How to Valuate a Cryptocurrency. What is That Coin Worth, and Where Do We Start?

The biggest question and concern investors in the cryptocurrency market express is that they are uncertain where the value of a cryptocurrency lies. Cryptocurrencies are not securities, rather they are commodities and are not governed and regulated like securities are. Unlike stocks and bonds, the SEC is not present to ensure basic compliance rules are enforced over cryptocurrencies, so more scams and inefficiencies may be present.

What does a cryptocurrency derive its value from? Like any asset, cryptocurrencies are valued by their ability to produce or store value. Stocks are typically valued on the future value of their cash flow. Bonds and REITs are valued based on the net present value of their projected dividends in relation to interest rate projections. Precious metals and collectibles are valued based upon their rarity, total supply and the current condition of the local and global economies. Each asset is valued differently based on its economic utility. So, how do we value this new digital asset class? Is a cryptocurrency just money made out of thin air? The answer is: it all depends on the crypto currency's utility as an economic means of exchange and/or technological usefulness.

How do we valuate a cryptocurrency? Like any asset, a cryptocurrency is valued based on its utility. How useful is this asset? Given that the coin market is so young, most "investors" are actually speculators who are gambling. Seeing the extreme volatility of Bitcoin, one may surmise that whales and leveraged traders fully control the markets, and coins with no value serve as under regulated pump and dump schemes. Is this so?

What about other considerations including inflation, total supply, scalability and the technology's unique value proposition? These all play into the valuation of a cryptocurrency. Would you be interested in purchasing $10,000 in a cryptocurrency with no clear supply, a shadowy team of developers and no clear path forward? Probably not. How about a cryptocurrency with a definite supply value, groundbreaking technological utility and a vocal group of experienced talent? Mabey so.

Investors need to be wary about excessive marketing, an unknown of unverifiable development team and a roadmap with missed milestones. Like any asset, cryptocurrencies can be scams or assets with true value. A cryptocurrency's biggest weakness is that any programmer can create a new coin with a potentially fraudulent or non-existent value. There are currently 3,000 cryptocurrencies tracked on Coinmarketcap, and what is there to stop anyone from making a new coin? It makes sense to stick with the blue-chip cryptocurrencies at this time, and limit risk of one's own capital.

Cryptocurrency is only a decade old, so definite valuation is a struggle. Millionaires have been minted by investors who got in early on the trend. Cryptocurrencies are often hyped and pumped using social media, and investors or speculators would be wise to fully vet any cryptocurrency before investing.

Sources:

Pictures from Pixabay.

https://www.lynalden.com/cryptocurrencies/

https://coinmarketcap.com/

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