What’s the best way to value crypto exchange tokens? Cryptocurrencies are difficult to value because the industry is very new and their utility value and use cases can still be very abstract and are still emerging. As a result, no simple valuation method can be applied to this broad basket of cryptocurrencies (a total of 6600 plus listed coins on Coin Gecko at the time this article was published).
However, there is a small group of coins that have a business model very similar to that found in traditional finance. They are the crypto exchange coins.
Introduction to Crypto Exchange Coins
While bitcoin and many cryptocurrencies may require some level of technical knowledge to understand, there is nothing technical about crypto exchange coins. Yes, they are mostly ERC 20 Tokens and some of them are running on their own blockchain networks like the Binance Chain. Their use cases are simple. The crypto exchange business model is also easy to understand.
A crypto exchange is synonymous to what a stock exchange does. A crypto exchange business revenue is derived mainly from listing fees and transactional volume. This business model can be easily understood even by a non-crypto audience.
Crypto exchanges list their own exchange coins for the crypto exchange client to save on fees while transacting through their platforms. These coins’ main utility is to reduce transaction fees. The other utility use includes participation in exclusive promotional events on the crypto exchange.
In fact, most crypto exchange coins are kept in the exchange by the coin holder and disbursed automatically for fee deductions. Relative to other coins where there are often more considerations and steps, crypto exchange coins are bought to enjoy exchanges’ discounted transaction fees.
Valuing Crypto Exchange Coins
The price of the crypto exchange coins represents the market sentiment and confidence level of the exchange to the crypto community. Any indication that leads to higher profitability of the crypto exchange will likely be perceived as extremely bullish on the prices of the exchange coins by the crypto community.
Two factors are closely examined for the profitability of crypto exchanges.
- Number of User Sign-ups and Client Base
- Volume of Transactions in Exchange
We will not be discussing user sign-ups and client base in this post. These figures are difficult to track and currently, there is no way to verify these figures even if they are reported. If the number of client accounts per exchange is reported, there is still no clear indication of the proportion of active accounts relative to the total client base as the number of active accounts is the key indicator that is directly linked to the exchange profitability.
Volume of Transactions Processed by Crypto Exchanges
The next best indicator to show signs of exchange profitability will be the volume of transactions taking place. A number of crypto data platforms such as CoinGecko (CG) and CoinMarketCap (CMC) have been tracking these figures.
How Do We Use These Reported Figures
While these tracked volume transactions are reported, there are a number of articles that have discussed in great details about why these figures can be easily skewed. Although the figures are largely disputed, it is by taking the first step to tracking these figures, which through time, the reporting process will become more transparent and accurate.
For the time being, we should not take any of this volume transactions in absolute terms because a data point can be distorted easily. The next best way to use these figures for comparison and analysis is to track them over a period of time.
CG and CMC are implementing new measures to increase the transparency and the level of accuracy to these reported figures. They have an adjusted volume of transactions where they factor in a number of criteria and generate a discounting factor to the reported figures. Another way which is yet even more accurate is tracking the liquidity in fiat currency of each exchange and then adjust based on the actual liquidity to a percentage of the reported volume of transactions in that exchange.
This is almost guaranteed that the process of these data aggregated and accuracy will be improved through time. Meanwhile, let’s discuss how we can use the volume of transactions metrics to value crypto exchange coins.
Token Value to Exchange Volume Ratio (TVEV)
If you agree with us at this point in time that crypto transactional volumes are the best indicator linked to the exchange’s profitability, then Token Value to Exchange Volume (TVEV) valuation method presents one of the best methods to value exchange coins.
TVEV ratio serves as a simple model to compare the prices of an exchange token to the traded volume on the underlying exchange. TVEV is first adapted from Network Value to Transactions (NVT) ratio first formulated by Willy Woo, who is a very experienced and long-time crypto analyst. For more information on the detailed calculation, do refer to the TVEV ratio page on TokenClan.
