Virtual currencies are still a mystery to most people. Indeed, in the space of a few hours, they can increase or decrease considerably in value. However, as traders or investors in digital currencies, understanding the financial estimate of these virtual currencies is a must.
Indeed, it will allow you to know when to sell or buy a currency. To help you, here is a mini-guide that outlines the models for assessing the value of a cryptocurrency. Read it.
The monetary model of the exchange equation
This model is also called the absolute valuation model or theory of the quantity of money. It makes it possible to establish the value of the cryptocurrency provided to users. For this, it makes a deduction from the financial value of a virtual currency by linking it with the speed and supply of other coins. Here is his equation: M×V = P×Q
M is the total number of coins circulating in an economy. V is the speed at which money is spent. Q is the actual expenditure index. As for P, it is the price level of a virtual currency.
In which case should the theory of the quantity of money be used?
In general, this model is used to establish a schedule for supplying the units of a currency. It also makes it possible to predict the availability of parts as well as the number that will be exchanged. In addition, thanks to this model, you will be able to predict the speed at which a virtual currency will evolve.
You will also be able to set up a discount factor. The latter will allow the currency to be useful in the future.
What are the limitations of the exchange equation model?
Any business model has limits. And it is no less for the model of the exchange equation. Indeed, very little information is currently available in this model, on the speed of evolution of virtual currencies. In addition, this information varies depending on the cryptocurrency studied.
Moreover, in fiat currencies, GDP is replaced by chain transactions. Most of these transactions are, moreover, coins. The latter vary according to the exchange made. The percentage of tokens traded cannot be accurately determined with this model. Several other elements are unfortunately still difficult to decipher with this model.
The Cryptocurrency Valuation Model
At the moment, there is not much interesting work in this specific area. However, there are measures that can help you make relative assessments.
The NVT (Transaction Value Ratio)
This measure makes it possible to estimate the cost of the market capitalization emanating from a virtual currency, in dollars. This is also done in relation to its volume of daily transactions.
Transactions per second
This measure is quite useful for virtual currencies, and not just any of them. These are the ones that want to be adopted by the majority of consumers.
Characteristics that fall under the ownership basis of a virtual currency
Several factors can affect the value of a specific cryptocurrency. This can be the concentration of ownership or the number of users holding a significant amount of coins. The quantity of coins provided according to consumers' assets is also a significant factor.
Mining profitability
Examining the ownership structure depends on two elements. The first element is the type of mining of the virtual currency. The second is the profit that miners make from cryptocurrency.
Transaction volume and distribution
This measure evaluates the availability of a virtual currency in relation to exchanges. In addition, the transaction volume and distribution also evaluate the means of distribution of transactions via these exchanges.
In the end, there is not yet until now, a competent model capable of accurately determining the exact value of a cryptocurrency. However, you can make use of the above in order to have a rough estimate of the value of cryptocurrencies.
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