Tips to value Crypto Assets
In the golden age of cryptocurrency, understanding where to invest your money is as important as having the money to invest in the first place. Recently, the demand for cryptocurrency has opened options and opportunities that were previously thought to be out-of-reach or that needed the backing or multinational corporations.
However, these new horizons come with added challenges. The first challenge is understanding new concepts, like cryptocurrencies, the blockchain, and crypto assets. The second challenge is learning how to value, and price said assets and guarantee a return on investment. So this is what you are about to learn right now, how to value crypto assets.
It is the same, but different
Before we start, we must understand the differences between currencies and assets. Financial Journalist Patric McDonnell wrote an article explaining this top. In "What Is The Difference Between Bitcoin, Forex, and Gold" McDonnell explains that a currency serves as a medium of payment, an intermediary which allows for easier trading. An asset, on the other hand, is something that is useful and which can hold value.
Bitcoin and altcoins are currencies because they can be used to pay for goods and services. But they are also assets because they still hold an intrinsic value determined by fundamental market forces.
It sounds like these terms are interchangeable when it comes to cryptocurrencies, and, in a sense, they are. Value is the estimated amount someone is willing to pay for something. It can grow or decrease depending on supply and demand. Price means set amount needed to pay for an asset. Thus, the value is held by the quality and quantity of an asset, and the price of something will vary according to its value. Price is the amount that reflects the value and interaction between supply and demand.
Tips to for proper valuation
Now that you know that both definitions are linked when it comes to cryptocurrency, then you are ready to follow these simple tips to guarantee that you do a successful valuation before investing in Bitcoin or altcoins.
Scarcity translates to value: Crypto coins with a finite number of units produced will increase in value as it reaches that limit. According to coinmarketcap.com, there are 16.5 million BTC in circulation. With a cap of 21 million BTC to ever be mined, the scarce number new of BTC available drive prices up
Demand and supply: There are cases when there is, virtually, an unlimited amount of a coin. In that case, market forces determine how much value that cryptocurrency can hold. ETH has over 90 million tokens in circulation. However, because the Ethereum blockchain is the platform for ICO's the demand for ETH is high. That means that it will increase in value over time.
Purpose and Focus: Altcoins are not created equal. They all have different purposes and goals. Some, like Dogecoin, is partially formed as a joke. Others, like Monero, is to offer extra privacy. Either way, it is important to know the goal of each Token. This is particularly the case with ICOs.
Basically, profitable investing boils down to purchasing crypto assets at a reduction to intrinsic worth. The larger the low cost, the extra seemingly the funding will carry out. Benjamin Graham, the daddy of worth investing, known as this “margin of security.” The idea is straightforward in concept and very difficult in observe, with the valuation course of something however simple.
Two highly-educated, emotionally steady, and affordable individuals can view the identical data and are available to very totally different conclusions. Individuals weight data in another way based mostly on their preferences, values, and experiences. Some are comfy tolerating sure forms of threat. Predictions differ and forecasts could be wildly divergent. These variations create the market. As only one participant out there, right here’s how I consider an organization’s intrinsic worth.
I at all times begin by understanding what I name proprietor earnings, which I outline as:
Proprietor Earnings = Internet Earnings + Non-Money Bills (Depreciation, Amortization, Depletion) + One-Time Expenses - (Upkeep Capital Expenditures + Working Capital Wants)
Stated one other method, proprietor earnings are the income left over after needed expenditures that crypto assets owners can discretionarily spend, save, or reinvest. Blindly following the formulation can simply present false precision and a false sense of safety. It’s merely a simplified place to begin.
If you follow these simple advice, your quick analysis will help you determine if your crypto asset will be a boom or a bust.
References and Sources:
» What Is The Difference Between Bitcoin, FOREX & Gold? ‘A Tripod Theory’