Cryptocurrency Investments: Main Metrics to Consider

TL;DR

The key to systematic capital growth is a careful selection of assets that can provide you with a regular return. Here’s the point when portfolio building comes into play. An investor’s portfolio is an important step toward achieving financial goals. Thus, it requires thoughtful planning as well as consideration of some crucial factors such as investment horizon and risk profile.

Investors use various methods of asset valuation when forming their cryptocurrency portfolio. Some of them prefer technical analysis indicators hoping to buy assets at the best price. However, the majority prefers to conduct a full-fledged fundamental analysis, considering the current situation on the market in general, as well as through the prism of a substantial number of financial and economic indicators of protocols.

In this article, we’re going to reveal the main metrics and multipliers that should be taken into account when estimating the investment attractiveness of cryptocurrencies.

Fully Diluted Valuation (FDV)

FDV is a metric that is used to estimate the total value of a cryptocurrency, given that all of its tokens are in circulation. It equals the current price of the token at the maximum supply if all tokens were in circulation.

This metric differs from regular market capitalization as it considers those tokens that have not yet entered the market (for example, those that are under vesting). FDV gives investors a more precise idea of ​​the true value of a cryptocurrency. This helps determine if a token is undervalued or overvalued.

If the project has a large gap between the Market Cap and FDV, this indicates that there is a large potential pressure from the seller's side. Over time, when the project tokens enter circulation, this will put a lot of pressure on the price of the token. It is extremely important to keep track of such vast discrepancies to avoid buying the wrong asset.

Total Value Locked (TVL)

TVL is one of the most important metrics in DeFi. It represents the total amount of funds blocked in protocols.

The general rule is: the more funds are blocked, the better. This means that investors trust the protocol and are willing to exchange their liquidity for receiving liquidity. In turn, a rise in the protocol’s TVL leads to recognition and increased liquidity.

Sidenote: The most convenient resource for finding the current TVL level for any protocol is DeFiLlama.

When evaluating TVL, it is also worth considering the “nature” of the locked funds. In the case where the protocol has a TVL of $300 million, and the protocol does not have any additional economic incentives, this may signal the protocol’s natural, organic growth. While the $300 million TVL of the project, which attracts liquidity providers with additional incentives by farming its token, is less reliable.

As an example, SushiSwap attracts LP providers due to the аfarming possibility of the $SUSHI token, while Uniswap's liquidity is entirely organic.

Revenue

Protocol revenue is an important metric that reflects the amount of money received by the DeFi protocol. Revenue can be formed from various sources, as a rule, these are commissions received from lending, trading, and other services offered by the protocol. For example, in DEXs, liquidity providers are rewarded with commissions paid by traders. In lending, borrowers pay interest on loans to lenders, etc.

The more revenue metric, the better, because it reflects how much users are willing to pay for the service provided by the protocol. A high revenue metric indicates that the project is in high demand.

Sidenote: Here are the top services providing information on protocols’ revenue: TokenTerminal, Dune, etc.

Price to Sales (P/S Ratio)

The P/S ratio is Fully Diluted Value divided by Annualized Protocol Revenue. This essential indicator shows how a project is valued regarding to its protocol revenue.

A higher P/S ratio signals that the protocol is generating lower revenue compared to the historical market cap and therefore might be overvalued.

P/S is calculated by dividing the project's fully diluted market capitalization by its annual revenue. In this context, revenue is the total amount of fees paid by blockchain or DApp users.

P/S = FDV/ Revenue

It's worth noting that P/S is an indicator that can be applied for comparing projects from the same segment, as P/S values ​​can highly vary in different market segments.

Daily Active Users (DAU)

​​Daily Active Users is a metric that shows the number of unique public addresses that interact with the DAapp smart contracts. DAU is a crucial indicator for defining the performance of any decentralized application and indicates if users are interested in the project. The more users interact with the protocol, the more commissions they leave, and the more profitability the project generates, which in turn directly affects the cost of the project’s native token.

There are several sectoral indicators related to a specific sector. Investors also take them into account when compiling an investment portfolio or entering a strategy. The second part of the article is devoted to them. 

Decentralized Exchanges (DEXs)

Trading Volume

This is one of the main metrics when evaluating AMM. The higher the volume, the more money will be distributed between the protocol participants - liquidity providers (LP) and token holders.

Lending Protocols

Daily Loan Volume

This indicator is applied to credit protocols such as AAVE, Compound, MakerDAO, etc. The higher the demand for loans, the higher loans’ interest rate. In turn, it directly affects the profitability of lenders. This sets off a chain reaction and encourages users to deposit more funds into the protocol, thereby increasing the overall protocol liquidity.

Derivatives

Outstanding Debt 

It is one of the key factors affecting the profitability of derivatives protocols e.g. Synthetix. The higher this value, the more income can be distributed among token holders.

Closing Thoughts

An integrated approach is king when analyzing the investment evaluation of cryptocurrencies. The financial indicators of the project, the on-chain activity of the protocol, and other important characteristics are evaluated. It is also necessary to take into account the specifics of the particular sector where the project functions.

Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.