Dear Steemit friends,
do you think cryptocurrencies are a whole different beast than stocks?
You may right in terms of the value which is behind the name of Bitcoin, Neo, Reddcoin, Catcoin 🎣 and thousands of others popping out of thin air.. but in my short list here you can also see a very diverse bunch of cryptocoins in terms of
- age
- development stage
- real world applications
- market cap or sentiment
- future prospects
..
I'm constantly learning about the crypto market, please see this as my current state and also no financial advice! Let's start!
PART 1/2 - Stock Market
That are things you would consider also in the stock market. Question there could be:
1. How management and team works?
Is there a strong leader who drives the company each day to succeed? How honest is the management? Do they delivery what was promised in time? Excellent management is always important for companies, because without most of them would struggle, unless you create a product or service which cannot be destroyed by bad management.. know one?
2. How old is the company?
If you're a conservative or defensive investor, you would trust a company with age of 100 years more than a startup with 2 years for sure! The growth investor would look for a chance to invest in a excellent startup which could be a disruptor in the future and take a lot more risk than the defensive investor.
3. What is there track record in terms of rising earnings and dividends?
Do they have constantly rising earnings, maybe with a rate of 10% in both categories or do they have more aggressive growth like 20 or 40% or sometimes 100% for limited amount of time because they disrupt the whole market? How durable and stable is that, 2, 5, 10 years and what are future prospects. How the earnings and dividends fluctuate for the investor, is it save income or always at risk?
4. Is there a moat around that company?
Are they leaders in terms of product prices or are they leaders in marketing and branding and can sell for the highest possible prices all the time? Do they have a unique technology which will not copied in 5 or 10 years or where competitors have a hard time to catch up for many years?
5. What is the enterprise value compared to the current market value?
What i pay for the company compared to the current share price or market value. There a some assets, hidden cash deposits which will lower the current market price for me as investor? In extreme cases maybe the price is zero or i got more than i pay because the company is sitting on a vein of gold just waiting for digging?
6. Is the company a market leader or will be in the future and when?
They are the Zero to One category (see book by Peter Thiel) which have a track record of negative earnings and explosive growth of 100% for 10 years? Is there a clear sign that they will market leaders in 5 years because they invest everything they earn in growth of production, sales, stores, new technology and to wipe out competitors?
7. What's the DCF for next 10 years?
If i invest 100 bucks today what is the interest rate for that investment in 10 years and what are my goals when i want hit breakeven with my investment? Look for further explanation here.
8. What's the PE and EP ration?
Is the ratio of price to earnings < 10 or 40 and higher? Is the earnings to price ration <5%, 10% or >20 or 50% which shows the growth opportunities of the company in short and maybe in the long term?
9. Is this a growth, dividend or a mixture of both stock?
Growing companies often see often rates of 20, 50 and even 100% growth per year but never pay a dividend. On the other hand there are many big companies with 3-5% percentage or sometime 0% or negative growth which paying high dividends of 3 to 5% all the time (dividend aristocrats) and some between with 10% growth and a dividend of 2 to 3% every years. Which category belongs the company and what is my intention to invest in terms of risk to reward ration?
PART 2/2 - Cryptocurrencies and Assets
Many questions and now i try a quick answer if you can answer them also for cryptocurrencies.
1. How management and team works?
In the young market of cryptocurrencies where often no product exists, just an idea it's very important for me to see a great team behind. Because that's the anchor or the only think which is for real at this moment. It's similar to stock market, but much more important. I'm looking for constantly communication by the team with investors, before, within and after the ICO and of course the following years. Communication with honesty is the key. Schedules are very important but no one can met every schedule therefore ongoing communication is very important to build on trust for the foundation of the future company. A strong leader or front man is very important who stands for the image of the startup and gives confidence to investors.
Sadly very few teams in crypto space recognize the importance and often i experienced bad or delayed communication in the most crucial times. If i see such signs i'm alarmed because if it's not work in the exciting times of an ICO than i think it would also not improve later on, because maybe the company is simply not interested in communication with their investors and maybe has some bad intention. Also established crypto companies should communicate in a open and friendly manner. Webinars, live Q&A, Vlogs a great to build on trust. Slack, Telegram, Facebook are additions to that but cannot substitute the more personal channels i think, especially in early stages of a cryptocurrency. That's the major issue if you're not constantly communicating in transparent and open manner you lose all the trust in you and finally cannot get funding or start with bad reputation, both not good. You investors or users should be always informed about the newest development, changes which have a impact.
2. How old is the cryptocurrency or asset?
I would say Bitcoin is the oldest but in terms of stock market still very young. Look 8 years (2009) is nothing for a company. You need at least 5 years to get a bit stability in a business. For Bitcoin i would say it's just out of their infancy and that is i think one reason why many trust the currency more than others.
All other assets and currencies are much younger than Bitcoin, a huge amount is still popping out of the air within ICO's. The market is flooded by newcomers with no track record, no working product, nothing just ideas and often just for collecting money to run away or promises that they begin thinking if the money is in their pockets.. think for yourself what will happen in many cases in terms of your intentions of a investor.. or speculator?
I think everybody should be aware of the circumstances in the crypto space. It's exciting because so many news every day but a the same time puts many in danger to give money for nothing.. for me all ICO's are speculative type and i strongly recommend doing homework before to deciding to invest. And also then if you decide be aware it's very high risk because the companies are still in the first month of pregnancy often it's before fertilization but whitepaper promises otherwise..
3. What is the track record of earnings and dividends of the crypto c/a?
Today i see typical coins of a currency and tokens with some rights for investors.
