Valuing a cryptocurrency can be a complex process, as there is no universally agreed-upon methodology for determining the value of digital assets. Cryptocurrencies are a relatively new asset class, and their underlying technology, market dynamics, and adoption patterns differ significantly from traditional financial assets. As a result, valuing a cryptocurrency requires a multifaceted approach, taking into account various aspects of the project, its utility, and its potential growth.
To gain a comprehensive understanding of a cryptocurrency’s valuation, it is essential to consider a range of metrics and factors that provide insights into different dimensions of the project. These metrics can help assess the project’s overall health, growth potential, and market position, enabling investors and market participants to make more informed decisions about the value and prospects of a particular cryptocurrency.
In this guide, we will explore nine key metrics that can be helpful in evaluating a cryptocurrency’s valuation:
1. Total Value Locked (TVL)
3. Annual Fees
5. Developer Activity
6. Fully Diluted Market Cap
7. Market Cap/Fully Diluted Market Cap
8. Daily Active Users
9. Fully Diluted Market Cap/Daily Active Users
By considering these metrics in conjunction, investors can gain a more accurate and holistic understanding of a cryptocurrency’s potential and value, ultimately allowing them to make more informed decisions in the dynamic and rapidly evolving world of digital assets.
The 9 key metrics to Value a Cryptocurrency
Total Value Locked (TVL): TVL refers to the total value of assets locked within decentralized finance (DeFi) platforms or other applications. It indicates the level of user trust and platform usage. A high TVL is generally a positive sign, as it suggests that users are actively engaging with the platform and are willing to lock their assets, indicating confidence in the project.
Fees: Fees are the costs associated with performing transactions or using services on a blockchain or platform. In the context of DeFi platforms and dApps, fees can also include costs associated with specific platform activities, such as trading or lending. They are typically paid to network participants including miners or validators for processing transactions and securing the network and liquidity providers in the world of Defi.
High fees are a positive sign, as they suggest strong demand and usage of the platform and indicate that a project is generating more income, and subsequently increased income for liquidity providers, validators, or the platform itself (in case of centralized platforms).
However, from a user perspective, high fees can also be a barrier to entry, making it more expensive to interact with the platform or perform transactions. In this context, a low ‘fee per transaction’ can be seen as a positive sign because they promote accessibility and affordability for users. A too high ‘fee per transaction’ may discourage users from using the platform, which could negatively impact adoption.
It’s essential to strike a balance between generating income for the project and ensuring that fees remain affordable for users. The ideal situation would involve a project having a high volume of transactions and usage, allowing it to generate substantial income while maintaining relatively low fees for individual users.
Annual Fees: Annual fees refer to the total fees generated on a platform or blockchain over a one-year period. This metric can help assess the overall usage and utility of a cryptocurrency. A high annual fee indicates that the cryptocurrency is being widely used and has a strong demand.
Revenue: Revenue refers to the total income generated by a business, typically from sales of goods or services, before accounting for expenses. In the context of cryptocurrencies, in theory these entities could generate large revenue through various channels, such as trading fees, withdrawal fees, subscription fees, or other services they provide to users.
Most decentralized cryptocurrency projects do not generate revenue at present & so it is a less important valuation metric than fees in the traditional sense. Instead, decentralized projects often focus on creating utility, fostering network growth, and ensuring security. In this context, transaction fees are primarily used to maintain the network’s functionality and reward network participants (miners, validators, or liquidity providers), rather than generating revenue for the project itself.
Unfortunately as a result at present most crypto projects have zero revenue, as they pay 100% of the fees back to network participants. For example Uniswap has zero revenue at present & the trading fees earned primarily benefits liquidity providers on the network which does contributes to the overall value and utility of the platform. By facilitating seamless token swaps and rewarding users for providing liquidity, Uniswap continues to attract users and grow its ecosystem, but also means the actual Uni token holders see no benefit from the huge amount of fees gathered. However there is speculation more projects especially those generating high fees may turn ‘the fee switch on’ in the future to reward token holders.
Developer Activity: Developer activity measures the level of engagement and involvement of developers in a cryptocurrency or blockchain project. This can include contributions to the project’s code, improvements, bug fixes, and new features. A high level of developer activity is generally a positive sign, as it indicates that the project is actively being developed, improved, and supported by the developer community.
Fully Diluted Market Cap: Fully Diluted Market Cap (FDMC) refers to the market capitalization of a cryptocurrency assuming that all tokens, including those not yet in circulation, are issued. FDMC can help assess the potential value of a cryptocurrency in the long run.
Market Cap/Fully Diluted Market Cap: The Market Cap to Fully Diluted Market Cap Ratio compares a cryptocurrency’s current market value with its value if all tokens were released. It helps investors gauge the impact of future token releases on the cryptocurrency’s value. A higher MC/FDMC Ratio is generally considered better, as it indicates that a larger portion of the total token supply is already in circulation, and there is less potential dilution from future token releases. A lower ratio suggests a higher potential for dilution as more tokens enter the market, which could affect the cryptocurrency’s value.
Daily Active Users (DAUs): DAUs measure the number of unique users who interact with a platform, application, or cryptocurrency within a 24-hour period. A high number of DAUs is generally a positive sign, as it indicates strong user engagement and adoption. However, a low number of DAUs may suggest that the platform is struggling to attract users, which could negatively impact its growth and valuation.
Fully Diluted Market Cap/Daily Active Users (FDMC/DAUs): This ratio compares the fully diluted market cap of a cryptocurrency to its daily active users. A low FDMC/DAUs ratio can be a positive sign, as it suggests that the cryptocurrency is undervalued relative to its user engagement and adoption. Conversely, a high FDMC/DAUs ratio may indicate that the cryptocurrency is overvalued compared to its actual usage, which could negatively impact its future growth potential.
Where to find the data for each Valuation Metric
Here’s a list of websites where you can find each of the nine metrics mentioned:
Total Value Locked (TVL): DefiLlama provides information on TVL for various DeFi platforms, applications & Blockchains.
Fees: CryptoFees shows you the daily & 7 day fees allows you to see the transaction fees for different crypto protocols to see which projects people are paying to actually use. DefiLlama also shows 7 day and 30 Day fees.
Annual Fees: Token Terminal provides a variety of on-chain metrics and analytics, including annual fees for most cryptocurrencies.
Developer Activity: Electric Capital Developer Report provides insights into monthly developer activity across various blockchain & crypto projects. Alternatively, you can visit a project’s GitHub repository to assess its developer activity by commits.
Fully Diluted Market Cap: CoinGecko allows users to display fully diluted market cap information for each Cryptocurrency.
Market Cap/Full Diluted Market Cap: CoinGecko allows users to show the Market Cap to Fully Diluted Market Cap on a scale of 0-1.
Daily Active Users: Token Terminal provides on-chain data and analytics for all of Crypto, including information about daily active users for specific projects and applications.
Fully Diluted Market Cap/Daily Active Users: There isn’t a specific website that directly provides this ratio. However, you can calculate it using the data from CoinGecko for fully diluted market cap and Token Terminal for daily active users.