by Nuno Menezes
Protos Asset Management, a leading data-driven cryptocurrency asset management company, recently developed analysis ratios streamline the valuations of cryptocurrencies.
Using Data to Determine Investing Strategies
The company is excited about the advancements made in its valuation models for cryptocurrencies and released a Medium post on April 19, 2018, to discuss and introduce its new crypto-economic ratios which are said to draw on utility, innovation, adoption, and publicity of a given network.
Valuation is an investment concept popularized by Warren Buffet who implemented it by using a ratio analysis strategy, used primarily to study the relationship between the market price and the intrinsic price of a given asset.
The concept is particularly useful for evaluating an asset’s utility and price, serving as a tool to assess “cheap buys” and “expensive sells,” and determine entry and exit points within a defined market trend.
According to the post, the price-earnings-ratio is popular because it is especially useful with equities while being able to compare the price of an asset in regards to the earnings of the company.
4-Factor Data Model
Proto Asset Management believes that given the exclusive properties of crypto-economics, there is the need to replace or reinvent the existing rations for traditional assets and as so the company went ahead and started to develop the adequate ratio for cryptoassets.
The company discusses a “4-factor model” to analyze a cryptocurrency:
1: How much turnover (utility) does the network have with price?
2: How much developer activity (innovation) does the network experience in relation to price?
3: How many users (adoption) does the network have in relation to its price?
4: How much news (publicity) does the network generate in relation to its price?
As stated, cryptocurrency networks have arguably different properties as common companies as they are not tied to cash flows which are used for a discounted cash flow analysis. The progress and development are driven by a developer community and its investors and users as opposed to employees and customers in a company organization.
Based on this approach, Proto Asset Management was able to identify a complex set of measurable factors considered to be intimately attached to cryptocurrency returns.
The company also identified four additional factors that have a direct impact in the attempt to find a ratio that is applied to digital assets:
On-chain transaction volume: measures the network’s turnover and serves as a proxy for its utility in transferring value.
Github commits: measures the activity of the network’s developer community and serves as a proxy for the ability to innovate over time.
Active addresses: measures the adoption of the network and serves as a proxy for the network’s potential customers.
News: measures the publicity that a network receives and serves as proxy for the networks ability to create hype.
Even though the company acknowledges that this can be regarded as a limited selection of factors and wants to encourage any discussions with researchers that can come up with different views.
The company listed four ratios which they believe can provide a lot of information on cryptocurrencies:
1- 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.”
2- NVD — Network Value to Developer Output
The NVD ratio goes after the number of code pushes, issue interactions, pull request interactions, GitHub commits, comments on commits, and number of repositories that were open sourced should be collected.
3- NVU — Network Value to Users
The NVT ratio assumes users to possess a token and never make use of it, considering utility to be solely described by transfer and store of value.
4- NVN — Network Value to News
News and hype have an enormous impact on prices and it is essential to consider if recent media development backs the current network value. This ratio identifies new investors attracted only by market hype and includes sophisticated sentiment analysis. To normalize the ratio, the NVN is calculated in millions.