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How do we value blockchains?
At Bitcoin Market Journal, we’re obsessed with finding “key metrics” to value digital assets like bitcoin and altcoins – in the same way that investors have metrics like P/E ratios to value stocks. In this topsy-turvy new world of digital assets, we’re trying to bring order to the chaos.
We started from a simple premise: the health of any economic system would be based—at least in part—on how many people were using it, and how much they were using it.
Based on these principles, we came up with three metrics that we’re sharing over three weeks. Today, our analyst Kevin Kelly explains the third of these metrics: TokenVelocity. |
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What is Velocity?
Economists and investors use hundreds of metrics to gauge the health of an economy, but one of the most well-known is the velocity of money. Velocity serves as a measurement of the rate at which money is exchanged within an economy.
Most countries calculate their velocity of money using a ratio that divides Gross Domestic Product by the M1 or M2 money supply. The velocity of the U.S. dollar is around 6 or 7, meaning that the average dollar bill trades hands around six or seven times a year.
Developed economies -- like the United States and Western Europe -- tend to display a higher velocity of money, indicating that a healthier economy is directly proportional to a high velocity of money. They have better flow.
Crypto enthusiasts now ask the question: "Do the same principles apply to the health of a blockchain network?" The answer rests in the application of the technique, and how we derive a “crypto-friendly” version of the formula.
We believe that token velocity indicates the long-term, intrinsic value of a token. It can provide powerful insights into the liquidity and overall popularity of a blockchain network.
Understanding Token Velocity |
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The traditional ratio for money velocity is derived from the Equation of Exchange, well known to all economists:
PQ=MV M is money supply V is velocity (number of times per year the average dollar is spent) P is the price of goods and services Q is the quantity of goods and services
The “V” within that equation can also be used for token velocity, which is the total transaction volume in USD divided by the market cap of the token. It measures the “speed” of a token: in other words, the number of times it changes hands. Analyzing a token’s velocity helps investors understand its liquidity and usage rate.
Analyzing Token Velocity
Description: Token velocity is the total transaction volume in USD divided by the market cap of the token.
Model: Our model using the Velocity formula includes a side-by-side comparison with the Market Cap/Metcalfe Ratio and NVT. The model uses a total of seven variables to compute the three ratios in an attempt to value the currencies amongst each other. The data for each currency (as well as your own) can be found at https://bitinfocharts.com/. Users must simply input data for their token of choice and examine the difference between the ratios.
Details: Although the model may appear simplistic, it can yield tremendous insights into the realm of cryptocurrency valuations. Assumptions and formula details for the Velocity formula are described below.
- Price: current market price of digital asset
- Market Cap: the value of the total market (number of coins in circulation x price)
- Transaction Value last 24hrs: total value of transactions occurring in the past 24 hours
- Average Transaction Value: average dollar value of a single transaction
- Transaction Value Last 24 hrs: Average Transaction Value x Transactions in last 24 hours
- Active Addresses: total number of active addresses (think of this like wallets)
- Volume last 24hrs (USD): total value of transactions occurring in the past 24 hours on the network and exchanges
- Metcalfe Ratio (n^2): the total number of active addresses, squared
The formula for token velocity is nearly the inverse of the NVT ratio with the difference being that token velocity takes exchange transactions into account whilst the NVT ratio does not.
The NVT ratio excludes exchange data, because it tries to determine the overall health of a blockchain network -- exchange transactions can muddy the picture of real people using the network.)
Token velocity includes exchange data, in order to measure the full scope of a token’s liquidity and activity in the blockchain economy. |
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In our model above, we found that tokens like bitcoin (BTC) and ether (ETH) tend to yield lower velocities due to certain structural aspects in their design. Educated crypto investors understand that Bitcoin and Ethereum are less capable as a means of transaction due to their low TPS (transactions per second).
Litecoin, a token that produces a solid 56 transactions per second, has a much higher velocity since a vast majority of its users utilize the token as a means of payment. Litecoin has a higher velocity, which means more “flow.” This can be a good indicator of the overall health of Litecoin: like a free-flowing river, or robust circulatory system, Litecoin is flowing.
Conclusion
Now that we’ve explained our three Blockchain Investor Metrics, we’re making our model free to do analysis on your own favorite blockchain project:
Additionally, you can download our academically-published, peer-reviewed Blockchain Investor Scorecard, which lets you analyze the five essential Key Performance Indicators (KPIs) that influence the long-term value of a token or project.
