In equity markets, valuation models were popularized by the legendary investor Warren Buffett.
In general, all these models use ratio analysis, which studies the relationship between the market price and the intrinsic value of an asset. The analysis enables a trader to segregate cheap and expensive stocks.
In case of cryptocurrencies, Protos has developed a four factor model, which aims to answer the following questions:
1. How much turnover (utility) does the network have in relation to how it is priced?
2. How much developer activity (innovation) does the network have in relation to how it is priced?
3. How many users (adoption) does the network have in relation to how it is priced?
4. How much news (publicity) does the network receive in relation to how it is priced?
Cryptotokens don’t have cash flows, which can be used to perform a discounted cash flow analysis. In case of blockchain networks, progress is driven by a developer community and not by employees or customers.
Protos has identified a compressed set of measurable factors, which it considers appropriate to be linked to cryptoasset returns:
- On-chain transaction volume – measuring the network’s turnover and serves as a proxy for its utility in transferring value.
- Github commits – measuring the activity of the network’s developer community and serves as proxy for the ability to innovate over time.
- Active addresses – measuring the adoption of the network and serves as proxy for the network’s potential customers.
- News – measuring the publicity that a network receives and serves as proxy for the networks ability to create hype.
Protos does acknowledges that the above list is limited, but plans to add other factors such as hash rates, volatilities, inflation rates, as well as mining distributions and wealth distributions in the future.
Four ratios
NVT — Network Value to Transaction Volume
The ratio measures the “speculative fraction of the on-chain volume that is used to transfer value from one exchange to the other and the negligence of any utility other than the transfer of value.”
NVD — Network Value to Developer Output
The NVD ratio is based on the number of code pushes, pull request interactions, issue interactions, GitHub commits, comments on commits, and number of repositories that were open sourced should be collected.
NVU — Network Value to Users
The NVT ratio is based on the assumption that users will hold a token and never make use of it. In abstract, the NVU ratio “assumes that utility can be solely described by transfer and store of value.”
NVN — Network Value to News
News and hype have a huge impact on cryptocurrency prices. Therefore, it is a must to consider whether or not the current network value is supported by the latest unusual news announcements. In order to normalize the ratio, the NVN is calculated in millions.