The first one is just a currency and value is determined how much it's in use in real world means is there are real transfer of value with the currency and how much is that. I cannot see earnings, somebody? But it's possible to mine coins like Bitcoin, Ethereum or Litecoin. That's a dilution of the current market and at the same time a long term value appreciation (maybe) for the miner and holder. The so called proof of work (pow) concept is based on profitability for the miner. He looks if the effort for mining equipment, energy costs will offset the value of mined coins.
The second category are tokens where you got the right to get payouts for holding tokens. If you look for example to TenX. If you hold their tokens you get 0.5% of all revenue from what i know and as investor you look that the company can grow to a degree where it could payoff because 0.5% is relatively small stake and the company need at best billions of revenue to have big payoff for investors. Other crypto companies give more for their tokens like Trueflip where you can get 10-15% from every sold ticket and you speculate that the number of tickets rise to 15.000, 50.000 or maybe 200.000 per day and calculate the income or dividend for that.
4. Which cryptocurrency has a moat?
Today if i look around i see some assets (they are a base technology for others who want create a coin or currency) like Ethereum with the smart contracts and the clear Roadmap with the last two stages Metropolis and Serenity. Also Bitcoin has a strong branding with a already huge market penetration worldwide. There are ATM's to exchange Bitcoins, many shops who accept the currency, but on the other hand it lack on the technology and that's a major issue. But the value of Bitcoin also is derived from the scarcity of the available coins at 21 Mio max. But a real moat.. mmh it's difficuilt, from a conservative standpoint i see no real moat where i'm happy. Today there are so many rumors about new technologies, first (Bitcoin), second (Ethereum), third (IOTA) generation of cryptoassets and don't forget what we don't see the proprietary developments of big companies like Microsoft, IBM, Intel who maybe creating their own blockchain technology in the shadows of the well know charts of coinmarketcap.com. So i'm aware of that and know it's always high risk in crypto market but i have high risk tolerance and calculate my risks.
5. What is the enterprise value compared to market value of a cryptocurrency?
Currently i don't have a definitive answer to that. If i determine the enterprise value i look at brand (intangible value - a good brand combined with excellent marketing can do magic), support for high demanded current products (what could the currency do for well known products, would it be the quantum leap for it if major companies adopt the currency? -> asset play)
6. Is the cryptocurrency a market leader or will be in the future and when?
That's just guessing. My first look is always at the major assets like Bitcoin, Ethereum and then at the newcomers like EOS, Tezos, IOTA and others. Which of them has the highest chances to lead in the future. For me it's very important the first mover advantage because that's also a moat which is not easy to overcome. But also how proactive are established currencies to evolve with new technologies. Are they flexible enough to adopt new developments in the cryptoscene. How is the architecture of the cryptocurrency or asset. Sometimes there is a new technology which can wipe out everything we currently know, it's rare but possible.
7. What's the DCF for next 10 years?
If i invest 100 bucks in Bitcoin today what is the interest rate for that investment in 10 years and what are my goals when i want hit breakeven with my investment?. Today we 100% growth average each year in cryptocurrencies! That's phenomenal but we see also high volatility which is currently lower than in the past but always a hard ride and nothing for the typical conservative investor. If i predict 100% growth for the next 5 years and have $250 then i should $8.000 and my interest rate for my $250 should be in 2023 at 3,300%! That would be incredible but it's like looking into a crystal ball honestly.
8. What is the PE or EP ratio of the cryptocurrency?
I cannot do that is my simple answer. But one idea to build a measure is the following
- look at the max. supply with coins and the current price and build a ratio for example. Bitcoin will be 21 million coins at some point and is currently at $4.600 - the ratio of price/cap = 0.00219. If you look for example a not so known coin like Reddcoin with max. supply of 28,611,678,083 RDD. The supply is about 1362 times higher and the current price is $0.001374. If i simply multiply the currenct price with the factor then i get a normalized Bitcoin price of $1.87 which looks at first glance cheap compared to the price of Bitcoin. That could be a measure for further value appreciation but is no guarantee because it depends on many more factors like chances of Reddcoin to get traction in real world applications.
Another measure one should recognize is dilution ore inflation of the currency. Look at Dogecoin with massive amounts of new coins each year and also STEEM with doubling inflation each year. Imagine which growth must be implied to fight the inflation.
A rough measure for me is always the max. supply because it determines roughly how high the price could be often in comparison to the Bitcoin. If a currency has 1 trillion coins than it's not realistic that the price per could be $100,000
9. Is this a growth, dividend or a mixture of both stock?
Everything is growth now :) But for me the beauty is also if you look at the chances of token appreciation of some currencies or crypto companies. The market at whole is in its infancy and if you get a token with a high company share in revenue and they eventually succeed with a much much higher market share then you tokens are so valuable because they increase in price itself at exchanges and you get also high dividend payouts in the future. It's like Bitcoin but also with dividends. Therefore i'm looking always for models with the two factors dividends and growth. If you look at stock markets there is a Coca Cola (which is for years now a slaggard) which is know a company with track record of 10% growth each year and a 3% dividend. Similar in cryptocurrencies but with much much higher growth opportunities.
I don't asked the question about the intrinsic value, because i'm simply not ready for it.. but what said Warren Buffet about Bitcoin and the crypto market at all?
"Stay away from it. It's a mirage, basically...The idea that it has some huge intrinsic value is a joke in my view."
quote by Warren Buffett
I take that serious but also see the great opportunities of the technology, but current valuation is another thing as you can see is not easy to apply known metrics.
What's your approach for valuation or selecting cryptocurrencies for your portolio?
Which measures you apply?
i would happy to discuss some methods, possibilities here. Thank you!
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see also my other posts
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CRYPTOCURRENCIES IN A BUBBLE? - WHERE ARE WE NOW? - WHAT LIES AHEAD OF US?
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