Here's your midweek read- How to accurately assess undervalued & overvalued cryptos?

Hi there,

The total crypto market cap is still below the $1 Trillion mark! If you thought we would be there, we are afraid the market thinks differently. However, with the market remaining range-bound, it is a good time to understand how to spot undervalued or overvalued cryptocurrency projects.

Separating undervalued & overvalued cryptos

Imagine having a tool that helps one predict whether an asset is undervalued or overvalued. The price-to-earnings ratio is an incredibly powerful tool that is used for valuing the worth of stocks. If the P/E of a company’s stock is 50, it means that investors are willing to pay $50 for every $1 earnings of the company.

However, with crypto, there cannot be a proper P/E ratio, as it is a commodity. Many people use 'market capitalization' to gauge the worth of a cryptocurrency. This is flawed because Mcap can be gamed and is usually very common in the crypto spectrum. A token can be created with a circulating supply of 10 billion, and a few coins trading at $1 means the market cap is $10 billion — but that coin could only have a trading volume of $1000.

An important on-chain metric used to gauge the long-term aspect of a token is the amount of value staked to support the network. It is also known as Total Value Locked or TVL and can be used to deduce whether people support the project for the long term.

The Network Value to Transaction (NVT) ratio was one of the first widely used on-chain metrics. By comparing the value of the network with the volume of transactions recorded on the blockchain, we can identify when a cryptocurrency is overvalued. When the volume of transactions does not justify the value of the network, the NVT ratio is relatively high. When considering the transaction volume, if the network value is unusually low, it may suggest that a higher valuation is justified.

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Edul Patel

Co-founder, Mudrex.com