Posted: 08.07.2021 | 09:13
7 Indicators DeFi Investors Should Know
Some new projects can be difficult to make sense of, as the DeFi space is getting bigger and bigger. At this point, fundamental analysis helps to analyze whether a protocol is overvalued or undervalued so that traders can make better decisions about their positions.
An experienced crypto trader uses many of these metrics extensively in fundamental analysis of traditional cryptocurrencies.
Here are 7 indicators that every DeFi investor should know:
- Total Locked Value (TVL)
Total Locked Value (TVL) is the total amount of funds locked into a DeFi protocol. TVL can be thought of as all the liquidity in the liquidity pools of a particular money market.
TVL can be a useful data point to give an idea of the general interest in DeFi. TVL can also be effective in comparing the "market share" of different DeFi protocols. This indicator can be especially useful for investors looking for undervalued DeFi projects.
Also noteworthy is how TVL can be measured using different denominations. For example, TVL locked in Ethereum projects is typically measured in ETH or USD.
- Price-to-Sell Ratio (P/S)
In a more traditional business situation, the Price-to-Sale Ratio (P/S Ratio) compares the price of the company's stock to its revenues. This ratio is then used to determine whether the stock is undervalued or overvalued.
- Token Supply on Exchanges
Another strategy involves monitoring token supply on cryptocurrency exchanges. When sellers want to sell their tokens, they usually do so on centralized exchanges (CEXs). However, there is an increasing number of options available to users on decentralized exchanges (DEXs) that do not require trusting an intermediary. However, centralized venues tend to have much stronger liquidity. Therefore, it is important to pay attention to the token supply on CEXs.
- Token Balance Changes on Exchanges
We already know that paying attention to the token supply can be beneficial. However, just looking at token balances may not be enough. It may also be helpful to look at recent changes in these equilibria. Large token balance changes on exchanges can often indicate an increase in volatility.
- Number of Unique Addresses
The growing amount of addresses holding a particular coin or token, though with limitations, points to increased usage. More addresses appear to be associated with more users and increased adoption.
Still, this is a playable metric. It is easy for one to create thousands of addresses and distribute funds among them, thus giving the impression of widespread use. As with any metric in fundamental analysis, the number of unique addresses must be compared with other factors.
- Non-Speculative Use
Understanding what the token is used for is crucial to finding its true value. Ideally, this could be measured by the number of transactions that were not made for speculation purposes. This can be tricky, but looking at transfers that don't happen on decentralized exchanges is a good start. The goal here is to check if people are using the indicator.
- Inflation Rate
Another important issue to consider is the inflation rate. It does not guarantee a small supply forever, especially if new tokens are constantly being minted. A notable feature of Bitcoin is that it prevents the value of existing units from depreciating in the future and is a constantly decreasing inflation rate. Inflation itself is not always negative, but too high can reduce the share. There is no standardized percentage that is considered "good" or "bad," so it makes sense to consider the number when evaluating other metrics.
As a result, as always, markets are prone to unpredictability, irrationality, and extreme volatility. First of all, each investor's own research is essential for success.