This post is a description of the four paradigms I've identified on crypto-related social media which I've called 'tiers' of cryptocurrency valuation models. I'm very interested in engaging with you and hearing your thoughts.
In the past year we've seen major bull and bear markets. It feels like everyone and their brother has come and gone, dipping their toes into crypto and then realizing it's a boiling pot. Because crypto is globally accessible, the diverse entrants to these markets bring different heuristics and models to valuing currencies - each of which varies greatly, especially in complexity. I've identified three tiers of valuation models so far that I think we've also moved through as a community, and one which I believe is upcoming.
A first-tier valuation model is the price-based appraisal of a currency's value. Initially, new entrants to crypto flocked to Ripple (XRP) and Cardano (ADA), seeing their price under a dollar and imagining a Bitcoin-type meteoric rise. The flaws of this type of valuation are retrospectively self-evident, but there are almost certainly still investors using these models, and more who will join using them in the future.
Looking at relative size of each cryptocurrency adds complexity to first-tier models, and for that, most people use Market Capitalization. Market cap is calculated by the price x circulating supply of the currency, an important factor because more supply of a coin decreases the price by filling demand, as seen in XRP's and ADA's cases with their large supply.
A third tier valuation considers the price and the market cap of each coin, and also begins to look at the effects of supply and demand in the protocols of each coin. This has only recently begun to be written about, but one of the more evident results of this thinking has led to the recognition that many coins, specifically utility tokens may become completely worthless because of their massively over-issued supply. This collective realization also stems from the recognition that utility tokens different than shares of stock in a company - that they don't pay dividends or yield profits of a project. With 65 billion Tron, you begin to wonder how many are actually required as payment to maintain the network, and how that might affect the price.
These 'tiers' of valuation models seem roughly analogous to the mindset of the average crypto investor's journey in assessing which currencies to invest in, and each tier seems to have dominated popular thought in cryptocurrency subreddits at times this year. What I would call tier-four valuation models are the natural next step for cryptocurrency investors. These types of models go into the specifics of how each currency works, and finds the incentives, calculating likely purchase amounts, frequency of use, and other factors which affect the price of each currency, such as whether staking is required to maintain the network. Because cryptocurrencies are arguably a new asset class, tier-four valuation models must incorporate formulas from various disciplines, and formulas are still being refined to accurately predict each cryptocurrency's. As more savvy investors recognize the limitations of lower-tier models, rampant speculation will settle, making prices less volatile. At that point, will be interesting to see which models are most accurate.
Until then, I'm interested to hear the community's ideas on this trend, whether anyone's noticed it, or something else.