5 charts to uncover your next long-term DeFi investment |
The DAO has been a long-term success story in the cryptocurrency world, and its decentralized nature is an example of what many believe will be the future. But while it’s too early to say whether decentralization will win out for all industries, certain trends offer clues about potential winners and losers. Here are five charts that can help you uncover your next deFi investment:
The “if i invest $100 in ethereum today 2021” is a chart that shows the projected return of an investment if it was made today. The red line represents the price of Ethereum and the blue line represents the percentage of profit.
It’s very unusual for a project to garner a lot of buzz, only to fizzle out after a few weeks. That’s why it’s critical for retail DeFi investors to 1) establish a framework for analyzing projects and 2) put that approach into practice before diving in.
DeFi’s decentralized nature allows everyone to participate. It’s amazing how little technical knowledge or money is required to launch a business or token. The consequences for investors who invest without doing due diligence may be disastrous.
Decentralization has the advantage of making data more open and accessible. Because data does not lie, this is the first place an astute investor should go.
You can’t go wrong with three metrics and five charts when analyzing a project.
Amount locked in total TVL Growth Chart 1: TVL Distribution Chart 2: TVL Growth
Chart 3: Market Cap/FDV Ratio Chart 4: Market Cap/TVL Ratio
Price and distribution of tokens Token Price Movement (Chart 5)
Total Number of DeFi Protocols in a Month (Data source: Footprint Analytics)
1. Locked Total Value (TVL)
Ascertain that the project’s TVL increase is consistent.
The entire value of assets placed by users and locked into a protocol is referred to as TVL. Users are more confident in supplying liquidity and collateral for the protocol’s economic activity when there are more assets locked in a project. This demonstrates the market’s belief in the initiative.
TVL & Market Cap Comparison of the Top 10 Protocols (Data source: Footprint Analytics)
As you can see, the top ten protocols have massive market capitalizations over $5 billion and consistent month-over-month TVL increase. This signifies that a project’s vigor and strength are still intact.
When looking at lesser, less renowned initiatives, however, the situation is different. Huge daily TVL movements, with an unsustainable increasing tendency, which is frequently followed by a major decrease the next day.
Projects with Unstable TVL (Data source: Footprint Analytics)
Choose projects with “middle-of-the-pack” TVLs.
Projects are sprouting like crazy, as seen in the scatter chart below, with a very unequal TVL distribution. There are now approximately 500 DeFi projects in the pipeline, with 33% having TVLs of less than $5 million.
Protocol Distribution by TVL (Excluding Top 10 TVL Protocols) (Footprint Analytics provided the data.)
This is one of the simplest methods to divide projects into three groups:
Overleveraged/overvalued or already “priced in”
It’s brand new, untested, and potentially dangerous.
Projects with promise
What is the best way to strike a balance between risk and reward?
Individual investors should strive to choose projects in the center of the TVL range and above (about $20 million) when selecting who to invest in to be on the safe side and avoid the possibility of too tiny enterprises running away with their money.
Seed rounds by investment institutions are appropriate for those with a value of $1 million to $10 million. Individual investors should steer clear of companies since their long-term orientation and strategic direction are unclear.
While TVL projects in the $10 to $20 million range have identified a good development strategy and investors have access to data on this sector, there is a danger of stunted growth in these projects in terms of stability, as well as a significant risk of weak or declining growth if growth is insufficient.
TVL projects in the $20 million to $50 million range have found a clear match in terms of product mechanics and growth, with community and technical support getting more complex with time, and are a suitable option if you want to achieve larger returns than the top protocols.
If you have a low risk tolerance and a low demand for return, you may invest in projects from the top protocols depending on your selected DeFi project category (e.g. DEX for providing liquidity, lending for lending, etc.)
2. Market capitalization (MC)
The most accurate overall picture of a project’s market worth is its market cap.
This statistic is determined in the same way that stocks are calculated in the conventional equity market: the price of the token is multiplied by the number of tokens in circulation and accessible for trade.
The price of a token may fluctuate fast since the amount of tokens is determined by circulation and supply and demand. Market capitalization, on the other hand, tends to fluctuate within a 20% range, with no big spikes followed by significant drops.
The market cap is a solid underlying indicator for evaluating projects and identifying prospective and profitable investments because of its consistent quality.
When searching for long-term investments, keep an eye out for low MC/FDV ratios.
The fully diluted value (FDV) is calculated by multiplying the maximum supply of tokens by the token price. In other words, after all tokens have been distributed, it equals the market cap.
If a project’s tokens have a low MC/FDV ratio, it suggests that a big amount of tokens have yet to be distributed. This occurs when 1) the protocol is brand new and 2) the token’s total quantity is unusually huge.
Token MC/FDV Ratio in Top Protocols (Data source: Footprint Analytics)
Investors should carefully analyze FDV, concentrating on the project’s length of time online and the token supply timetable.
