How To Evaluate Cryptocurrencies?

I often hear from people: “Are you comparing these 2 coins?! You can not do that…” And I think for myself: “No, you can not do that, but I can.” When I ask why I can not compare “these 2 coins,” I get variations of answers: “Because they are different.”

I think that everyone who is serious about cryptocurrency investing should be comparing them to each other often. So let’s do this on imaginative example:

  • Scenario A: New coin is listed, and it is instantly top 50 which means that market cap is higher than $1 billion, people are rushing to buy, price is growing… so I get asked: What do you think about this new coin, should I buy this?
  • Scenario B: Coin in top 100 is pumping, it grew from $100 million market cap to $600 million market cap. People are rushing to buy, price is growing… so I get asked: What do you think about this new coin, should I buy this?

My answer is a big NO.

– Firstly, do not FOMO (Fear Of Missing Out), that is bad for you for many reasons, short term and long term.

– Secondly, There are whole bunch of other coins that have up to 100x lower market cap with similar chances.

Why is market cap important?

Notice here in previous examples that I did not look at the price of the cryptocurrency. There is one simple reason for that – it is not important! So what is important then? Well… important is MARKET CAP.

Market cap = number of coins x price of coin

You buy percentage with same amount of money. If you put $1000 in $1 billion coin A, you are getting 1:1.000.000th part of the pie. If you put $1000 in $1 million coin B, you are getting 1:1000th part of the pie.

This simply means this:

  • If coin A has market cap of $1 billion, and everyone’s share is equal to $1000, there are 1 million owners.
  • If coin B has market cap of $1 million, and everyone’s share is equal to $1000, there are 1 thousand owners.

Question for you is, if everything else is equal, what should you rather buy of these 2 coins? If you want for same amount of money to exchange for 1000 times higher chunk of a pie, then you will want coin B.

But not every cryptocurrency is equal! So now what?? Easy… you have to identify what is that variable that changes, and what is the value of that variable.

That variable is expected value or potential, and probability of achieving that expected value or potential.

If you are just speculating (which I do not recommend, because it is bad for you for many reasons, short term and long term) then there are some other variables as well. For investors who has long term outlook (which is 5 years+), these other variables are not important at all.

Here is how would that look on diagram:

If you think that probability is 60%, then lower the amount by 40%.

Now let’s compare coin A and coin B and see how they look like on diagram.

Another important factor is probability of happening something. You need to, by comparing two cryptocurrencies, determine what is the probability of ultimate success.

The expected value/probability ratio of both coins is what you need to compare in order to determine which cryptocurrency you should buy and hodl.

What probability consists of?

To better understand all of this, I will share what I have learned from Vinny Lingham, the founder of Civic cryptocurrency. This is more or less his words on this topic:

Let’s assume there is an equilibrium point where cryptocurrency doesn’t increase or decrease in price because we have hit the terminal velocity & max tokenomics (like staking) for token usage in the marketplace.

Whatever that number is, at that point the price of that cryptocurrency should be very stable and not deviate much day to day, assuming a modest annual growth rate of the network.

Today’s price should be a discounted value based on that terminal price, accounting for time and adoption risk.

Let’s assume a time factor is 10 years and the terminal value of a network is a big number, say $100bn. Excluding execution risk, the net present value of that future network based on a 3% annual discount rate should be maybe $75bn. Now, why would that network not be valued at that today? Mainly because over a 10 year period there are too many risks. Execution, technical, political, etc.

So the NPV (Net Present Value) of a future large network should be somewhere between 0-75% of it’s terminal value on a 10 year timescale. If you think execution and adoption risk is the biggest issue, then maybe that’s another 50% removed. So we’re down to 25% of terminal value, before discounting other risks.

The problem in crypto right now is that everything is pure speculation. We aren’t even accounting for substitute goods or competitive risks.

So, at the end of the day, it’s more important to back a team that can overcome and mitigate these risks over a long time horizon as it is impossible to predict them. Survival is the only game in town. The teams that can survive first 3-5 years from now, will probably be the de facto winners in their respective categories.

Survival biases is really what history is made of.

So the real question when assessing any network and the valuations thereof, is if the current NPV is a fair discounted future value of the terminal value for the network when it reaches terminal liquidity and, effectively, terminal network value. Arguably, most tokens are not at the terminal price value but the risks are heavily discounted right now because 95% of them will not survive to reach that point. If you think you’re smarter than the market, make your picks, sit back and enjoy the roller coaster ride!

As you can see, there are few things showing variable is made up of several ingredients.

Just because everyone around you are speculating, it does not mean that you should speculate too, or that speculation is the only way.

If you came to this part of the article, you know how to DYOR (Do Your Own Research), which is important because you need to DYOC (Draw Your Own Conclusions). Do not trust anyone, not even me. You can not trust people on Telegram, you can not trust people on Twitter, Reddit nor YouTube.

We are all superbiased in many ways, and vast majority are just looking for shortcuts asking questions:

Any news?

At what price should I buy?

Should I wait or buy now?

Will price go up or down?

I want to kick these people in the but because they are like parasites in the system who just want to drain value.

These people are chasing 10%, 30%, 50% returns. I am going for 100x or more. With mindset that you just learned, you will figure out that there are just two final outcomes: Or this cryptocurrency you like will go to 0, or it will go beyond anyone’s imagination.

If you are looking for anything in between, forget what you just read.

Now that you know how to evaluate cryptocurrencies, you know if you should buy them or not, you next thing you need to know is When Should You Sell Cryptocurrency? Click on the question to find out.

About the author

Robert Bartus

Robert has a marketing background, he worked as internet marketing growth hacker. He bought first "altcoin" in the mid of 2014. From 2017 he worked for 2 crypto exchanges and dozen various crypto companies as advisor and community manager which gave him valuable insights about the crypto industry.

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