You can use a token’s supply and market valuation data alone to decide if and when to buy or sell, or even structure your portfolio accordingly.
In this post, I will show you how to analyse and interpret a project’s supply and marketcap data to help you make sound investment decisions.
Understanding supply
As you may already know, a token’s supply refers to how many of it exist or will exist and it’s categorised into three:
- Maximum Supply
- Total supply
- Circulating supply
Let’s discuss each of them below.
1. Maximum Supply
Maximum supply refers to the highest amount of the token that can ever exist. Beyond this number, no new tokens will be created.
The lower the maximum supply of a token, the higher the potential value, given sufficient demand.
Similarly, the higher the maximum supply of a token, the lower the potential value or price due to inflation.
1.1 What is the ideal maximum supply number?
There’s no magic number, but personally, I prefer tokens with a very low maximum supply because, given sufficient demand, their price tends to appreciate more.
My preferred range is from 1 to 10 billion (10,000,000,000) maximum supply.
But the main determinant of what a good maximum supply is for a particular project is the size of its market.
The larger the number of users a project serves the more it can afford to have a large maximum token supply as there will be enough demand to support its value.
However, a very niche project with a small market will not do well with a large token supply as there wouldn’t be enough demand to support its value.
For such tokens, their price will always be suppressed due to inflation and insufficient demand.
1.2 Token supply that I would avoid
I avoid projects with multiple tokens or that have infinite (unlimited) token supply because I consider them as money grabs or they’re just terrible at tokenomics.
Nobody needs multiple tokens for the same project and an unlimited supply is equally bad as demand is limited.
Finite demand vs an infinite supply is the perfect way to keep a token’s value suppressed forever.
However, there’re exceptions like Ethereum (ETH) where a project implements a burning program that takes more tokens out of circulation than new ones being created.
But these are rare exceptions.
Plus it’s only possible because the project is big and generates enough revenue to buy back and burn enough tokens to offset its inflation.
There’re not many projects with such a strong revenue system, so most infinite supply tokens are doomed from the beginning.
1.3 How to determine the fair value of a token using its maximum supply data
Here’s a simple way to determine whether a token is currently overvalued or undervalued based on its current price and maximum supply.
For simplicity, I will be using the Presearch (PRE) token for this evaluation.
Presearch has a maximum supply of 500 million with a current FDV of 31 million. FDV = maximum supply X current price.
Now, based on my understanding of the project’s fundamentals and potential, I believe Presearch should be worth not less than $1 billion.
This is clearly a $1 billion project given its market size, fundamentals, and all. And I came up with this figure by studying the project, its market and competitors’ size, etc.
But this is my own evaluation of what the project should be worth. Yours or any other person’s could be different.
However, the most important thing is to make your estimations based on your own evaluation and understanding of the information you have about the project.
Continuing with the above calculation, now, divide your estimated worth of the project by its maximum supply to get its fair price or value.
For Presearch, it’ll be:
$1,000,000,000 / 500,000,000 = $2
Based on my own projections, the fair value or the least price for Presearch (PRE) is $2. As such, the current price of $0.06 is a massive steal.
This is why PRE is one of the tokens I am currently accumulating. I believe it’s highly undervalued.
If your estimated fair price of the token is higher than the current price, the token is undervalued. If it’s lower than the current price, then the token is overvalued.
With this information, you can decide whether to buy now or wait for the price to fall below your estimated fair value.
Furthermore, you can also decide to buy now regardless and stake it to earn more of the token.
Hopefully, your staking rewards will offset any drop in price due to inflation. But don’t bet your life savings on it.
2. Total supply
This is the total amount of the token that has been created, excluding any amount that’s been burned.
It includes the circulating supply plus all locked tokens and those in liquidity pools, etc.
Furthermore, the total supply will increase towards the maximum supply as more tokens are created through block emissions or mining as the case may be.
Burned tokens are excluded from the total supply and all future burns will reduce the total supply accordingly.
Here’s how you can use the total supply to determine if it’s ok for you to buy a token now or wait.
If the current total supply is say, just 10% to 40% of the maximum supply, you can safely expect the price of the token to do poorly in the short term.
This is because there are still a lot of tokens waiting to be created and a lot of selling pressure to come due to inflation.
So you may want to hold on until at least more than half of all tokens have been generated.
However, if the current price is way below your estimated fair value of the token, it may be appealing to buy and stake to earn more of the token.
Furthermore, if the total supply is too far from the maximum supply and the FDV is way above what you think the project should be worth, you can expect the price of the token to dump in the short to medium term due to inflation.
3. Circulating supply
The circulating supply is the amount of the token that’s been released into the market and is being traded by the public.
