powderpc

How to Set Fair Value Crypto Price Targets Using Basic Analysis

BITFINEX:LTCBTC   Litecoin / Bitcoin
Most people here are reading a bunch of charts and that's fair, but if all you understand are charts then you won't understand the most critical, basic elements of how to fairly value a cryptocurrency. Don't fall for some of the nonsense that others propose as guidance for how to invest in cryptoassets. These people are obviously ignorant clowns here to entertain you rather than help you invest in a sound, reasonable way that will guide you towards a meaningful long term position with cryptoassets in your portfolio.

The first valuation method I propose is extremely simple and extremely accurate. It is simply a relative valuation based on Bitcoin             market cap. This is a simple way to find arbitrage opportunities in the market.

By using Cryptocompare's USD Coins List you can see sort coins by "Market Cap". In general this can be assumed accurate with the exception of pre-mined and/or highly dubious coins with structural centralization features such as XRP and Dash (although you'll probably be

So if we're looking at Bitcoin's market cap at this moment, it is $118.5 B.

Looking at Litecoin it is $7.03 B.

$7.03 / $118.5 = .05932

So Litecoin is 5.932% of Bitcoin's market cap.

Bitcoin             price is $7033 (might be slightly off here) at the time that market cap was $118.5 and Litecoin price $127.50

0.05932 * $7033 = $417.20

Since Litecoin has a higher coin emissions curve and a higher supply than Bitcoin             then we need to adjust the valuation based on the coin supply.

You can look up the coin supply by going to the individual coin's page on Cryptocompare.

Litecoin is at roughly 55,097,000 (55 million or so) coins (I'm doing this off memory and it changes every 2.5 minutes)

Bitcoin             is at 16,849,775 coins.

Dividing Bitcoin's supply by Litecoin's to get the "coin supply ratio" :
16849775 / 55097000 = 0.3058

So Bitcoin             is about 30.58% of Litecoin's current supply. Since Litecoin is creating coins 4X faster than Bitcoin             but started 2 years later, over time this 30.58% ratio will move towards 25%. I'm not going to do the math there but you can figure out the rate of change pretty easily but essentially, that number will decline over time. So in the case of Litecoin there is a slight discounting effect that happens over time due to the declining "coin supply ratio."

So we can then take our $417.20 * 0.3058 = $127.58

Note that for example with Bitcoin Cash             that the supply is identical so you don't really need to do this step. And for coins that have less supply than Bitcoin             you would use a "coin supply ratio" that is greater than 1 so that the lower supply has a multiplying effect on price.

And amazingly enough, this is what the market is more or less asking for Litecoin almost to the penny.

If we take into account: coin emissions rate differential and coin market cap relative growth

then we can VERY easily find arbitrage opportunities by setting targets for when we see divergence from the market price and what should be fair value.

I will save this discussion for another time but you can pretty plainly see how a coin that has an expectation of doubling its market cap in relation to Bitcoin             will have a high probability of increasing its value/price by a factor of 2.

So then it becomes a matter of measuring/filtering for the rate of change in relative market cap as that is one of the central influencing factors to find coins that are "on sale" at least until their metrics change. I won't get into that here, but it's generally easy to intuit             with knowledge of the overall crypto market but not that hard to put in concrete             numbers either.
Comment: I am really sorry. I made a bunch of stupid errors in this piece. In general, this needs to be rewritten because of faulty math and poor reasoning. However, the method I use is below, similar to this one described above.
Comment: I will need to rewrite this so take this all with a grain of salt. I made a miscalculation that led me to think I understood something correctly when it wasn't the same as the normal method I use. And the normal method I use needs some tweaks as well because it more or less only applies to coins that trade mainly as a BTC pair and a BTCfiat pair.
Awesome explanation, thank you!
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powderpc die_fokken_blompot
@die_fokken_blompot, hey I made a super dumb mistake above. This is not actually the method I use. I wasn't thinking clearly or something. Clearly math is not my strong suit.

In the calculations above I more or less calculated the value based on market cap. That will always give you that figure, i.e. with X coins * $coin price = coin market cap.

My normal way of calculating fair value is to take the volume (which cryptocompare now splits into "Direct" and "Total" and come up with a ratio. I use this volume ratio to assess the relative market share for a coin.

So for Litecoin this number is 0.0877. Taking that times BTC price and then by the 0.3058 ratio you get about $209 as fair value. This would suggest Litecoin being undervalued based on the current market price of $143.33

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