The reserve ratio, or the number of tokens held by the project divided by the number of tokens in circulation. This helps to reduce large price fluctuations. It gives us an idea of the token’s price insulation. The higher the value, the more insulated the token’s price movements. If there is a huge demand, the project could stabilize the price by meeting the demand. This metric will fluctuate over time as the project releases more tokens to the market.
Another useful metric to analyze an ICO is the number of working capital needed in order to satisfy the digital token holders. This metric is known as the commitment ratio. You can calculate the ratio by simply dividing the redemption value of the token by the amount of capital raised. These values are often disclosed at the end of an ICO. However, some projects may disclose these values in their whitepaper.
Now, the redemption value is the market price in USD of the digital tokens in the market. Keep in mind those digital tokens exclude the ones held back by the project. Similar to the reserve ratio, the commitment ratio will fluctuate due to the fact it that it uses the market price of tokens.
We’ve gone over some key quantitative metrics, now let’s move onto some fundamental, or subjective, metrics to analyze a digital token.
Now, there are a few questions you need to ask yourself before you decide you want to invest in a digital asset.
The first subjective “metric” you need figure out is whether the project is unique or not. You need to ask yourself, “Is this project or company uniquely implementing blockchain?” Additionally, you should figure out whether it is a valuable implementation of blockchain technology. Remember, this is all subjective. For example, Bitcoin and Ethereum are unique implementations of blockchain, they both have a comprehensive whitepaper, have little to no competition in the space, relatively fast block confirmation times , and blockchain is core to both their platforms.
In order for a project to be successful, there needs to be strong community support. Are there a lot of people talking about the digital asset? Are there a lot of online forums, communication channels (like Telegram) discussing the project and positive influencers in the space (positive general sentiment surrounding the project)? Basically, the more people are talking and supporting the project, the more fundamentally valuable it is.
Another two questions you should ask yourself, “Is the product being widely used or implemented by large companies? What is the development stage?” If the company is being widely used, such as Bitcoin and Ethereum, chances are the digital asset should become valuable overtime. Keep in mind, there needs to be consistent use of the platform. Moreover, if large companies are implementing the project’s technology, value could be added to the digital asset.
Again, these metrics are all subjective, one person’s views may differ from another’s views.
Understanding metrics are highly important when you’re considering an investment in cryptocurrencies. You should have a good understanding of the basics now, which range from liquidity to ratios you may want to use when analyzing ICOs. You should practice using these metrics and fundamentals which should help you in your investment and trading process.