In the conventional stock market, the Price to Earnings (PE) ratio has been a long-standing tool for valuing companies. PE ratio compares the company’s total market capitalisation to its total earnings. This is a measure of the fundamental value for stock and shares since earnings is the main indicator most investors are concerned with.
In the same way a share investor wants a company with healthy earnings, an exchange token holder wants the exchange to facilitate a healthy amount of transactional activity. TVEV ratio can be viewed in a similar fashion as that of the PE ratio in valuing equities.
In short, TVEV ratio is the measurement of how much the market is willing to pay for a dollar transacted via the crypto exchange.
This is a screenshot taken at TokenClan for quick reference of the top crypto exchange coins’ TVEV ratio in the 30 day period.
For the latest TVEV ratio for the top crypto exchange coins, visit TokenClan for more details.
How to Use TVEV Ratio?
It is an art to attempt to understand or read the market via the TVEV ratio. However, by comparing TVEV ratio with historical TVEV values, we can then use the current TVEV ratio to help determine if token prices are overvalued or undervalued moving into the future.
A High TVEV Ratio Can Indicate High Growth Expectations Or Possibly Overvalued
A high ratio, relative to its typical range, may mean that the crypto community is perceiving that the future is very bright for the exchange, and investors are expecting high transactional growth expectations ahead, or it can mean that the exchange coin is overvalued.
It is normal to observe recently listed exchange coins to have a higher TVEV ratio relative to the rest due to recency bias and effect.
Recency bias is a psychological phenomenon where a person can remember something which has happened to them recently compared to the thing that has happened to them a while back.
As a result, TVEV ratio for newly launched coins should be monitored and observed for at least a period of 12 months before any meaningful comparison and analysis can be conducted.
As a result, recently listed exchange coins should be deemed highly speculative and higher risk than other industry peers. The recency bias will have an impact on most investors and traders judgement. It is important to be prudent by observing recent listed coin’s TVEV for at least a period of 12 months before furthering your exchange coin buy decisions.
A Low TVEV Ratio Indicates Low Expectations or Possibly Overlooked By the Community
A low ratio, relative to its typical range, may mean that crypto investors and traders are expecting limited growth prospect for the exchanges and have low expectations for the transactional activity of the exchange to go up.
Alternatively, crypto investors and traders may have overlooked this exchange with low TVEV ratio, and as a result, making the coin undervalued.
Here is How We Apply TVEV Ratio…
Comparing TVEV Ratio Across Multiple Exchange Coins
There are many ways to use TVEV ratio. It is an art. We use a simple way called benchmarking. It is very simple to understand without needing much financial jargon and it is easy to execute. However, there are so many ways to interpret and use TVEV ratio. I will only be discussing one method here.
There is an assumption that we make here. All the exchanges illustrated here are sharing the same traits and risks. But in actual fact, every exchange’s target market is different. Exchanges have their individual strengths and weaknesses. Some are better than the rest. This is the real world. I am making assumptions for the benefit of illustrating the uses of TVEV ratio.
In the real world, we definitely have to do more research than this. Some of the steps that we took are; Checking out on the crypto exchanges. Signing up as a user in the crypto exchanges. Understanding their strength and weaknesses. Monitoring and tracking these crypto exchanges whether if they are working to benefit the crypto community or they are operating like a fly-by-night crypto exchange.
These are all the essential groundworks that are necessary for the crypto investor that is often not mentioned but should be seriously considered. No ratio or any service can replace doing this simple research work.
Once we get comfortable with a few crypto exchange coins, this is when we start monitoring their exchange coins TVEV ratio. Let’s start benchmarking to make some buy decisions for crypto exchange coins with TVEV ratio.
Binance exchange is the unicorn in the crypto space and has enjoyed tremendous success over a small period of time to rise up its rank to become one of the industry top players in the crypto space. As a result, we are using them as the industry benchmark in the following examples. You can set a different crypto exchange as the industry benchmark. In this context, let’s assume we are using Binance as the industry standard.