MC/FDV Ratio is Low (Data source: Footprint Analytics)
The following are some instances of projects with low ratios:
Fruit: The MC/FDV Ratio is 0.002%.
The MC/FDV Ratio in StakedZEN is 0.077 percent.
MC/FDV Ratio is 0.17 percent, according to Hanu Yokia.
The MC/FDV ratio helps investors to determine if a token’s price has reached a saturation point. Because a low ratio means that whenever project owners issue additional tokens, the supply will ultimately exceed the real demand. As the market reacts to the rising demand, the price will most likely fall.
Take a look at the graphic below to see how top-ranked projects fared in terms of MC/FDV.
Projects with an MC/FDV ratio greater than 60% are preferable for long-term holding with nearly assured price stability.
Top Protocols’ Costs (Data source: Footprint Analytics)
On the other side, projects with a high MC/FDV ratio have several disadvantages. They are frequently more expensive to enter. Though this isn’t always the case, examining data can help you make better decisions depending on your objectives.
Curve (CRV) has an MC/FDV of 11.86 percent, for example. Another loan initiative, Lido, has a lower MC/FDV of 5.54 percent while also having a higher token price. When comparing the two, it’s clear that investors wishing to invest in long-term DeFi lending programs should choose Curve over Lido.
Look for projects that have a low MC/TVL ratio.
Top 10 Protocols with the Highest MC/TVL Ratio (Data source: Footprint Analytics)
The current MC/TVL ratios of the top ten TVL projects are almost all less than one. This indicates that these initiatives are undervalued and should be pursued. This is why:
The greater the TVL of a project, the higher the MC should be from an economic standpoint, since a high TVL implies that investors have a high level of trust in the project’s economic value.
To put it another way, when investors lock in their tokens, they are putting their money into the enterprise rather than speculating. It’s typically a positive indicator when there’s more use than conjecture.
As a result, investors should pay attention to the MC/TVL ratio. A ratio more than one suggests that the project’s valuation is too high and that its investability is poor, while a ratio less than one shows that the project is undervalued and that its returns are poised to rise.
For accurate comparisons, always compare projects within the same categories, and compare the ratios of lesser-known projects to those of the top protocols.
2. A fair token allocation system and a stable token pricing
Choose projects with stable coins.
Many individuals invest in DeFi backwards. They begin by examining token prices before doing research on the underlying project in order to justify their (often FOMO-driven) investment.
Instead, you should have previously conducted research on viable initiatives using the metrics and indicators discussed above.
Token Price Changes in the Top 5 Protocols (Data source: Footprint Analytics)
You may then look at the token pricing once you’ve made a shortlist of companies you’re interested in and inspected them for sound fundamentals.
“Stable” is a relative word in cryptography.
Price surges and dips of less than 20% should be avoided, according to Footprint. Normally, a large price shift signals an unfavorable market response to some news, which might be a pump.
If the token price is largely steady, the token’s liquidity is likewise pretty stable. As a result, the risk of a large number of individual investors selling tokens causing harm to the business is decreased.
This rule, like other metrics, works well when comparing your alternatives on a visualization chart, like seen above.
According to the statistics, InstaDApp and MakerDAO, for example, are more immune to the negative consequences of a sell-off than Curve.
Summary: 5 Steps to Assessing a DeFi Project’s Investability
Start with the basics when searching for a new project to invest in. Compare projects inside the DeFi projects you care about in your thesis using data.
The main points to remember are:
TVL growth that is stable
TVL rating in the mid-range or above, with a budget of $20 million or more
A MC/FDV ratio greater than 5%
The MC/TVL ratio is less than one.
Price of tokens is stable, with monthly changes of less than 20%.
The following stats are available to readers directly in this highlighted article: “How to Discover Valuable Project,” according to the Footprint dashboard.
Furthermore, a protocol’s tokenomics and team structure are important factors to consider while investing. If the team or foundation owns a large majority of the tokens, there’s a good likelihood the project is a money grab.
This may easily lead to a scenario where a small number of individuals releases tokens fast in order to “cash out,” resulting in a significant dilution of the token price and a higher likelihood of the tokens being sold off.
As a new investment market, DeFi has opened up more investment opportunities than conventional finance, including many worthy initiatives that have been overlooked.
However, opportunity and danger are inextricably linked. It’s vital to keep in mind that the DeFi market is fundamentally unpredictably volatile, and that even the aforementioned signs are no guarantee of long-term success.
What is Footprint Analytics, and how does it work?
Footprint Analytics is a one-stop shop for analyzing blockchain data and uncovering insights. It cleans and combines on-chain data so that users of any skill level may begin exploring tokens, projects, and protocols right away. Anyone may create their own personalized charts in minutes using over a thousand dashboard templates and a drag-and-drop interface. With Footprint, you can discover blockchain data and invest more wisely.
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The “is ethereum a good investment” is a question that has been on the minds of many people. If you’re looking for an answer, then these 5 charts will help you uncover your next long-term DeFi investment.