Valuation Strategies for Cryptocurrencies (Introduction)

Since they began trading publicly, cryptocurrencies have been notoriously difficult to value. Much of the valuation has been speculative with volume, business adoption, or merchant acceptance being the most commonly cited metrics. However, given the high levels of volatility in the market, it's clear that there isn't broad alignment on valuation metrics.

Well, time to add a new metric to the books - commits! Cryptomiso recently released its ranking of cryptocurrencies based on GitHub commits, and the chatter has begun on what that means.

First, what is a commit?

Per GitHub: "A commit, or revision" is an individual change to a file (or set of files). It's like when you save a file, except with Git, every time you save it creates a unique ID (a.k.a. the "SHA" or "hash") that allows you to keep record of what changes were made when and by who."

...but what does that mean in English?

In short, the higher the commits, the more the developer team is changing and editing the code. One could argue that a coin with strong, long term potential should have more commits, while a coin that is either stabilized or has declining potential should have less commits.

For example, as pointed out in a recent Merkle artcile, Dogecoin has almost 0 commits - suggesting low long-term potential.

...so...can we actually use commits as a valuation indicator?

This is where it gets tricky. For starters, we don't have enough data right now to draw any sort of correlation. Second, market cap is driven by a lot of other things right now - volume, market sentiment, economic conditions, etc. If we were confident that market prices were driven by a defined set of valuation principles, we could draw more of a correlation, but it's clear that the data is really noisy right now. Finally, we have no way of telling the quality of a commit - it could be a complex recode or just changing a single letter - so volume is not the best indicator of true development potential.

...but if I wanted to try?

If you REALLY wanted to try, you'd want to look for:

1. coins with a high commit number and;
2. a below average market cap $ per commit

Assuming you believe in the business case of the platform, this would suggest that the developer team is dedicated to building and improving the platform and that the market hasn't quite realized the "full potential" yet. As the platform stabilizes, one could see the market cap $ per commit trending back towards the average, as the price rises and the number of commits declines.

So without further ado...

I ran a quick analysis of the top 20 coins by commit* and their market cap, based on data from Cryptomiso and Coinmarketcap as of 2/1/2018. The greens suggest a market cap $ / commit below average and therefore could signal potential long term, investment opportunities. The reds suggest, in contrast, a stable coin and platform (e.g., Bitcoin) with potentially less runway for growth.

So you bought Komodo then?

Nope, not yet. For me, this has only led me to start exploring Komodo in greater detail. But in the world of crypto, a little focusing can only help!

In the coming weeks, I plan to explain other high-level valuation strategies being used in the market so please stay tuned!

*Note: Certain coins with 0 market cap were excluded; Bitcoin was excluded for average calculation purposes; Commits calculated from 2/17 - 1/18;

Disclaimer: This is only my opinion and is not a recommendation for a certain investment action or strategy.