The traditional notion of value indicator relies on metrics like price-to-earnings ratio, free cash flow or debt-to-equity ratio that have no obvious equivalent in the crypto space. However, that’s not necessarily a bad thing and just another sign that crypto requires a new set of value indicators powered by the elements that make crypto a unique asset class. Just like momentum, value indicators are essential establishing any meaningful quantitative strategy in the crypto space. To evaluate the potential of this type of strategies, let’s look at one of its maximum expressions.
O’Shaughnessy Trending Value Investment Strategy
Pick the most undervalued companiesWith the highest stock price increase over the past six months
Instead of focusing on a single value ration like most strategies, the value investment method used a combination of six value growth metrics:
Price to book valuePrice to salesEarnings before interest, taxes, depreciation and amortization to Enterprise value (EBITDA / EV)Price to cash flowPrice to earningsShareholder Yield (Dividend yield + Percentage of Shares Repurchased)
If a company’s price-to-book ratio is in the lowest 1% of the dataset, it gets a score of 1. For some ratios it’s the other way around, for instance EBITDA/EV. If a company belongs to the highest 1%, it gets a score of 1. If a value is missing, it gets a score of 50. The same calculation is repeated for each of the ratios and then sum up these values. Companies are again divided into 100 groups based on this score. This final result is called value composite. A value composite of 1 means that the company belongs to the 1% cheapest companies according to these factors.
After that, the trending value strategy selects the top 10% ranked according to this value composite score. Then he filters these stocks by a momentum factor,. The result is an extremely cheap group of stocks but with a foundational value and also enough momentum to continue raising.
Strategies like the trending value investment method are definitely applicable to the crypto asset market with the small caveat that they will require new value indicators. There is been some interesting work done in this area already but I would like to present some new ideas that might be worth exploring.
Four New Value Indicators for Crypto Assets
Price to In-The-Money Ratio
Using this notion, we can develop a simple ratio that evaluates the price relative to a representation of the number of investors “in the money”. A high ratio could mean that the price of a crypto-asset of overvalued relative to the population of investors that have realized gains.
Price to Active Market Cap Ratio
IntoTheBlock’s Active Addresses analysis measures the segment of a crypto network that has experienced regular activity. Evaluating the positions of those addresses we can estimate the notion of “active market cap” or a segment of a market cap of a crypto asset that have regularly influence in it.
The price to active market cap ratio could provide a more objective view about the current value of a crypto-asset. A high ration might indicate an overvalued crypto asset relative to its active market cap while a low ratio might indicate some signs of potential future growth.
Price to Large Transactions Ratio
Large transactions are a strong indicator of the vitality of a crypto asset and the commitment of investors. IntoTheBlock’s large transaction signal tracks the number of large transactions on a daily basics.
The price to large transaction ratio could be an indicator that illustrates the value of a crypto assets relative to the amount of funds processed by large investors. A high ratio could indicate an overvalued asset that could vulnerable to a price drop by a large order.
Price to Exchange Inflow Ratio
Crypto exchanges move a significant percentage of the daily volume of most crypto assets. IntoTheBlock has been working on a new series of signals that evaluate the flow of funds processed by crypto exchanges.
The price to exchange inflow ratio measures the current value of a crypto asset relative to the regular flow of funds into centralized exchanges. A low ratio could indicate an undervalue asset that could be pose for growth based on future activity in crypto exchanges.
These are just some ideas about new value indicators for crypto assets. If you noticed that I was being very generic on the formulas, it was on purpose as we are still working out the details. In future posts we will deep dive into the specific indicators.
(Disclosure: The Author is the CTO at Into The Block)