Investors analyzing both the quantitative and qualitative aspects of digital assets will undoubtedly have an edge in this race for value.
Health, wealth, and happiness, |
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Kevin Kelly Analyst, Bitcoin Market Journal |
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No thanks to broad inaction on climate change we're now just 100 seconds from midnight.
For those of you who are unfamiliar, the Doomsday Clock is a metaphorical barometer maintained by the Bulletin of Atomic Scientists, which currently boasts 13 Nobel laureates on its prestigious board, and it's meant to give us a sense of how neigh they feel the end actually is.
Yesterday, they set the clock forward by half a minute and it now is now giving its most dire reading since it began ticking in 1947. Nearly 40 years ago, when the clock first read two minutes to midnight it inspired this awesome song by Iron Maiden, a song that I listen to too often to this day.
As our world leaders conclude their annual shindig in Davos with little to show in the way of actionable commitment towards their stated goals, the rest of us can only hope that we'll still be singing songs about Doomsday in another 40 years. That and make consumer and investment choices that shape a better future.
I remain convinced that grassroots projects for renewable energy will be one of the best investments people can make in the 2020s. |
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Funding for Forks
Satoshi Nakamoto in his superior wisdom did prophesize about what might happen in the event that someone wanted to make another version of bitcoin, and his advice was pretty stern... |
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It seems today that we have more forks than we really know what to do with. Bitcoin Gold, Bitcoin Diamond, and Bitcoin Unlimited are all pretty risk but the original fork known as Bitcoin Cash is now starting to show some serious cracks. On Wednesday, the following blog post received reactions that ranged from extreme skepticism to outright ridicule... |
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In short, the backers of this new proposal including Roger Ver and Jihan Wu, who are some of the most vocal Bitcoin Cash supporters, are saying that from now on a total of 12.5% of all block rewards must be diverted away from the miner into a special fund that will oversee the future development of Bitcoin Cash.
To be clear, it is important for any cryptos long term survival that there are resources going towards the development of the network. For example, Ethereum Classic (a fork of Ethereum) has recently secured funding from Greyscale in order to develop their network for the next two years.
The above proposal for BCH actually looks a lot like the way Z-cash (another bitcoin fork that focuses on privacy) is setup. More like a company and less like an open-source network. The apparent problem however, is the way they're trying to force this through and threatening that any miners who don't go along will be abandoned. Meaning, if a miner mines a block that doesn't include the new tithe, that block will be rejected by the network.
At current estimates, the current backers of the new ordinance only have about 35% of BCH's total hashpower (read: control of the network). So it does seem like it will not only be difficult to enforce but if they do end up making good on their threat they'll most likely end up ripping the network to shreds. |
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...and now we understand the dangers of forks. As far as bitcoin is concerned, development actually seems to be going forward as smoothly. Just as I'm writing to you I came across the following headline, which seems extremely encouraging indeed. In short, it seems like BTC might be close to seeing one of it's largest upgrades the assets short history. |
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Of course, we await to hear feedback on this upgrade from other coders in the community. If there are no major objections, which there have not been so far, we go forward. If not, well, then we start debating and slinging mud on social media for the next few months until a compromise is reached. |
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Bouncy Bounce
For anyone wondering why we're now getting a pullback in crypto prices over the last two day, just know that it's not entirely unexpected. In an interview last Thursday, I discussed the technical setup with AIBC's Jessica Walker. You can catch the recording at this link (timestamp: 1:30).
In short, after a hard rally we've come up on some serious resistance at the 200 day-moving average (blue line). A line that has played a significant role in bitcoin's graph over the last few years. In addition, the fact that it's now near the top of a wide channel that we've been tracking for the last few months means that many will likely be de-risking. |
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Now, as we mentioned in the video, it was expected that we would likely see some sort of pullback before making another attempt to cross this double barrier.
So the question becomes: at what point would we consider this a minor pullback for the sake of gathering momentum and at what point will people see it as a reversal that could take us back to the bottom of the channel?
My feeling is that if we're able to hold above $7,800, it will be a very good sign. This morning, we actually saw an interesting bounce of $8,200 so if that holds firm, it's quite likely that we'll end up seeing that big breakout after all.
Have a wonderful weekend!
Best regards, |
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Mati Greenspan Analysis, Advisory Money Management |
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