Financial Metrics

Though cryptocurrencies don’t have familiar revenue based metrics they do are metrics that are useful.

Market Capitalisation

This is the number of coins in circulation (aka Circulating Supply) times price. On its own it’s a metric that should be treated with caution, as it can be spoofed or reflective simply of manipulation like pump and dump.

If however, you combine Marketcap with Transaction volume, you can create a hybrid index which is more meaningful.

Token Distribution & Economic Model

As cryptocurrency projects issue tokens to finance themselves they will publish a scheme for how tokens will be distributed. This will often include a ‘premine’ which essentially means a percentage of the supply of tokens will be created outside of any proposed mining mechanism – essentially creating value out of thin air.

This has been a point of contention with ICOs and new crypto venture, with premines often associated with an attempt to cash in early.

The distribution of tokens will provide very valuable information about how the project intends to finance itself, reward its investors, team, community and users. If the project is serious it will include lock-up clauses which mean that those rewarded with tokens cannot cash them out until after a specific period has expired. 

Token distribution is one element of the economic model for managing the supply of tokens or coins which has a critical impact on scarcity and price. Given Bitcoin is form of digital cash, certainty over its supply – fixed at 21 million – and governed by a very clear issuance mechanism, is one reason why people are willing to invest in. Any project without a clear economic model, or a supply that isn’t capped or can be easily changed, is one to be wary of.

Seeing into the future

Given cryptocurrency is transformative, assessing the future impact of a new technology can be hard. Tesla is a great example; it is a publicly traded company with financials – including PE Ratio – but x7 increase in its share price in 2020 wasn’t driven by current performance.

Some of that speculation might have come from the opinion on macro-factors like future adoption of electric cars as well as influences that are harder to predict, such as development of battery technology, changing attitudes to fossil-fuel based cars, and autonomous vehicles.  

But equally, parallel developments, such as the ease of share trading played a huge part, and how those new traders valued the charisma of its CEO – Elon Musk. So in that sense, fundamental analysis needs to consider subjective factors.

When you look at the impact of Covid19, you are into the realm of unknown-unknowns, solutions for problems that don’t even exist.

What this means is that investing sometimes requires you to look into the future, rather than things as they are now. The growth of the internet destroyed bricks and mortar businesses like Blockbuster, and created an entirely new way of delivering business and consumer services that we now take for granted.

If that kind of change is coming in relation to blockchain technology, where will the impact be greatest and is adoption likely to follow a simple linear path? There are no certainties here, and at a very general level the labels Bull and Bear Market – referring respectively to optimism and pessimism around price – gauge sentiment but more specific models exist that describe how new technologies are adopted.

Some of the most commonly mentioned in relation to cryptocurrency are:

Diffusion of Innovation (Everett Rogers)
Shows adoption following a normal distribution curve across groups of adopters with varying characteristics and motivations. The critical point of adoption is called ‘jumping the chasm’ when adoption moves from innovators & early adopters (making up 16% of all adopters) to the mainstream. Many analysts believed we are at that point now with crypto & blockchain.

Gartner Hype Cycle
This is a branded model produced by Gartner that visually maps the path of a new idea or technology through distinct phases starting with a technology trigger, peak of inflated expectation, trough of disillusionment, slope of enlightenment and eventually a plateau of productivity.

Elliot Wave Principle
The Elliott Wave Principle looks at collective investor psychology, which it suggest moves between optimism and pessimism in natural cycles. These mood swings translate into patterns that correlate to price movements at each of five broad stages.