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Metrics to Use while Determining the Value of Cryptocurrencies

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Owing to the strong benefits that they have over fiat money, cryptocurrencies are taking over the market rapidly. The popularity commanded by the various cryptocurrencies like bitcoin has made many people across the globe interested in investing in this sector. Numerous major economies in the world are now taking steps towards legalising cryptocurrency exchanges, further increasing the relevance of these financial tools. 

Just like any other resources, consumers must be aware of the value of crypto assets before investing in them. To understand the market values of the various cryptocurrencies you need to use crypto valuation metrics available in the market. These metrics analyze the value of existing crypto assets in the market along with the emerging ones. Before diving into the crypto market go through apps like this Software, look into the metrics for cryptocurrencies that we have enlisted for you. 

Market Capitalization

Market capitalization is undoubtedly the most popular metric of cryptocurrency in the market. Used by almost all popular crypto exchange sites, this metric is trusted by about 90 per cent of investors for the evaluation and comparison of crypto assets. All major websites dealing in crypto assets make exclusive use of market capitalization. The market cap of the various cryptocurrencies is used to rank them on these sites. It is simple to calculate and is considered reliable because it can easily give a customer an idea of the gross market value of the cryptocurrency in question at any given time. To calculate the market capitalization of a certain digital current all you need to know are the total coin supply and the latest trading price. The formula for this metric is: 

Market Capitalization = Total Coin Supply * Latest Trading Price. 

However simple and reliable this metric be, it has one major drawback. With this metric, when a new currency or fork is generated, it invariably inherits the supply of coins from the parent blockchain. This means that irrespective of the actual value of this new fork, it gets a good Market capitalization score, which ensures it a position among the top cryptocurrencies in the market. As a result, many investors are misled and confused as even cryptocurrencies whose volumes are scant and prices are plummeting are presented as one of the best cryptocurrencies in the market. 

Because of these shortcomings, many sites and researchers are now giving up using this metric as a quintessential measure of the values of the various cryptocurrencies. 

Network Value to Transactions Ratio – NVT

The values of the coins in circulation at a given time are added and measured in Network Value. From blockchains and block explorers, the worth of on-chain transaction activities is collected. That further provides an estimation of the value of the on-chain transaction. 

The NVTratio figures out the value of transaction of crypto-asset activity concerning the dollar.

NVT here refers to the Market Cap divided by the Total Daily Transaction. 

When talking in terms of units, NVT is described as:

DAY/COIN= $USD / [($USD / COIN) / DAY]

It is useful to count the Network value to transaction ratio, but it is not flawless. Many irregularities are part of this metric. As noted before, NVT depends on Market Cap, which itself is a deceptive measure. NVT metric needs further additional calibration to adjust the inter-exchange transactions that eventually shift off-chain.

Realized Capitalization

Even when some of the coins lose their market grip with time and eventually turn worthless, the market cap metric still takes their value into account without judging their legitimacy in the current market. But Realized cap can solve the problem by continuously reducing the effect and the value of the coins which are lost in the market. Instead of looking into estimates and history, Realized cap evaluates a coin in terms of its value in the real economy. 

Realized Cap = UTXO * Trading Price at the date of UTXO Creation

In terms of units, the market cap is described as :

$USD= COIN * ($USD / COIN)

Although the realized cap is beneficial and popular in evaluating cryptocurrencies, it has some shortcomings that pose some problems in the system. It is more complicated than other valuation metrics as it has to count the value of deep cold storage coins and the coins that are not sent to the upstate fork.

Conclusion

The metrics mentioned above are both well known and efficient. As a result, most investors and websites across the world use these. However, as an investor, make sure you consider multiple metrics to get a comprehensive picture of the market position of the cryptocurrency in question. 

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Anurag

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