Guessing on Cryptocurrency Prices? You’re Doing it All Wrong
By Mark Helfman on ALTCOIN MAGAZINE
If you’re plugged into the cryptocurrency space, you hear people ask questions like “can XRP go to $100? Can bitcoin reach $1 million?”
Seems everybody has an idea about high cryptocurrency prices can go. John McAfee says one thing, Mike Novogratz says another, Thomas Lee says something else, and random YouTubers say whatever. They have data and facts and evidence. They sound credible. And they’re armed with the most powerful weapon on the internet: an opinion.
Those numbers people throw around? They’re hogwash. Nobody can predict the future. Except maybe this guy:
While you can’t predict the future, you can make an educated guess about how much a cryptocurrency’s price might go up. Even if your guess doesn’t pan out, you’ll learn more about your crypto and get a better sense of what problem it’s trying to solve.
There are no dependable ways to value cryptocurrencies
Cryptocurrency is a purely speculative market with no benchmarks and scant performance history.
Many cryptocurrency analysts use stock metrics like market capitalization, aka “market cap,” or market value or beta or other obscure concepts and insider lingo. I discuss this approach in more depth on Investing in Cryptocurrency because it’s a useful crutch for comparing one cryptocurrency to another.
The problem is, it doesn’t help you assess whether any single cryptocurrency is over- or under-valued, nor what you can expect as a potential return.
I’m not sure stock market concepts work with cryptocurrency prices because stock analysis has some basis in reality, with decades of research into its usefulness and application. Cryptocurrency has no such reality.
So what do you do?
Make an educated guess!
Educated guesses are the best types of guesses. Even if you’re wrong, you get to think critically.
How do you make an educated guess?
Learn a bit about the project. Start with coinmarketcap, which provides price information and links to other useful information. I also consider insights from cryptocurrency newsletters and other people I know and trust.
Then, look at the token supply, the token distribution, the market it’s trying to address, and the execution on the road map. Some basic rules:
- When you have fewer tokens, you get higher prices. For example, WAVES is $3 while XLM is $.10 — not because WAVES is necessarily more valuable, but because there are far fewer WAVES tokens than XLM tokens. WAVES has a higher price simply because of math. Ignore the numbers, think about value.
- Expect slower price growth whenever the development team holds a lot of tokens or the cryptocurrency has inflationary tokenomics (i.e., the network constantly produces new tokens). As new tokens get released into the market, they tamp down on price growth, even if the overall value of the network goes up.
- Consider the size of the market that would use the token. Bitcoin’s market is massive-everybody can use bitcoin to send money to each other. Quantstamp’s market is tiny-it’s for people who need smart contracts. You can’t expect QSP to even sniff $50 per coin. Bitcoin’s price can realistically hit $1,000,000 without it even capturing much of the world’s wealth. Set your expectations accordingly.
- When developers show they’re executing on their roadmap, you should trust they know what they’re doing and have the resources and management to deliver results. Past performance doesn’t guarantee future success, but it’s better than hoping a poor-performing team will shape up.
How do you put that information to good use?
Use your brain!
For example, the cryptocurrency DENT right now has a value of $80 million, according to coinmarketcap. Its immediate usage is buying/selling unused mobile data.
(For U.S. readers, this may not make sense because many of you have unlimited wireless packages. In many places, people buy mobile data in fixed packages, e.g., 4 GB per month. DENT is for those people, not you.)
From my research, I discovered this market is somewhere between $5–10 billion. A very wide range, for sure, but I’m just a guy sitting at a keyboard, it’s the best I can do. Let’s use $8 billion as our number.
As of this post, DENT captures a tiny 1 percent of this market, with some portion of those tokens held as speculation. If DENT succeeds, it will almost certainly capture more of this market. Even a leap to 4 percent would quadruple your money, which is an insane return on your investment.
Supply of DENT is fixed at 100 billion, so you don’t need to adjust for possible inflation but DENT has a hefty development fund, around 40 percent of the total supply. When developers hold a lot of tokens, this reduces the amount available for purchase and exchange, which artificially raises the price. Once they sell, prices generally go down. So you have to account for developers’ release of more DENT into global circulation. Coincidentally, DENT just released a bunch of tokens and as a result, its price went down while the rest of the market went up.
DENT’s team has announced plans to build remittances, phone calls, and video chat into its app. These are all features that will further build its network and open up new, potentially massive markets, possibly $1 trillion worth of commerce or more.
Millions of people have already downloaded DENT app and report actually using it, meaning it’s already gained a little traction. As a result, you can expect the potential market to expand over time. Not to mention the potential extra boost if some people switch to fixed-rate data packages to take advantage of arbitrage opportunities that never existed before DENT was created.
And, of course, speculators buying to sell once the price goes up.
Always lower your expectations
Did you notice I have not yet mentioned DENT’s price? Lots of numbers, lots of variables, no price.
Because you need to consider reality. DENT uses unproven technology to address a problem nobody’s ever tried to solve before. Even if it succeeds, it’s impossible to know what competitors will do. Even if succeeds and also drives away competitors, it’s possible people will constantly move money out of DENT, maybe even manipulate the prices. This happens to all currencies, even “real” ones like dollars, euros, yen, and pesos.
Also, it’s impossible to know the team dynamics and contingencies. What happens if their lead developer gets mad and quits? What happens if the team falls apart? If it turns out they’re all incompetent? If it turns out they’re all extremely competent but can’t agree on anything? It’s possible the entire project collapses.
After all that analysis-which doesn’t even consider the big risk that the platform itself will not work -you can make an educated guess about the potential price.
In DENT’s case, this is $0.15 (15 cents) per token if people use it for remittances.
At that price, DENT will capture $15 billion worth of commerce. At any one time, the world will use $15 billion worth of DENT for something-speculators trying to make money, users exchanging minutes or sending money to each other, wireless companies buying a little DENT to hedge against lost revenue, and DENT holding reserves in its treasury.
How accurate is that price?
That’s the best part about educated guesses-they don’t need to be right, they just need to help you think through your decisions.
As Supreme Allied Commander and U.S. President Dwight Eisenhower said, “plans are useless, but planning is indispensable.”
I can’t wait to see how it all turns out.
Originally published at https://markhelfman.com on May 3, 2019.