Cryptocurrencies can be a typical investment due to their volatile nature. On any day, it can produce massive losses and gains, and thus finding out the actual value of a digital currency can be very tough for any trader. Hence, for every cryptocurrency investor, it is important to know the comparison method between its intrinsic value and the present trading value because that can help in trading the same on sites like the bitcoin billionaire. One thing that must be mentioned here is that the conventional valuation methods for finding out the values of stocks, commodities, bonds, and fiat currencies may not work satisfactorily with digital currencies. It is due to the fact that there is no particular terminal value, no recurring flow of money, and no payment of dividends.
However, by using methods like the ‘relative valuation’ and ‘absolute valuation,’ one can find out the real worth of a cryptocurrency. Anyway, these methods of valuation should not be used for cryptocurrency investment as they can just help in understanding the factors that influence the value of a cryptocurrency.
- Equation of Exchange Monetary Model – Absolute Valuation Model
It is also called the Quantity Theory of Money and is a helpful theory to determine the value of cryptocurrencies. It is because the model tries to get the value that is supposed to be provided to the users in a digital currency network and connecting this value with the demand and supply of the coins to find the individual worth of a coin. The equation can be written as ‘MV = PQ.’ In this equation, ‘M’ is the average money supply within an economy. Here it signifies the net number of coins within a cryptocurrency environment. ‘V’ is the money velocity, i.e., a measure of the spending frequency of a cryptocurrency coin. ‘P’ is the price level of a cryptocurrency, and ‘Q’ is the real expenditures index.
- Using the Equation of Quantity Theory of Money
In its basic form, one can use the Absolute Valuation Model for a cryptocurrency as it can help in several cases, including the following:
- Forecasting the supply routines of a currency unit. It can help in determining the availability of coins and their exact numbers in a trading session.
- Getting a rough market share of the cryptocurrency’s reach and providing the S-adoption curve.
- I am speculating the velocity of the cryptocurrency.
- We are determining the discount factor which is needed to arrive at the future utility of a cryptocurrency compared to the present.
- Relative Valuation Model:
People can also use the Relative Valuation Model for finding the real worth of cryptocurrencies. Anyway, in this model, much still needs to be done as there is not a lot of empirical evidence. Still, some interesting metrics are there for making comparisons and can help in determining relative valuations.
These are as follows.
- The ratio of value-to-transactions: For a cryptocurrency, it is a ratio of the market cap dollar equivalent to its day-to-day transaction volume.
- Transactions in a second: It is an important metric determining the mass acceptance of cryptocurrencies by customers.
- Cryptocurrency holding base properties: A specific cryptocurrency’s value can also depend on aspects like the ownership concentration, ratio of coins provided to the user holdings, and the number of owners who have more than a certain number of digital coins.
- Mining profitability: It determines the nature of mining the cryptocurrency and the profitability of miners in the job. This can be a very helpful aspect while studying the ownership structure.
- Distribution and business volumes: It looks at the exchanges where there is an availability of cryptocurrency and the transaction volume distribution within the exchanges.
- Conclusion – After going through the absolute and relative valuation, it can be safely concluded that there is still a lot of room in cryptocurrencies model development that can precisely arrive at their value. The long-term value of any cryptocurrency is certain to be related to its incentive, distribution, and staking models inside a framework. Thus, different types of models may be in place for examining different cryptocurrencies because a one-size-fits-all approach may not be feasible in the case of digital currencies. However, at the moment, we can certainly make use of these two models to tentatively arrive at a cryptocurrency’s value that can at least provide the users with something to ponder about and help in deciding an investment.