CMC has also ranked Binance as one of the top exchanges by liquidity.
Mid to Long Term Coin Hodl-er
Coin holders who are looking to hold coins for mid to long term will likely be buying coins during times when it is undervalued.
In the recent data, as shown above, KCS and HT token are overvalued and OKB is undervalued in the month of April 2020. If you are a crypto exchange hodler, buying OKB token will definitely be a better buy than HT or KCS. It is because you are paying much lesser in bitcoin or USD for 1 dollar of transaction taking place in Okex.
While BNB is used as the industry benchmark, BNB is like ‘the golden standard’ at which you should buy BNB in batches or dollar cost averaging in a timely manner.
Short Term Hodl-er or Traders
For people who are buying coins and looking to sell in the short term, they will likely be buying on growth, that is when the following conditions are met.
- TVEV ratio is increasing in a consistent manner
- TVEV ratio of the exchange must exceed that of the industry benchmark
Using BNB as the industry benchmark, any tracked exchange coin’s TVEV ratio that crosses above BNB’s TVEV ratio is an indication and signal to buy the respective exchange coin.
The increase in TVEV ratio which exceeds that of the industry-benchmark will raise a lot of ‘eyebrows’ in the crypto community and the attention will likely bring in a second wave of speculators to buy into the exchange coins. These are the signs that appeal to the short term traders so that they can buy and sell over a short span of time.
If comparing exchange coins via TVEV ratio is not your thing, then you should be focused on a select few exchange coins. The next segment that i am going to share will be very interesting to you.
TVEV Ratio Provides a Good Way to Buy When Undervalued and Sell When Overvalued
Keeping track of a select few exchange coins TVEV ratio will be very helpful to designate undervalued and overvalued zones moving forward.
The Longer the History We Have for the Exchanges’ TVEV Ratio, the More Accurate We Can Identify Periods of Great Buys and Great Sells Moving into the Future.
We will be looking into BNB which enjoyed a lot of traction in 2019 and has risen up to the top 10 cryptocurrencies as ranked by market capitalisation on CMC.
The above chart is showing a 90-day TVEV ratio history for Binance coin. Most of you may remember 12th March 2020 to be the day that bitcoin price against USD crashed by a whopping 66% from 10,000 USD to as low as 3,800 USD.
From 12th-25th Mar, we have observed that BNB TVEV ratio was at its lowest in the 90-day period. On the hind side, it is easy to point out now that during that period of time, it was the best time to accumulate BNB coins.
This TVEV ratio will be useful in moving forward. Should we see BNB TVEV ratio to drop to the lows of 1.00 moving forward, it will signal a good time to buy BNB coins.
Will BNB TVEV ratio dropped to 1.000 moving forward?
Let’s review an earlier statement made in the same post.
The Longer the History We Have for the Exchanges’ TVEV Ratio, the More Accurate We Can Identify Periods of Great Buys and Great Sells Moving into the Future.
Here is where Tvev Ratio truly shines.
Based on the full history on TokenClan, it has BNB TVEV ratio data spanning from Mar 2018 till today, a little more than 2 years of historical TVEV data. A simple look during this period of time which is commonly called the ‘crypto winter’, the frequency that BNB TVEV drops below the 1.0000 level is recorded to be about 1–2 occurrences per year.
In probabilistic terms, it is quite a rare phenomenon. As we head into the Bitcoin halving in May 2020 which is usually associated to be the catalyst to trigger the start of the crypto bull market, expecting BNB TVEV to drop to 1.0000 will be more difficult moving forward.
12th Mar 2020 will be remembered by Binance coin supporters as one of the best time to accumulate more BNB coins in 2020 looking back. Should BNB TVEV ratio drops below 1.000 again and you are a strong believer in Binance crypto exchange, you should take the opportunity to accumulate more Binance coin at value.
