The price of crypto assets is for the most part driven by price discovery: as crypto traders buy and sell crypto assets on exchanges, the current going price is driven by what people are willing to spend and what people are willing to receive for selling it.
Evaluating the price of crypto assets is a different game. It’s not so much about what the price is currently, but about the factors outside of the marketplace that give the crypto asset value in the first place. By taking a closer look at the fundamentals of an asset, traders determine if the crypto asset has value currently, and try to forecast what will happen to that value in the near future.
When it comes to crypto, a number of fundamental elements should be taking into consideration, with utility as the main one. Depending on the type of utility, traders need to take special interest in different fundamental elements to evaluate the asset in question.
Note: Security tokens did not make it to this list because they are not evolved enough yet.
Cryptocurrency lends itself perfectly for digital payments, and there are many different coins that have been created specifically for this purpose. Bitcoin, the original cryptocurrency, was designed as a form digital cash that offered full ownership and censorship resistance.
However, during the last decade, as the asset proved to be highly volatile, BTC is arguably not suitable for payments anymore. Most times, it makes more sense from an investment point of view to hold on to your BTC rather than spend it on goods and services.
There are now many other payment tokens with enhanced features such as Litecoin (LTC) which processes transactions at a lower cost than BTC for example.
When evaluating crypto assets designed for payments, you need to look at feasibility, transaction costs and, perhaps more importantly, the degree to which the coin is accepted by merchants. A payment currency is no good if you can’t use it anywhere to pay for goods and services.
As a subset of payment tokens, there are many privacy coins on the market with enhanced features for the purpose of preserving privacy. The most popular include:
- Monero (XMR). It is considered one of the best privacy coins. It uses encoded transactions to hide both the amount in transactions as well as the addresses involved. Stealth addresses are created for one-time use to make tracing individuals even more complex.
- Zcash (ZEC). A Bitcoin-forked privacy coin that uses Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-Snarks) which allows miners to verify transactions without knowing who is involved in the transaction.
The same evaluation criteria as for regular payment tokens apply, with the added element of the reliability and sophistication of the privacy preserving mechanisms in place.
While stablecoins were originally designed as payment tokens, their applicability has evolved to such an extent that they deserve a section of their own.
Stablecoins pegged to fiat currencies like USDT, USDC, and GUSD can be used for payments, but arguably most crypto traders use these coins to move in and out of volatile crypto assets – moving from BTC to USDT when they expect the price of Bitcoin to drop for example.
The same stablecoins are also used as fiat on- and off-ramps, enabling newcomers to buy a fiat-pegged stablecoin available on an exchange so that they can move into crypto assets when the market reaches the right price.
In the world of DeFi, stablecoins can be used for many different financial services like borrowing and lending.
But that’s just stablecoins pegged to fiat currencies. There are many more types of stablecoins such as those pegged to gold or even stocks traded in traditional finance.
Evaluating stablecoins, the most critical element is the stability. By that, we mean the stable correlation between the price of the stablecoin and the asset to which it is pegged. If the price of gold increases, the pegged stablecoin needs to change with it. A quick look at the price history of NuBits for example, shows that the coin has not reliably held a 1:1 ratio to the US Dollar, and as it lost investor trust the coin is now worthless.
Exchange tokens are native tokens created by an exchange and can have a number of special features.
For example, after the launch of AAB, the token will be used by crypto traders on AAX to settle trading fees at a discount, make lending/borrowing even more attractive, and to unlock exclusive services.
Other exchange tokens provide customers with the ability to participate in IEOs, or even to receive dividends.
Native exchange tokens serve to drive exchange activity and provide customers with premium access to certain services. As such, evaluating the token is done by looking at the associated exchange – markets, liquidity, technical capabilities, jurisdictions in which it operates – as well as the type of services the coin unlocks.
Similar to exchange tokens but with broader application, are simply what we refer to as utility tokens. Ethereum (ETH) is the best example of this. ETH is used to power all operations on the Ethereum blockchain, which includes the immense DeFi ecosystem. When ETH is used in this fashion, it is referred to as ‘gas’, as it fuels activities.
For example, when you lend USDT through a DeFi application, that execution incurs a minor fee which is paid for in ETH. This has everything to do with smart contracts – code that self-executes when certain conditions are met. Smart contracts are what make decentralized financial services possible, as you no longer need a central authority to keep things in check.
Evaluation of a utility tokens requires traders to look at the full ecosystem that token powers. Ethereum saw a massive price increase in late 2019, as more people got into DeFi and more ETH was locked into various DeFi applications.
Other fundamental elements
Besides token utility, you also need to look at the blockchain protocol on which the token is based. This gives you a better idea about the reliability and technical capabilities of the crypto asset.
However, even if a token has great technical features, it doesn’t mean much in terms of value if the token is not widely traded on numerous exchanges. A token needs ample liquidity across multiple exchanges to generate enough trading activity for price discovery.
Lastly, if a crypto asset is closely associated to a group or company, then it’s important that as a crypto trader you take a look into that entity. It doesn’t apply to Bitcoin for example because there is no central authority involved, but if you want to evaluate a stablecoin like GUSD then you should look into Gemini, the company that operates the USD stablecoin.