How to value a crypto coin seems like the million bit question? Here is what i do before i acquire a new coin, steps in order of importance.
- SUPPLY - How does the coin inject supply into the network?
There are three main types;
Proof of Work - The coins are created through a network of computer "miners" that require initial capital to build the computer and constant electricity to run. People who invest in equipment and power to mine, have a pay off period and its not immediate, thus creating a pool of people that a vested interest in the success of the coin. BTC, LTC, ETH ect.... If network hash power is going up, likely the price is going to follow...you can look up exactly how much it takes to mint a coin for that day, and add a margin to that price as miners don't work for free. As hash power goes up so does the amount of resources it take to create a coin, and new miners investing waiting for their return.
Proof of Content - The coins that derive value from content that users create like Steemit ! If the user base is increasing the price will likely follow.
Proof of Stake - The people that hold the coin essentially have a vote on the network, the long term success of these type of coins are yet to be seen and largely unproven but are getting there with time. The issue here is the 51% problem if one entity holds 51% they could manipulate coins. More risky than the two other options.
Don't invest coins where the supply dramatically favors the dev team, is controlled by the dev team, or not clearly laid out in the whitepaper.
- LIQUDITIY
Once the a coin passes the above test, liquidity is where the value per coin lies. How much total value will people need to use the coin in their day to day lives. For example lets say there was a coin that had a total supply of 100 coins and people used them to exchange 100,000 US dollars of value every day. Each coin would have to have a value of roughly 1,000 dollars a piece... 100 coins x 1,000usd = 100,000usd worth of liquidity to transact daily.
This brings up two questions to answer how many people do you think will use the coin and how much value will need to be transacted daily. If you measure current fiat currency transactional volumes its around 5 trillion USD per day, so the current 800 billion dollar market total of cryptos is not going to be enough liquidity to replace, we need more coins or better yet more value attributed to each coin to replace the current forex financial system. Market cap in the crypto space is not as important as necessary liquidity. They are somewhat but not directly related as you never really know who is holding and who is trading. The exchanges in theory could be exchanging the same million BTC's everyday.
The way i look at it, does the coin replace a current system, does it solve that problem better, and will people prefer to use them and create demand. What are the numbers for the current system its replacing.
- DEVELOPMENT TEAM
More traditional way of looking at coin, do your research and investigate the team. Does it really even have one? Some don't and thats not necessarily a bad thing but the ones that do is like free info to look up.
If they don't have a published dev team crypto coins are largely open source, this allow anyone to inject a network upgrade or fork the chain if the users vote with either their coins, or their miners. Essentially a working democracy, more power, more votes, and certainly some entities have a huge amount of voting power. The entities with the most mining power also have the biggest stake in the coin success, and should do whats best for it. We could go down a rabbit hole on that statement but theory is there.
- MATH
The above three steps can get you a rough estimate of a coins value based on current information.
For example;
- What industry do you think it will replace or supplement = Forex markets
- Whats the current value of that industry traded daily = 5 trillion dollar
- How many coins are in the total usable supply = 100 million
So each coin needs to be at least $50,000 (traded value/supply) , if its a POW coin layer in how much it take to mine that coin and you should be close.
Always stay diversified, lots of innovated coins to come!