How to Value an Altcoin in 2020
Let’s talk about a simple yet important perspective for the valuation of any currency; cryptocurrency or fiat for that matter.
This valuation method begins first with understanding an important meaning lodged neatly within the definition of the word cryptocurrency - a subtle definition that has unfortunately been lost on many investors.
Taking a closer look at the word cryptocurrency, we see it’s a compound word - that is, two smaller words combined to make a new word with its own meaning:
- CRYPTO: An abbreviation of the word cryptography; the art of writing or solving ciphers and codes;
- CURRENCY: Something that is used as a medium of exchange; money.
As a compound word, cryptocurrency is generally defined as a digital currency that utilizes encryption as the mechanism to validate and verify transactions.
So what is it within the word cryptocurrency that lends itself to a new perspective on valuing altcoins?
The Subtle Meaning of Currency
When we refer to currency, let’s now rather consider this less used definition for this word:
Reference to flow, as in the flow or a river of the current in a battery.
This subtle difference in the meaning of the word currency is in no truer sense, the REAL value of any medium of exchange, is its currency — that is, its throughput, flow; current.
It’s this subtle yet often misplaced definition that helps to bring into focus a slightly different perspective when addressing the valuation of a medium of exchange — A valuation method determined by the mechanics of flow.
Valuing the Flow of a Currency
Intentionally, I’d like to move away from the use of the word currency and substitute it for the word flow to help impress upon this point.
If we think of the value of a currency as its flow rate, then what are the components that make up this flow rate? Flow Rate is calculated by dividing Volume by time. Time is definable, so we just need to determine Volume. This can be done by answering these 3 questions:
- How many users?
- How often do they use it?
- How large are the transaction values?
It shouldn’t matter if we are talking about fiat currency, cryptocurrency or the current through a dam or circuit, the laws of physics apply equally in all cases.
Factors that Contribute to Flow
Following on the heels of the premise that market price of a medium of exchange is largely based on its currency and its currency (flow) is determined by the number of users, their transaction frequency and transaction value, then what are the primary factors that contribute to an increase in users, an increase in their transaction value and increase in the frequency of their transactions?
It could be said it's determined by these three factors:
- Executive Leadership / Core Team
- User Community / Tribe
- Market Demand / Worldwide Reach
So, when valuing cryptocurrencies, especially for the longer-term investor taking the perspective of flow offers a slightly different paradigm in your assessment and valuation of altcoins.
The Time Value of a Cryptocurrency:
Time is the dimension we use to base profitability for all investments. The digital world naturally evolves much faster than the physical world and within the sphere of cryptocurrency, we see continually see rapid evolution. This rapidly evolving ecosystem will continually offer up extraordinary investment opportunities for the astute investor, year after year as these technologies and ecosystems evolve. It’s the astute investor that understands that over a relatively short space of time, the compounding effect of these rapid evolutions can lead to extraordinary gains.
As we’ve seen, in just over 10 years Bitcoin has gone from a valueless unknown to the best performing investment…probably of ever. If Bitcoin performed this well in its first ten years of life, how will its performance be in its next ten years? What value will Bitcoin have when it turns twenty-one?
And what does this say for cryptocurrencies in general? For that matter, what will the value of cryptocurrencies be in five, ten or even fifteen years from now? Those who wish they bought Bitcoin when it was a dollar are missing out on bitcoins of tomorrow which are nestled within the thousands of altcoins trading today.
For those looking to get involved in cryptocurrency, there is no better time than now to hone and acquire the skills necessary to value and find the bitcoins of tomorrow.
Until then trade safe,