Crypto Summit 2021: How to Value Crypto
December 31, 2021
Lead Tech Analyst
I/O Fund’s Lead Tech Analyst Beth Kindig shared her views on cryptocurrency in the Finimize X Ledger Crypto Summit 2021. Here is the video “How to Value the Next Big Crypto Play” and an overview of the discussion.
04:00 Methodology to value Crypto or De-Fi project
08:56 Sentiment analysis
16:03 Sentiment Drives Hypergrowth
16:40 How I/O Fund traded Bitcoin
19:08 Audience Q&A
29:00 Promising Ethereum competitors
31:30 Final takeaways
How to Value Crypto:
There are a few valuation metrics that are used to value crypto and Decentralized Finance (DeFi). Total value locked (TVL) is emerging as one of the leading indicators. If you divide the market capitalization by TVL, the ratio could potentially help investors value crypto assets similarly as price-to-sales ratio, which is based on revenue. Crypto does not offer financials or quarterly results so the next best thing is to look at growth in terms of the total amount of funds locked into DeFi projects. In 2021, total value locked grew over 1200% with Ethereum claiming 62% of TVL. Notably, TVL growth benefits from increase in the underlying token price.
In 2018, Ethereum had a much larger share of TVL in the >90% range. This year, Ethereum’s dominance in TVL was challenged by Binance, Solana, Polygon, Terra and others.
Institutional inflows can also be a leading indicator, with Solana seeing upwards of $2 billion in venture capital with $250 million invested into SOL-based exchange-traded products (ETPs) with $42.2 million invested in one month. In a research report from Coinshares dated November 29th, “in terms of inflows relative to assets under management (AuM), Polkadot and Solana continue to be the winners, with inflows representing 8.6% (US$11.5m) and 5.9% (US$14.6m) of AuM respectively last week.”
Polygon’s popularity can be tracked in terms of network usage and the number of addressees from senders/receivers. In early October, the network saw a high of 566,516 which surpassed Ethereum’s 527,158. This represents 30-day growth in October of 168% compared to Ethereum’s 0.6%. Polygon’s usage is driven by NFTs on the OpenSea market and gaming with Arc8 seeing over 100K users within days of launch.
Metrics are fairly fragmented and hard to track yet unique addressees and number of developers on the platform can be tracked. For example, Solana has 2.3 million monthly active addresses on its network, 1 million active users for its Phantom wallet and 1,750 developers as of November.
Network hash rate is a lagging indicator for Bitcoin yet helps determine if the trend is up or down.
The I/O Fund’s Unique Approach:
In a contrarian stance, the I/O Fund does not believe valuation is what drives crypto. Instead, the portfolio manager, Knox Ridley, tracks sentiment in order to actively manage these assets. Notably, the I/O Fund was a pioneer in adding crypto alongside stocks with proper allocation and active management. Most funds and portfolios avoid this as the volatility in crypto is complex. We also send real-time trade notifications for every entry/exit and this helped us drive market-leading returns of 236% in one-year.
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Below is an example of how crypto performs like high beta stocks. On the chart, you can see the price fluctuations for Bitcoin, Ethereum and Upstart are nearly identical in terms of drawdowns. While many investors become concerned by this price action, it’s actually quite normal for the pricing in disruptive tech to be volatile. Over the long term, the gains almost always outweigh the losses, which is why the holding period for tech must be a minimum of three years and up to ten years. Near the bottom, when fear is at its most extreme levels, investors begin to question their holding period and decide to exit early, which is a behavior that leads to devastating losses. It’s much better to assume disruptive tech will have extreme fluctuations and to hold firm to the original plan of holding for an extended period of time. The only exception to this is if the story fundamentally changes.
Source: Ycharts; data as of December 1st
To give you a good example of what we mean by sentiment is that when Bitcoin was trading around $19,000 --- everyone wanted to buy (extreme greed), and when it dropped to $4,000 -- nobody wanted to buy (extreme fear). The I/O Fund specializes in disruptive tech stocks and Knox Ridley helped guide entries in the $7000 range during this time period. We provide a chart of our Bitcoin entries and exits below. The point is not to time the exact bottom, rather to get in at a reasonable price.
Source: I/O Fund, Portfolio with real-time trade notifications for stocks and crypto assets
According to the technical analysis from our portfolio manager, Bitcoin has the potential to reach $108-$160K before the next major selloff (i.e., note: assets and stocks do not go up in a linear fashion; therefore, pullbacks are distinguished from selloffs). You can also follow our portfolio manager Knox Ridley on Twitter and sign up to our free newsletter to get regular updates on Bitcoin’s price movements.
Lead analyst for the I/O Fund, Beth Kindig, has been covering crypto since 2013 which is three years before Ethereum’s launch. Therefore, we are more comfortable than most in weathering the fundamentals and technicals for crypto. This has helped the research firm build a unique subset of crypto positions. We believe Ethereum competitors have an advantage right now and should be closely assessed for opportunities. This is due to Ethereum’s high gas fees, longer-than-expected proof of stake merge, further 1-2 year delays on shards and rollups, and overall, a complex product road map where many things can create delays for the #1 DeFi network.
We discuss this and more in the Finimize Crypto discussion.
Additional previous articles from I/O Fund.
Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
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