Some people think that cryptoassets are bubbles without intrinsic value and this is mostly due to the fact that they don’t know how to analyze them. Cryptoassets can’t be analyzed with the same valuation frameworks used in stocks and other non-cryptoassets. However, the crypto-community has been pushing up some useful valuation models. In this article we are going to review some of them.
What is fundamental analysis?
Fundamental analysis is a method of evaluating a business asset in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors. Why should we do fundamental analysis? To make a model which tell us the relationship between the current prices at which the asset is being trading and its fundamentals. Assuming that fundamentals are going to be reflected on prices in the long term, if the analysis an undervaluation of the asset that could be a signal to open a long position (and obviously, if the asset is overvalued we have a signal to go short).
Common methodologies to perform fundamental analysis on stocks involve analyzing company revenues, profits, cost of goods and services, taxes, dividends payments, etc. Based on these parameters, we can use methods like Discounted Cash Flow to give a present value to the company (an absolute valuation method). And we can build some useful metrics like price to earnings ratio, gross margin or net income, which can also serve us to compare different assets (we can call them relative valuation methods).
Why can’t we use this metrics to analyze cryptoassets? Well, most cryptoassets don’t work like companies. There are not revenues or cost of goods to analyze here. How to compute price to earnings ratio for ethereum? How to compute net income in Bitcoin Cash? Does it even make sense to ask these questions? No, it doesn’t. We need another frameworks to valuate cryptoassets, so let’s see what we find.
Valuation Frameworks:
Relative Frameworks:
- Network Value to Transactions (NVT) ratio
- Metcalfe’s law
Absolute Frameworks:
- Cost of production model
- INET model
- VOLT model
- Discount Cash Flow model
If you wan't to know more about them, just check my article: https://blog.coinfabrik.com/a-review-on-cryptoasset-valuation-frameworks/