A drop to that zone immediately signalled BNB going to the undervalued zone once again. That means buying at this time, coin buyers are forking out lesser in amount for a dollar of transaction processed by the exchange. This is what we termed an undervalue buy, not basing on the price being low alone but paying the same price at a time the exchange’s revenues is still raking in the same if not higher profits.
Why Accumulating Crypto Exchange Coins Based on TVEV is Way Better Than Just Basing Your Buying Decisions on Price Alone?
Most people will buy based on a drop in price. The key is not to buy because the price is cheap as the price can get even cheaper. Most financial traders will have termed this way of buying as ‘Don’t catch a falling knife.’
Crypto investors are going to get more information on TVEV ratio with a ratio history dated back N number of days.
I will like to clarify that at this point, it is certainly not wrong to buy when coin price fall. The key here is finding out the cause of the fall before you buy.
If the reason for the sharp fall in price is caused by market sentiment across the board (market risks), then it is fine. What if the fall in price is due to a fundamental change in the value of the underlying crypto exchange business going from the state of bad to worse? In this situation, you will be expecting the price of the coin to fall even lower each time you buy.
Before we discussed in greater details about TVEV, basing on price alone for most people means buying on a drop in price.
TVEV ratio is here to help as basing your buy decisions using TVEV is certainly going to be much better than based on price alone.
TVEV Ratio Formulation
TVEV ratio has two components used in calculation of the ratio.
A Fall in TVEV Ratio Can be Due to 2 Factors
Token Supply is constant. A fall in the ratio is due to either of the following situations or a combination of both factors.
- Fall in token price
- Increase in Exchange Volume in the past 24-hour period
An Increase in TVEV Ratio Will Also be Due to 2 Factors
Token Supply is constant. An increase in the ratio is due to either of the following situations or a combination of both factors.
- Increase in token price
- Decrease in Exchange Volume in the past 24-hour period
Let’s review the earlier problem, should there be a fundamental change in the value of the crypto exchange business, it will be tracked by the volume of transactions in the exchange 24 hours.
Taking the assumption that the fall in the volume of transaction happen first while the token price remains stable, TVEV ratio of the exchange coin should increase in value initially. The impact on price may not happen immediately. That means we will experience an initial increase in TVEV ratio while the exchange volume decrease for the affected exchange.
Following this situation, the community will take some time to notice the new information and start pricing in the fall in transactional volume, eventually, selling pressure will build up. When that happens, the token price then starts to fall, and TVEV ratio will then start to fall.
The magnitude of the subsequent decrease in TVEV ratio will depend on the extend of which component change by a greater proportion, TVEV ratio can fluctuate in its value from falling to it initial state where things are operating normal to a fall well below its initial value prior to the event happening.
We will be able to track the magnitude of change in TVEV ratio and attribute the underlying cause of the changes easily with the help from monitoring closely on the the exchange token’s price relative to its exchange volume via TokenClan.
Putting what we’ve just learnt into practice, let’s try to apply in the context of 12th March 2020 for the Binance coin. It is great that we can examine each component of the TVEV ratio directly from the TokenClan data platform.
From the data above, the drop in TVEV ratio in the period can be largely attributed to the following factors
- Fall in prices of Binance coin (due to market sentiment)
- Increase in transactional volume (healthy revenues for the exchange)
The Impact on BNB TVEV
BNB TVEV dropped below 1.0000 during the 12th -25th Mar 2020.
Buying during the same period will have been a great buy opportunity as the fall in price is due to the pessimism generated by the COVID-19 virus pandemic across the financial markets but the underlying crypto exchanges have been processing even greater amount of transactions during the same period which is extremely healthy for the business.
We have discussed at great length how to use TVEV and why basing your buy decisions with help of TVEV ratio to single out possible undervalue zones moving into the future will provide the crypto investor with an extra edge in his/her decision-making process.
