More than 10,000 crypto tokens are circulating in the digital economy. Finding a crypto token with a value is a difficult task and hence the chances of making money are very low. This article shall explain the meaning of the value of the crypto token and how to calculate it.
Buying inexpensive coins in the cryptosphere is a fad, similar to purchasing penny stocks. However, one must recognize that stocks and cryptocurrencies are not the same things. Since cryptocurrency is often unpredictable, you may wonder what makes it valuable. The pricing of a crypto token determines everything, and various visible and invisible elements determine the price. Bitcoin’s price fluctuates by 5% or 10% on any day. Smaller cryptocurrencies can experience more significant price fluctuations.
Therefore, copying stock market phrases like stock price, crypto price, and the market cap does not make them identical. That is why most people become disoriented and cannot understand the precise relationship between market capitalization, supply, and pricing.
Further, the tokenomics for a certain crypto token are usually clearly detailed in the project whitepaper. It should help you understand the crypto token’s functioning, aim, allocation strategy, and more. When investing in cryptocurrencies, being able to compare its current market (trading) value to its intrinsic worth is a crucial metric for evaluating when to buy (undervalued) or sell (overvalued) markets.
How to Value a Crypto Token?
The technology underlying a cryptocurrency is critical. Decentralized currencies are resistant to censorship but are practically hard to shut down. However, they are controlled by decentralized protocols. Therefore, determining the intrinsic value of a crypto token is difficult as they don’t provide information on their fundamentals. However, the white paper gives information on tokenomics and utility. But the crypto-valuation is mostly a do-your-own-research type. There is a lot of literature on valuations. However typical valuation theories like residual income, comparable transactions, DCF, and so on will not do justice to the entire cryptocurrency ecosystem when it comes to valuation. Therefore, the crypto-sector must then continue to study and create new valuation models as they attract institutional investors.
Market-Cap & Supply Dependency
Market capitalisation (market cap) is a metric that quantifies and tracks the market value of a cryptocurrency. In other words, it is a cryptocurrency’s true worth. It equals the price of one token multiplied by the circulating supply of the token.
Market Capitalisation = Price of One Token x Circulating Supply of Tokens
Market Cap, Traded Volume & Circulating Supply of Bitcoin (BTC) on 11th July 2022
The price of a token is the value for which it is traded. When a buyer agrees to a fee to buy a token, it becomes the price of that token. Hence, it depends heavily on the demand and supply principle. When the buyers are more than the sellers, the cost of the token increases. Similarly, when the sellers are more than the buyers, then the price of the token decreases. Therefore, it can be said that the price of a token is a market-dependent function.
However, some tokens are pegged to fiat currencies and have their price changed per the pegged currency. Example- Tether (USDT) pegged to US Dollar ($).
The token’s algorithm controls the availability of tokens in the market via staking, mining, and coin-burn. As a result, some tokens increase in number due to token mining (e.g., Bitcoin (BTC) & Ethereum (ETH)), whereas some tokens decrease in number via coin burn (e.g., Binance Coin (BNB) & Bitcoin Cash (BCH)).
What Determines The Value of A Crypto Token?
A majority of the crypto investors are speculative. They buy and sell to make profits rather than using the token for its’ utility. This makes the market heavily fluctuate. Also, the holding period for a token in a wallet is very low. This volatility makes it difficult for us to determine the actual value of a crypto token.
Many factors give us directions to look into when valuing a token. Some of them are listed below-
- The allocation & distribution of the token
- Supply of token
- Market Capitalisation
- Token Model: Inflationary, deflationary, or dual model.
- Team Composition & Funding for the Project.
Avoiding the Common Misconception
One of the worrying misconceptions regarding crypto tokens is that the tokens worth pennies (say Dogecoin) are cheaper than the tokens worth thousands of dollars (say Bitcoin). However, if we dig a little deeper, we will readily understand that the price change should always be considered in percentage.
Assume that Token 1 is worth $1 and Token 2 is worth $2000. Now, you invest $2000 in each coin. Hence you get 2000 units of Token 1 and 1 unit of Token 2. Suppose each token appreciates by 10%. Then, the absolute return of Token 1 will be 10% of total units, i.e., $200. Similarly, the final return of Token 2 will also be 10% of total units, i.e., $200. Hence, the return is the same in both cases.
However, some might argue that the chances of Token 1 (cheaper token) appreciation by 50% are way more than Token 2 (expensive token) appreciating by 50%. This national bias is wrong and not backed by the data. The cost of the higher coin is most likely due to the higher utility, higher popularity, limited supply, more reliability, etc.