Summary: This article provides an explanation on how to value crypto protocols and blockchains by building a detailed valuation framework and analyzing various market metrics.
What Does Crypto Asset Valuation Mean?
- Described as the art of valuing an asset based on its "fundamental value"
- Factors to consider when valuing cryptocurrencies: business model, competitive advantage, narrative and marketability, community, profit generation and revenue, treasury, tokenomics, and security and software
What Is Important When Valuing Crypto Protocols and Blockchains?
- Roles of stakeholders and network effects in blockchain protocols
- Importance of strong network effects as a competitive advantage (moat)
How To Build a Framework for Valuing Crypto Protocols:
- Define the protocol's market
- Assess market concentration
- Identify demand-side advantages (e.g., what drives network effects)
- Determine supply-side advantages (e.g., economies of scale, strong treasury, productive team, tight-knit community)
What Are Market Metrics in Crypto and How Do They Matter?
- Key metrics: circulating supply, total supply, market capitalization, fully diluted value (FDV), total value locked (TVL)
- Important ratios: circulating supply to max supply, market cap to FDV, FDV to TVL
The Role of Tokenomics:
- Tokenomics is crucial when valuing crypto protocols
- Understanding a token's emission schedule and potential impact on its valuation
A Complete Framework for How to Value Crypto Protocols and Blockchains:
- Understand the protocol and its key value drivers
- Form an investment thesis
- Analyze catalysts
- Assess the risks
- Incorporate key metrics and market data
- Understanding and utilizing a valuation framework, analyzing market metrics, and considering tokenomics are vital when valuing crypto protocols and blockchains for investment opportunities.