Using Fundamental Analysis for Cryptocurrency: Storing Value

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  1. What is value storing?

When you’re researching cryptocurrencies for future investments, it can be hard to get a sense of how much a currency is truly worth.

That’s because these currencies are entirely digital; there’s no direct, tangible benefit in purchasing and holding them, so visualizing their uses and future worth is extremely difficult. This is a far cry from predicting the worth of a stock, as most socks are based on companies with products or services you could use.

Because of this, the frameworks you’ll need to use to assess cryptocurrency prices and inherent worth are quite different than those for regular stocks. One of the more popular fundamental techniques for valuing cryptocurrencies is the idea of value storing.

What is value storing?

A store of value is traditionally thought of as an asset that can be saved for long periods of time while holding or increasing in worth. Most importantly, a good store of value is an asset that is easy to transfer in exchange for some sort of purchasing power. Perhaps the best example of a value storing asset is gold, due to its use as the standard for most of the world’s money.

Gold has a predictable weight that won’t change over time, can be stored in small or large quantities securely and easily (i.e., in a safe or in a bank), and can be easily sold at a number of locations.

It also has clear, trackable prices, and generally maintains stability in those prices due to its use as a standard.

How can cryptocurrencies be stores of value?
Shifting the viewpoint of value storing assets to cryptocurrencies highlights a few key differences in these types of assets. The most glaring difference in the cryptocurrency market as compared to the gold market is that price stability and growth is not nearly as predictable.

For example, Bitcoin has inflated in price spectacularly in its short history, something that cannot be said of gold.

Across all cryptocurrencies, there are massive fluctuations in price that create value storing instability. Though the above statements may make it seem like cryptocurrencies cannot be good value storing assets, there are several metrics unique to the cryptocurrency world that must be evaluated to ascertain whether specific coins are able to store value well.
When you’re analyzing the value of a currency, the first metric to consider is the utility of the currency.

It’s easy to buy into the hype of a coin because of general positivity and wishy-washy statements of its use. However, a true investor should dive into white papers and technology-focused publications about a currency. By doing this, you’ll quickly understand whether a currency truly has a use. If it does have a use or feature that’s unique in a compelling way, then it will likely continue to have value.

Another metric to consider is the age of the underlying technology. At first glance, Bitcoin doesn’t have many intrinsic features. But because it’s the oldest currency, it has more weight in the market and is more likely to retain value. Because it’s steadily increased in price (as a general trend, ignoring major spikes due to media coverage), and there’s more historical data to analyze for price trends, there’s less of a chance that Bitcoin’s price will drop.

Age is by far the most important metric to consider when making safe purchases since you’ll have more established information to work with.

A final, difficult-to-measure metric is confidence in a currency. This can be thought of as a direct comparison to confidence in a business’s revenue strategy. How likely are investors to assume that their investment will pay off, and how likely are they to tell other people about the currency? Because cryptocurrencies have no tangible output, confidence, and sharing of positive information about that currency online are extremely important for determining the long-term value of an asset.

Fundamental analysis metrics and frameworks for cryptocurrencies are certainly different than those for traditional assets. But some of the traditional theories, like those about value storing, can be modified slightly to meld with these exciting markets. With the metrics mentioned above and an idea of how assets can store value over long periods of time, you’ll be well-positioned to analyze your favorite cryptocurrencies and determine whether it’s time to invest.