Cons of TVEV Ratio
No ratio or any valuation model can be perfect. The only way is to understand how the ratio is formulated and try to read ‘in between the lines’ on the changes in TVEV values and what are the likely reasons leading to the fluctuation in value.
You may have heard this saying in the financial markets, past performance is not indicative of future results. When in doubt, you should always do your research and homework to verify the findings you have found. This is very true especially in the emerging crypto space.
In fact, whatever you have just learnt on this page should be thoroughly researched and verified by yourself before applying it in the crypto markets. That’s where TokenClan can be a great help for the crypto community interested in exchange coins.
TokenClan aggregates a rich history of the TVEV ratio and other exchange coin meta information. As shown in the picture below, this is a page showing Binance coin data. TokenClan processes CG’s crypto data and presents it in a manner conducive for crypto investor that is particularly interested in exchange coins.
TokenClan.io seeks to be an independent data platform for the crypto community who sees the importance of token metrics in understanding and analysing these cryptocurrencies in-depth, to make better trading and investing decisions.
Crypto Assets for Passive Income Book
If you will like to read up more on crypto exchange coins, TVEV ratio and the impact of Bitcoin Halving on the entire crypto industry, you should check out my recently launched book titled “Crypto Assets for Passive Income”. It is available on Amazon Kindle and physical copies are available for sale too.
We are shipping physical copies worldwide. Currently, we are running a special offer. Due to the nearing of the Bitcoin Halving event scheduled in May 2020, we want to get the information in the book out and as a result, we are setting aside 100 physical books for an irresistible offer. For the next 100 people who go to this link to register yourself, you will be getting this book for free. All we ask is that you pay for the shipping fees. Varying shipping rates apply depending on the shipped location.
Note: Normally, we are selling the book for USD $28 excluding shipping and handling at this book page for your reference.
In this post, you first learnt about crypto exchange coins and why there is nothing technical about them compared to other categories of cryptocurrencies. Their business model is no different than stock exchanges and that means even non-crypto people can understand the business model of crypto exchange easily.
We discussed crypto exchange coins and the volume of transactions processed by the exchange. If you agree that the volume of transactions processed by the exchange is directly indicative to the profitability of the exchange, then Token Value to Exchange Volume (TVEV) valuation method will be one of the best ways to value exchange coins.
TVEV ratio formulation and its practical applications and uses were illustrated with chart examples. TVEV ratio for one crypto exchange coin can be compared and analyse against other exchange coins.
Alternatively, the TVEV ratio of one exchange coin can be tracked and monitored over a period of time. With 12 months of data points, zones can be plotted to signify undervalued zones and overvalued zones. These zones could then be very helpful should the coin’s TVEV ratio go backs into these special zones in the future.
For your latest crypto exchange coins TVEV ratios, visit TokenClan Exchange Coins for their latest values.
Interpretation of TVEV ratio and its application like any financial indicator is always an art. It is the discipline to keep yourself to a consistent plan layout with a risk management plan so that you aren’t risking or overexposing to exchange coins or the cryptocurrency markets.
If you like our content and will further like to learn more about crypto exchange coins, and the impact of Bitcoin halving on these select group of exchange coins, i am inviting you to get my book titled “Crypto Assets for Passive Income” to further your learning on this subject.
The special book offer is only limited to 100 copies of books we set aside. We ship worldwide. Hope that you can get them while stock last for free excluding shipping charges. Should the offer is over, you can still get the book on Amazon Kindle.
We have reached the end of the post. I hope this post has brought you a new perspective to how you can value crypto exchange coins with TVEV ratio. I know you are a serious crypto enthusiast when you reached this far, as the majority of the people would have stopped and left mid-way into the article. I sincerely wrote this article to create value for the crypto community especially for people who are seeking a data-centric approach to making buy or sell decisions in the cryptocurrency space.