Similar to the total supply, the more of the token’s supply is in circulation the better, as there’ll be less additional selling pressure from inflation.
If all (100%) of the tokens are in circulation, the price will only be subject to an increase or decrease in demand or userbase.
And as the project grows, the value of the token should naturally grow with it.
Furthermore, the more of the token is taken out of circulation through staking or similar programs, the better for the price as there are fewer tokens available to be sold.
Ideally, you want to buy a token that most of it is already in circulation and they have a staking program that’s financed using the project’s revenue.
Meaning the project buys back its own token from the market using its revenue and distributes it to stakers or farmers.
Understanding marketcap (market capitalisation)
The marketcap refers to the total market value of a cryptocurrency’s circulating supply and is calculated by multiplying the circulating supply by the current price of the token.
Circulating supply X current price = Marketcap
It is a usually misunderstood and highly overrated metric in crypto because some people tend to think that it means the total amount of money that’s been invested in a token.
That’s very far from the truth.
In fact, it is a vanity metric as it does not even remotely reflect the total amount of money invested into a project.
For example, let’s assume we just created this token called CST with a maximum supply of 1,000,000 and a circulating supply of 500,000.
We’re going to list this token on a DEX with an initial price of $1, so we did. Now, someone found our token and bought 100 CST at $100 and the price increased to $1.1
On CoinGecko and other crypto data aggregators, the marketcap of this token will be 500,000 X $1.1 = $550,000.
Though only $100 has been invested in this token it now has a marketcap of $550,000.
The situation is worst if the token has a 1 trillion supply or more, as even a $1 investment in the token could give it a marketcap of hundreds of billions.
Fully diluted valuation (FDV)
The fully diluted valuation is the marketcap of a token assuming its maximum supply comes into circulation.
It is calculated by multiplying the maximum supply by the current price of the token.
Maximum supply X current price = FDV
As discussed earlier, you can easily calculate the fair price of a token and determine whether it’s currently overvalued or undervalued by comparing its current FDV with your estimation of the project’s real value.
Total value locked (TVL)
TVL refers to the total amount of real capital that’s been deposited on a platform in form of lending, liquidity or staking pools, etc.
Unlike marketcap, TVL values are real money deposited by users in a protocol and better represent how popular a project is.
The higher the TVL, the more people trust the platform or find it attractive and the greater adoption it enjoys.
DeFiLlama is one of the most popular crypto tools that measure the TVL on all popular chains and protocols.
Understanding FDV/TVL Ratio
The FDV/TVL ratio compares a project’s TVL with its FDV and can indicate whether it’s undervalued or overvalued.
It is calculated by diving the FDV by the TVL values. If the ratio is greater than 1.0, it means that the FDV is greater than its TVL.
This suggests that the project is likely overvalued, as the valuation is higher than the actual money people are willing to deposit into it.
For example, based on this metric, we can say that the Biswap (BSW) token is currently undervalued with an FDV/TVL ratio of 0.63.
There’s more capital locked on Biswap than its fully diluted valuation which shows that the level of adoption is greater than its current value, hence undervalued.
So, the next time you check CoinGecko, CMC and other crypto market data aggregators, look out for these numbers and factor them into your analysis.
The farther the number is below 1 the more undervalued, and the farther above it is above 1 the more overvalued the project is.
However, note that as the project grows and time passes, these numbers are constantly changing. So, the situation could reverse as the market turns in the future.
Marketcap / TVL Ratio
The Marketcap/TVL ratio measures and compares a project’s market capitalisation with its TVL.
It is calculated by dividing the marketcap by the TVL to get the ratio.
If the ratio is more than 1.0, it means the marketcap is greater than its TVL, and this suggests the project is overvalued.
Similarly, if the ratio is less than 1.0, it suggests the project is undervalued as the true adoption shown by (TVL) is greater than its market valuation.
In that sense and using Biswap as an example again, the project is highly undervalued as its Marketcap/TVL ratio is far below 1.0.
You can visit your favourite projects’ CoinGecko page and look up their numbers to see for yourself.
Conclusion
You make money when you buy, not when you sell is a popular saying among investors.
And it means how much you bought a token determines to a large extent whether you make a profit on it later on or not.
As such when investing in crypto, it’s important to try and buy-in at the right price to increase your chances of making a profit later on.
That’s why in this post, we have discussed the various ways you can estimate a token’s fair value based on its supply, marketcap, and TVL data.
With this information, you can safely evaluate whether a project is currently overvalued or undervalued and then invest accordingly.
Which is your favourite way of evaluating a token’s fair value? Share with us in the comments section below.