5 Valuation Metrics for Bitcoin and Digital Assets

Many valuation metrics should be considered before investing in a digital asset. However, this article will explore five important categories which will help in analyzing the value of emerging and existing cryptoassets.

1. First and foremost are the software developers.

Although the majority of projects are open source, developer sentiment has a contagious effective when it comes to the morale and enthusiasm of a development community. If the number of talented developers increases, then popularity will attract more developers which will lead to more efficient development. However, if the number of talented developers begins to stagnate and decline, then the collective community will lose interest and most likely move into  different projects.

Developer impact can also be found in the quality of the latest GitHub commits. A commit is when source code is amended or added to the initial source code to improve the function of the system. cryptomiso.com is a website which ranks cryptocurrencies based on the quantity of GitHub commits a project receives. Bitcoin is currently 20th on this list.

The concept of ‘quality over quantity’ is entirely applicable to this scenario. In many cases, an excessive amount of commits can be a misleading statistic. A developer who can simplify the code as much as possible will ultimately make the source code more effective. If a VC is looking to invest substantially, they should communicate with a developer or learn to distinguish a quality commit from a unnecessary commit. In some cases a refactoring commit can create a bug within a network, such as the recent Bitcoin Cash near miss.

2. Understand the impacts of ‘digital siblings’ and competitors

In the realm of cryptocurrency, it is import to understand the origins of each crypto asset. For instance, one must understand which crypto assets are forks of a different source code. For example, Litecoin, Dash, and ZCash are all forks of bitcoin. Furthermore, features of different forks can be implemented into other similar projects. For example, Ethereum adopted zk-snarks which were first developed in ZCash. Zk-snarks are the premier technology for privacy and auditability. When considering the digital siblings of your crypto investment, ask, ‘can your cryptocurrency’s unique value be replaced by an existing fork?’

3. Issuance Model – How are the coins issued and who owns the majority of the coins?

In many cases, the company or foundation behind a cryptocurrency will possess a large percentage of the total supply. For example, it is said that Ripple owns about 60% (January 2018) of all XRP. Many have criticized Ripple on this point, however it is promising to see that they plan on injecting 2 billion XRP tokens into the Indian economy. In the next five years one billion people in India will become banked through their cell phones. By partnering with major Indian banks and Telecom corporations, Ripple hopes to dominate India and increase their rate of global adoption. Fortunately, it seems as if Ripple is acting responsible with their large amount of XRP. However, other whales who possess the ability to drastically manipulate the market may not be as responsible.

4. Network Health and Hashing Power as Security for the Network

There are many different facets to consider when evaluating the health of a network. Some variables include mining geographic distribution, total hash rate, and minimum amount of resources required to preform a 51% attack.

Bitmain has been one of the largest points of centrality within the bitcoin network. Bitmain controls three mining pools: AntPool, BTC.com and ConnectBTC. Combined, these pools control over 40 percent of bitcoin’s total network hash rate. This hashing power percentage will only increase with Bitmain’s IPO expected to be listed on the Hong Kong Stock Exchange in September.

Up until now, bitcoin mining demographics have been highly concentrated in parts of China and Iceland. Having the majority of mining farms in one location creates a central point of vulnerability for the bitcoin network.

Additionally, opening mining farms around the globe decentralizes Bitmain into a multinational corporation. Therefore, they decrease any single point of weakness. If any government wanted to dismantle bitcoin they would either invest billions in hardware to ruin the reliability of the network, (which is getting increasingly difficult as Bitmain expands). They could also invade the largest mining farms. While the majority of Bitmain’s mining farms are located in China, it is promising to see they plan to open a farm in Texas later this year. With more large mining farms dispersed around the globe, bitcoin will become less vulnerable to one centralized attack.

5. Consumer Community Support

First, how many companies will accept your cryptocurrency? There’s a website called http://spendbitcoins.com/ which lists how many places will accept a specific crypto asset. This metric is more important when evaluating cryptocurrencies, and is not as relevant for crypto commodities and crypto tokens.

For the majority of crypto assets, the adoption stage is still very infantile. Nevertheless, the target market for a coin’s usage is important to consider. Is the digital asset a token for smart contracts? Will it be a token used primarily in retail? Is it a digital transferable asset such as a sword in a video game or tokenized art?

A lot of cryptocurrency popularity is based on brand image. Humans are brand driven and loyal to logos and idols. For instance, there is nothing revolutionary about the cryptocurrency Dogecoin. Still, there is a strong community that has a genuine love for Dogecoin.

There are many other metrics which are not included in this article such as partnerships and funding. Either way these are just some of the important factors behind understanding a crypto asset’s potential for success and a profitable future.

Disclaimer: I am not a financial advisor, this is not financial advice. Please do your own research and make objective decisions. This article is intended to educate readers on the valuation metrics of cryptocurrencies. The author of the article owns cryptocurrency.