Let’s talk about a simple yet important currency valuation perspective; cryptocurrency or fiat.
This valuation approach starts with the interpretation of an essential concept that has been put conveniently within the definition of the word cryptocurrency-a subtle definition that has been lost on many investors, sadly.
Looking at the word cryptocurrency more closely, we see that it is a compound word-that is, two smaller words combined to create a new word with its own meaning:
- CRYPTO: a word cryptography abbreviation; the art of writing or solving ciphers and codes;
- CURRENCY: something used as a means of exchange; money.
Cryptocurrency is generally defined as a compound word as a digital currency that uses encryption as a mechanism for validating and verifying transactions.
So what is it that lends itself to a new perspective on valuing altcoins within the term cryptocurrency?
What Is Currency?
Currency is a medium of goods and services exchange. In short, it’s money, usually issued by a government in the form of paper or coins, and generally accepted as a method of payment at its face value.
In the modern world, money is the main means of exchange, having long since replaced bartering as a means of exchanging goods and services.
A new form of currency entered the language, the virtual currency, in the 21st century. Virtual currencies like bitcoins have no physical existence or support from the government and are traded and stored in electronic form.
Currency has been in use in some form for at least 3,000 years. Cash, usually in the form of coins, has proved crucial in facilitating continent-wide trade.
A key feature of modern money is that it is worthless in itself uniformly. That is, bills are not gold, silver or bronze pieces of paper. The concept of using paper as a currency may have been developed in China as early as 1000 BC, but it took a long time to catch on accepting a piece of paper in return for something of real value. Modern currencies are issued in different denominations on paper, with coin-shaped fractional issues.
Types of Currency
What is the value of currency? There are many different ways of assigning and managing interest, depending on the type of cash. These are the currency groups.
- Fiat Currency
- Asset Backed Currency
- Commodity Backed Currency
- Digital Currency
Valuing the Flow of a Currency
Intentionally, I would like to move away from using the word currency and replace it with the word stream to help make this point impressive.
If we think of a currency’s value as its flow rate, then what are its components? By dividing volume by time, the flow rate is calculated. Time can be defined, so we only need to determine volume. This can be done by answering the following three questions:
- So many clients do you have?
- How many times are they using it?
- How high are the values of the transaction?
Whether we’re talking about fiat currency, bitcoin, or current through a dam or chain, it shouldn’t matter, physics laws apply equally in all situations.
3 Factors contributing to the flow
Following the premise that a medium of exchange’s market price is largely based on its currency and its currency (flow) is determined by the number of users, the frequency of their transactions and the value of their transactions, what are the primary factors contributing to an increase in users, an increase in their transaction value and an increase in the frequency of their transactions?
It could be said that these three factors determine it:
- Executive Leadership / Core Team
- User Community / Tribe
- Market Demand / Worldwide Reach
So, when appraising cryptocurrencies, especially for the long-term investor taking the flow perspective offers a slightly different paradigm in your altcoins appraisal and valuation.
How to Value a Cryptocurrency
For traditional investments in stocks or real estate, fundamental analysis entails evaluating the financial health and viability of a company according to its financial statements. If the numbers look good, we can be confident that the company has good fundamentals and we can, therefore, invest in it. Performing fundamental analysis for cryptocurrencies, however, is radically different since there are no financial statements to analyze. Why? Because:
Cryptocurrencies are not businesses, but rather digital currencies reflecting quality or property in a network. Its viability is not based on revenue generation, but rather directly depends on community involvement (users who use the service, miners who secure the network, and developers, of course). Each cryptocurrency is a manifestation of Blockchain technology’s different applications and is usually decentralized
The crypto space is in its infancy stages, and nearly all cryptocurrencies are in phases of development. This means that there are actually instances of limited uses in the real world and thus a lack with track record to be shown for.
Therefore, basic cryptocurrencies analysis must be carried out using a different methodology. It is even more important for us to engage in research to determine the feasibility and potential of the coins given the complex nature of cryptos and their underlying technology. It means that we make better investment choices and are kept in the loop
Factors that Affects Crypto Value
- Utility: A coin must have a strong function (or use-case) to encourage people to hold the coins; the usefulness of a coin is closely related to its value.
- Scarcity: Scarcity refers to the coins ‘ finite nature. In economics, a fixed supply of a particular item would increase its value in the long term, provided that its demand increases.
- Perceived Value: A coin is only as valuable as it is considered by the markets, and how a project is valued depends on factors that are key to the project’s creation. Projects therefore that persistently meet their goals set out in their white paper
The Time Value of a Cryptocurrency:
Time is the factor we use to make all investments profitable. As we saw, Bitcoin has gone from a valuable unknown to the best performing investment in just over 10 years… probably ever. Because in his first ten years of life Bitcoin worked this well, how will his quality be in his next ten years? What is the value of Bitcoin when it turns 21?
And what does this generally say about cryptocurrencies? For that matter, in five, ten or even fifteen years from now, what will the value of cryptocurrencies be? Those who want to buy Bitcoin when it was a dollar are missing out on tomorrow’s bitcoins nestled among today’s thousands of altcoins trading.
There’s no better time for those who want to get involved in cryptocurrency than now to hone and acquire the skills needed to value and find tomorrow’s bitcoins.