As new opportunities pop up at a staggering pace, it’s important to find reliable means to evaluate all these new opportunities. Crypto ratios make it possible to compare and evaluate different opportunities.
Similar to how they are traditionally used, financial ratios provide valuable insights to a project's profitability, liquidity, and potential for growth. Comparing ratios across projects within the same industry has proven useful in determining the health of a business.
Ratios are almost never examined alone, they are usually looked at in combination with other performance indicators. From these ratios, investors with a more holistic understanding of the project.
Here, we take a closer look at several key metrics that investors should note when assessing a project.
Key Takeaways
- Market Capitalization helps assess the overall value and relative size of cryptocurrencies, guiding investors towards more prominent and stable projects.
- Daily/Monthly Active Users measure user engagement, indicating network health and adoption rates, crucial for long-term success.
- Transaction Volume reflects the activity level and liquidity within a network, signifying real-world usage and potential growth.
- Fully Diluted Valuation provides a forward-looking view of a cryptocurrency's potential market cap, considering all possible token issuance, aiding in understanding future investment scale and risks.
- NVT Ratio evaluates a cryptocurrency's value against its utility, helping identify overvaluation or undervaluation and signaling market sentiment.
- MVRV Ratio offers insights into investor behavior and market cycles, identifying potential buy or sell signals based on market and realized values.
Market Capitalization
Market Capitalization represents the overall value of a cryptocurrency, as represented by the following formula:
Market Cap = Current Price x Total Supply
Market cap allows investors to compare the relative of different cryptocurrencies regardless of the absolute price per coin.
It is also used to “rank” cryptocurrencies. Leading projects like Bitcoin and Ethereum are considered major players in the market specifically because of their large market caps. These leading projects are more prominent and better recognized, making them a relatively more reliable investment than other counterparts.
Historically, large market caps appeal to investors looking for relatively safer investments. A large market cap indicates that significant investments have been made into the project, a sign of confidence and stability from other investors. On the other hand, smaller market caps appeal to those looking for higher returns, given their speculative nature.
Daily/Monthly Active Users
Daily Active Users (DAU) and Monthly Active Users(MAU) measure user engagement and activity within a crypto platform. Where DAU represents the number of unique users within a day, MAU represents the same statistics over the course of a given month, giving investors a broader view of user engagement over a longer period.
DAU and MAU are both calculated by:
DAU/MAU = Average Active Users Over A Day/Month / Total Number of Active Users
Apart from indicating strong user engagement, this measurement of active users is also an indicator of network health, adoption rate, and market sentiment. For example, a growing number of active users indicates increasing interest and positive market sentiment, which is essential for its long-term success.
By analyzing these two metrics, investors can gauge the relative popularity of a project compared to others within the industry. For developers, DAU and MAU can highlight how a specific feature or update has been received by the audience. Spikes after a release can indicate successful adoption of new functionalities.
Transaction Volume
Transaction volume refers to the toal number of transactions of the total value of transactions processed over a specified period. High transaction volume often indicates higher liquidity within the market, though this does often come at the cost of increased volatility brought upon by shifts in market sentiment.
Transaction volume can be represented by either the total number of transactions or the total transaction value of activities within the network.
The metric serves as an indicator of a project’s activity level, liquidity, and adoption rate. Growing transaction volumes are a sign of increasing adoption and real-world usage, both great indicators of potential growth.
Fully Diluted Valuation
While the market cap represents the total value of a crypto asset in the market, the fully diluted valuation represents the total value of a particular asset under the assumption that all of the project’s tokens have been distributed.
Fully Diluted Valuation = Token price x Total Supply
In the traditional markets, this would be comparable to the total number of outstanding shares in the stock market.
This metric is significant because it helps investors understand the maximum market cap that could be reached and the potential scale of the investment, once all tokens have been issued. Also, take note that all tokens have similar issuance schedules - older projects, for example, will have issued more tokens than newer tokens, so FDV provides insight for investors to understand the value of an investment as more tokens are released.
When examining the FDV, consider factors like the Token Supply Schedule, the impact of inflation due to increased supply, and the risk for future dilution.
Network Value to Transactions (NVT) Ratio
NVT Ratio stands for Network Value to Transactions Ratio, it is a metric used to evaluate a cryptocurrency’s value against its perceived utility, as measured by transaction volume.
The NVT ratio can be calculated by the following formula:
NVT Ratio = Market Cap / Transaction Volume
The ratio helps assess whether a crypctocurrency is overvalued or undervalued. Similar to the P/E ratio in traditional finance, a high NVT ratio suggests that the crypto network or project is priced at a premium, indicating a potential reverse in positive trends. High NVT ratios have historically been associated with market tops and potential downturns.
On the other hand, a low Network Value to Transactions ratio indicates that the network may be priced at a discount. In these situations, there exists potential for accumulation and bullish trends.
Market Value to Realized Value (MVRV) Ratio
The Market Value to Realized Value ratio analyzes investor behavior and market cycles to assess a crypto’s fair value based on historical price movement and current market value. Extreme deviations between market value and realized value can be used to identify market tops and bottoms.
Market Value to Realized Value can be calculated bt dividing an asset’s market cap by realized market cap:
MVRV = Market Cap / Realized Cap
The MVRV ratio can be used to identify potential buy or sell signals and understand existing market sentiment. High values (>3.5) suggest late stage bully cycles and a heightened probability of distribution. Low values (<1.0) indicates that a large section of the supply is near break-even or even held at a loss, typical of late-stage bear accumulations, a possible signal for sentiment shift.
First conceived by on-chain pioneers Murad Mahmudov and David Puell in a paper released in October 2018, the metric has become a staple Bitcoin analysis tool ever since.
Conclusion
As the cryptocurrency market evolves, the need for reliable evaluation metrics becomes more critical. Crypto ratios serve as invaluable tools to create clear insights into a project’s profitability, liquidity, and growth potential. Using these metrics in conjunction with one another enable investors to make informed decisions by comparing and evaluating various opportunities within the crypto space.
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