Digital Currency Value Drivers
Determinants of Value
From a simplistic perspective there are six main categories that broadly give digital currency its value.
Underlying Blockchain Technology
Does the underlying tech solve real world problems? Does it solve these problems better than other currently available tools?
Demand and Scarcity
Is there a hard-cap on supply and underlying demand to support the value of the asset? Demand can be for a multitude of reasons – store of value, transactional currency, unit of account etc
There must be infrastructure in place that allows for use, transfer, storage and trading in the asset
The purpose for which the coin was created must be unique and offer some “utility” to users.
Does the coin have an active administration and development team behind it that are driving its continued evolution and success?
Particularly in the early life of a new digital currency there needs to be a strong, well advised and active community of people that support and believe in it.
The valuation of digital assets is very much an evolving field which has seen much experimentation in recent years. Much of the experimentation revolves around appropriation of traditional valuation methods, with varying success, and the creation of some new, digital asset specific models. This is a rich field of interest to Cloudbreak but beyond the scope of this simple educational page. As such we will list several tools below that you might like to research more in your own time.
Network Value to Transaction/Metcalfe Ratios (NVT/NVM): These methods measure the dollar value of digital asset transaction activity relative to its network value. An increase or decrease in the value of the ratio can act as a leading indicator for the future price direction of the asset itself.
Market Value to Realized Value (MVRV): Market value is calculated by multiplying current market value by the number of coins in circulation. This can be compared to realized value which is calculated by adding together the total dollar values of each coin the last time they were moved. This type of analysis can tell us when a market may have become over-valued; potentially indicating a drop from current pricing levels or vice versa if the indicator shows an undervalued market.
Stock to Flow: Attempts to quantify scarcity and hence value, relative to other assets. Stock is the size of the existing supply and flow, the yearly production. Higher SF values (Gold = 62) suggest higher monetary value. Bitcoin currently has SF of 25 but by 2022 will overtake gold, which currently has a market cap of around USD 8 Trillion. Bitcoin is the worlds first scarce digital asset, like silver or gold but it can be sent over the internet. These things together have been the subject of much recent analysis attempting to predict future Bitcoin prices.
UTXO Age Analysis: By analyzing unspent transaction output data on the blockchain, we can see the last time a bitcoin was moved or spent. We can use this data to make inferences about relative valuations of Bitcoin as the data tells us about the behavior of investors. For example, when we see an increase in the highest age bands, it tells us that investors are holding Bitcoin longer, suggesting that the market thinks higher prices will eventuate in the future.
Two of the leading minds in the valuation space are Willy Woo (woobull.com) and Chris Burniske (twitter.com/cburniske). You might find some interest in exploring their work.