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Web3 / Crypto investment metrics (brain dump)

Astronomer Adjusting and Preparing Telescope By His Camp in Winter.

Stocks, bonds and similar traditional (CeFi) asset classes have tremendous amounts of metrics or tools at their disposal. On the other hand, it is fairly difficult to grasp valuation, price predictability and various ratios in the crypto world.

The goal of this repo is to analyze and watch over possible cryptocurrency metrics and to shed a light on undervaluation and overvaluation of various tokens. For example, I will analyze possible ETH value based on similar token’s metrics.

Market Caps (MC or FDMC)

A fairly standard metric that is used both in CeFi and DeFi world. You can calculate it by multiplying the current price of the asset with the current circulating supply.

The trouble starts when you want to calculate the fully diluted market cap (FDMC) which takes total possible supply into account. As you guessed, this is fairly straightforward for BTC which is 21M, but rather complex for ETH where there are several current analyses given the EIP-1559 and the future 2022 merge. One of these papers is Justin Drake’s ETH suply analysis which predicts peak supply to roughly 120M. Keep note that ETH supply could go to lower numbers as per the burning fees process.

eth 120M Total Supply 1024x463 1
TokenPrice (USD)Market Cap (MC)Fully Diluted Market Cap (FDMC)
BTC$ 43,217$ 813 B$ 907 B
ETH$ 3008$ 352 B$ 361 B
ADA$ 2.26$ 72 B$ 102 B

Sources for analyzing MarketCap (MC): OR OR

Market Cap by Value Settled (MC/VS)

Stocks have an important P/E ratio which is basically a price of stock divided by earnings per one stock. You can get the same ratio if you divide the market cap with total earnings. P/E ratio is traditionally used to analyze the undervaluation or overvaluation of one asset. A high P/E ratio means that a stock is overvalued (or that investors are expecting high growth rates in the future).

This kind of analysis is not possible with crypto tokens as blockchain systems do not have earnings, but I will argue here that value settled on-chain is the closest metric for probing the economic value on one blockchain system. I think this is a fair analogy to an operating company’s earnings, which unlike revenue, show the real health of one organization

Problem with value settlement is that it is difficult to calculate in the crypto world as not all chains have smart contracts and DeFi layers. Nonetheless, it is the closest metric to the important P/E ratio.

TokenValue settled (USD) / DayMarket Cap (MC)MC / VS
BTC$ 11.6 B$ 813 B70
ETH$ 28.7 B$ 352 B12.26
XRP$ 0.96 B$ 44 B45.83

Basically, this ratio states that ETH has a potential to grow to 17,174 USD in market value if it reaches BTC’s MC/VS of 70. In other terms this is (70/12.26) * 352B = 2T USD of MC ETH value.

Sources for analyzing Value Settled

Market Cap by Fees Settled (MC/FS)

Fees are an indication of economic activity and they can be used to analyze usage of various blockchains. Total fees can be a strong indicator for which protocols have actual economic activity behind them. i.e. “Which blockchains are people actually paying to use?”

Problem with fees settlement is that fees and their part in DeFi layers are complex and non-straightforward topics. You should take this ratio as more of an experimentation than actual objective metric. For instance, ETH could be valued at roughly 100x more than the current price, but as I wrote earlier, fees alone are not the only indicator of potential market value

TokenFees settled (USD, 7 day avg)Market Cap (MC)MC / FS
BTC$ 0.817 M$ 0.813 T0.9951
ETH$ 37 M$ 0.352 T0.00951
ADA$ 0.038 M$ 0.072 T1.8947

Sources for analyzing Fees Settled

Market Cap by Lindy Effect (MC/LE)

Added and modified from Wikipedia… 

The Lindy effect (also known as Lindy’s Law) is a theorized phenomenon by which the future life expectancy of a blockchain, is proportional to their current age. Thus, the Lindy effect proposes the longer a period something has survived to exist or be used in the present, it is also likely to have a longer remaining life expectancy. Longevity implies a resistance to change, obsolescence or competition and greater odds of continued existence into the future.WIKIPEDIA

The concept is named after Lindy’s delicatessen in New York City, where the concept was informally theorized by comedians. We will use it to anaylze Market Cap to Lindy effect ratio on three popular blockchains and to see how they stack up (on 19th of Oct 2021)…

TokenAge (months)Market Cap (MC)Market Cap by Lindy (MC/LE)
BTC153$ 1171 B7.653
ETH74$ 447 B6.04
ADA48$ 69 B1.437

In this example, we see that the bigest potential lies within Cardano (ADA) as it’s currently underperforming in price / market cap domain. On the other hand, if ETH reaches BTC’s MC/LE ratio of 7.653, it would mean that the MC of Ethereum could be 566.32 B USD (that means that the price of ETH has a potential to rise roughly to 4.800 USD only on this account). As with fees, I don’t think this metric is usefull as MC/VS ratio as Lindy effect does not generally explain the usage, quality and current workings of one blockchain (as value settled does).

Market Cap by number of Stakers (MC/NS)

We will look at the number of validators on mainstream PoS chains like Ethereum, Polkadot and Cardano to see how do number of stakers that are securing the chain is stacked up against the market cap. We cannot use this ratio to anaylze prices, but it’s a fairly good metric to analyze market impact (MC) VS chain security issues (NS). Bitcoin network is excluded from this analysis (of course) due to its PoW hashcash algo.

TokenNumber of stakersMarket Cap (MC)Market Cap by number of stakers (MC/NS) [low is better]
DOT (Polkadot)297$ 40 B0.1346
ETH (Ethereum)249,081$ 447 B0.00179
ADA (Cardano)2,076$ 69 B0.03323

Sources for analyzing number of stakers