reliable crypto project will never hesitate to mention its team with data on credential and picture of team members. Besides, make sure to study the project’s whitepaper. Look for a use case that the crypto project is planning to fulfil. But also make sure that the use case and potential goals of the crypto is realistic enough, lest this would be another coin to end up in fiasco.
Evaluating a crypto asset might seem to be a long-drawn process but it is also a necessary one. If you are planning to pass on your digital assets to your future generation you better make sure they would be worth the shot in later years.