The are two basic ways to deal with cryptocurrencies. One is to try playing the market, trying to predict and profit from short term price swings. The other is the “hold on for dear life” approach, HODL. For those in the crypto world who believe in a positive future what is necessary is knowing when to hold on for the long term or sell crypto investments if it appears that they do not fit in a long term investment portfolio. Important aspects to consider are total value locked of a given cryptocurrency, protocol revenue, and the number active addresses.
Total Value Locked as a Crypto Indicator
The total number of crypto tokens being traded by those who may only be the market for hours, minutes or even seconds are not a good indicator of the stability of that token or the consensus of experts as to its long term future. On the other hand, Total Value Locked tells you the value of specific tokens locked or deposited in decentralized finance platforms or protocols across the blockchain. The purpose of locked tokens is for staking, lending, or to improve liquidity for trading pools. This metric is denominated in US dollars making it easy to compare from one token to another.
How Do I Know What Total Value Locked Is for My Investment Crypto Token?
In order to know this number you need to sum up all locked crypto assets in a given crypto protocol and convert to dollars at current prices. This exercise typically requires sorting out stable coins such as USDC and tokens such as Bitcoin and/or Ether. Calculate US dollar value of each type of asset and sum those value to get the total value locked of the token. This number will go up and down with withdrawals and deposits, token price fluctuations, and any variations in incentives or rewards related to the underlying assets.
Total Active Addresses as a Crypto Indicator
Price fluctuations of a crypto token can be especially misleading when trading volume is small. As with trading or investing in stocks, one would like to see lots of investors involved over the long term. A crypto token with a high number of active addresses has good user engagement and is generally a strong and healthy investment opportunity. With this metric you can see real investment participation rather than activity by short term speculators. As total active addresses rise with a token this is generally a sign of positive investor sentiment and a signal that the token price will likely rise over time instead of spiking and then falling. On the other hand, a falling number of active address is a sign to be worried about investing in a given token.
Protocol Revenue as a Crypto Investment Indicator
Successful blockchain project generate fees and economic value over time. Knowing that a token is involved in a DeFi project or projects that are profitable helps a crypto investor know that his or her long-term investment will be secure. This metric is similar to the use of intrinsic value in stock investing where an investor looks for positive forward-looking earnings and accumulation of value. In many ways this is how crypto was supposed to work as a means of exchange and doing business instead being so often a never-ending speculative frenzy. Long term crypto investors are well advised to look at protocol revenue, the number of active addresses, and total value locked as reliable indicators of when to buy, hold, or sell a given crypto token.
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