Using comparative or relative valuation tools to vet, study, or understand cryptocurrency projects is exactly like it sounds. This method of valuation can be thought of as a ranking of sorts, or a means of comparing apples-to-apples (rather than comparing crypto assets to the performance and behavior of traditional financial assets).
In the first part of this crypto valuation series, we looked at the basics of crypto fundamental analysis, which like comparative valuations methods can also feel basic or simple. But like fundamental valuations, looking at comparative or relative values can also yield a lot of high value information that should not be overlooked, especially when starting out.
Using comparative valuation models is also part of the traditional financial analysis tool kit.
Historically, relative valuation can be useful when comparing the value of a company to that of its competitors or industry peers to assess its financial worth. This is done using various financial metrics, ratios, and models.
One of the most popular relative valuation metrics in the stock market is the Price-to-Earnings (P/E) ratio, which compares a company's stock price to its earnings per share. This ratio helps investors determine if a stock is overvalued or undervalued relative to its peers.
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The basics for finding comparative/relative crypto valuations
When it comes to cryptocurrencies, the principle remains the same: compare a particular cryptocurrency to others in the market to gauge its relative value. Here's how you can go about it:
- This is the most straightforward metric. It's calculated by multiplying the current price of a cryptocurrency by its total circulating supply. By comparing the market caps of different cryptocurrencies, you can get a sense of their relative sizes and importance in the market.
- It’s worth noting that in terms of crypto market capitalization, Bitcoin has always been the most dominant asset (and Ethereum holds steady at the number two position). Big swings in market cap by individual assets are worth noting and worth researching.
- This metric indicates how much of a particular cryptocurrency is traded within a specific time frame. High trading volumes can suggest a high level of interest or activity around a cryptocurrency, while low volumes might indicate the opposite.
- Comparing trading volumes can help you understand which cryptocurrencies are currently in demand.
- Also, this is where the apples-to-apples kind of comparisons come in handy. There are big swings in volatility within the crypto markets, that are both cyclical and/or reactionary to things like sentiment and news cycles. That’s why comparing trading volumes of crypto assets to other assets and to historic performance is helpful.
- We’ll unpack utility in another post, but from a high level, when first vetting a crypto project, it’s always a good idea to figure out what the utility of the underlying asset.
- Some cryptocurrencies serve specific purposes within their native platforms. For example, Binance Coin (BNB) can be used to pay for transaction fees on the Binance exchange at a discounted rate. While many tokens created on Ethereum using the ERC-20 token standard are created to support the functioning (either through governance or exchange) of specific applications.
- Understanding and comparing these utilities can give insights into the potential demand and value of a cryptocurrency.
- Like all the financial product disclaimers say: “Past performance isn't indicative of future results,” but still understanding that basics about the background of a project is a good place to start. Check out the post about fundamental analysis for a checklist of sorts.
- Also, checking out the past performance of any crypto asset will give insights into how it has weathered market ups and downs and provide insights into its resilience, adoption rate, and market sentiment.
- A strong community and active developer base can be indicators of a cryptocurrency's health and potential for growth. Platforms like GitHub can provide insights into developer activity.
- A significant increase or decrease in developer activity might signify that something is up.
- Research platforms: Websites like CoinMarketCap or CoinGecko provide comprehensive data on market cap, trading volume, historical data, and more for various cryptocurrencies. Most of these tools allow you create your own dashboards or watchlists, which makes comparing and tracking projects of interest easy over time.
- Industry reports: Periodic reports from research firms or financial institutions often provide comparative analyses of top cryptocurrencies. Taken in aggregate, these reports can also help develop or sharpen and individual research framework.
- On-chain analytics: Not that long ago, finding info about what was happening with crypto projects required shifting through comments and news on chat boards and forums. Over time, the quality of information found on the most popular platforms began to decay — or else just get drowned out by more and more people posting bad takes. But now, it’s getting easier and easier to but through the noise and find on-chain info and analytics, which helps get a real signal. Glassnode is one example of a great on-chain analytics provider that can really help level-up your research game.
Comparative or relative valuation in the crypto space involves assessing a cryptocurrency's value in relation to its peers using various metrics and qualitative factors.
This approach provides a holistic view of a cryptocurrency's standing in the market, helping investors make informed decisions.