Last week clearly proofed that this question is extremely difficult to answer considering the market volatility. Steem was rather stable compared to almost all other cryptocurrencies, which I believe really is a positive sign.
Is it the amount of circulating coins?
The market capitalization of Steem now is around USD 950 million. That is approx. 25% below the market capitalization of last week. As you know market capitalization is calculated by multiplying the amount of circulating coins with the price per coin.
Market capitalization is the value of all outstanding coins together.
Last week the amount of circulating coins was around 250 million and it still is. Obviously, that indicated that this part of the multiplication did not have an impact on the market capitalization.
It must be the price!
What determines the price of an asset? Most people instantly answer: supply and demand. That is true off course, but does not really answer the question.
To be able to answer the question properly you will have to dug deeper. What are the drivers behind the demand and supply?
In other words: Why do people consider buying or selling an asset?
Last week, I explained this for a share in a company. An increasing (potential) amount of free cash flow generation by that company will ultimately increase demand for that share. This will logically drive up the price of that share.
The other way around it works the same. If the prospects of a company to generate free cash flow deteriorate, people will want to change a share in this company for a share in another company that is likely to perform better. This will increase supply for that share and this will drive down the price of that share.
Easy, right? Unfortunately, it is not so easy. Why?
People want to anticipate on future developments. They take a view on the possible future cash flow generating capacity of a company and act on that view, i.e. creating supply or demand already before the outcome is known.
The price of an asset is thus dependent on the believe in the potential benefits it may deliver to you in the future.
From a financial point of view, this means the future return an investment might deliver to you.
I believe strongly that you can put this to your advantage by putting in a lot of effort to find out the most likely future outcome.
The better you are able to estimate what the possible future free cash flow generation of a company will be, the better you are able to determine the fair price of share of that company.
Based on this knowledge you can benefit from over- or undervaluation of an asset as you sell or buy respectively.
Ok. That is useful, but how do we find out what the fair price of a Steem token is?
Next time, we will take this a step further and also discuss a possible valuation method.
All the best,
