The world of cryptocurrency is constantly growing, and Bitcoin Circuit’s popularity is a clear indication. However, it also includes decentralized finances, which is an important part of the crypto world. It can be quite challenging to keep up with the growth of DeFi, let alone determine and analyze the new projects that keep popping up rapidly. For this purpose, fundamental analysis is needed to determine if a protocol is undervalued or overvalued.
This is actually a great way for traders and investors to make the right decision. So, with this article, we are sharing the common key indicators that a DeFi investor should know about.
Total Value Locked
Commonly used as TVL, total value locked is defined as the number of tokens locked into the DeFi protocol. It wouldn’t be wrong to say that it’s all the liquidity in a liquidity pool of the marketplaces. For instance, a DeFi protocol can be used for exchanging cryptocurrencies, but TVL is all about the funds deposited to every protocol by different liquidity providers. As far as calculating the TVL is concerned, there are different ways of doing it, such as how much TVL is staked in projects.
Total value locked is one of the key indicators that offer information and knowledge on DeFi interest. The traders and investors can name TVL as the data point that comes across the decentralized finance projects. In addition, this key indicator can help assess and compare the market share of different DeFi protocols.
P/S ratio is the price-to-sales ratio, and this indicator is all about helping investors calculate if the stock is overvalued or undervalued by comparing the prices to the overall revenue of the company. P/S ratio can be achieved by investors dividing the market cap of the protocol by the revenue.
If the P/S ratio is lower, there are higher chances that a specific protocol is undervalued. Honestly, it might not be the right way of calculating the valuation, but it provides sufficient information and knowledge to the investor about the market valuation of the project.
Token Supply On Exchanges
When it comes down to the DeFi investors, they are advised to monitor the token supply on different exchanges. In the majority of cases, the sellers depend on centralized exchanges for selling the tokens. For this reason, a centralized exchange is likely to have a higher liquidity rate as compared to decentralized exchanges, which don’t need the intermediary trust. However, when there are excessive tokens to purchase on a centralized exchange, the pressure will be higher for selling the tokens.
This pressure is higher because the holders might not be storing funds in the wallet. Having said that, it is important that a DeFi investor monitors the token supply on cryptocurrency exchanges with higher liquidity. Still, we cannot term it an assertive strategy, and it won’t be able to predict the sell-off as traders tend to have a huge volume on the exchange for trading on futures or margin. Still, monitoring the token supply is still an important consideration for DeFi investors.
Token Balance Changes
We have already shared the importance of monitoring the token supply on crypto exchanges. However, when you are an investor, it won’t be enough to track the token balance and supply only. It is essential that you monitor the recent changes associated with token balance on the crypto exchanges.
These changes in the token balance on the crypto exchange will signal an increase in the volatility rate. This is because when larger funds are withdrawn from the centralized exchanges, it could mean that the whales have started accumulating the tokens.
Unique Address Count
Monitoring the constantly increasing number of addresses holding assets will be a reliable strategy for investors to determine the reliability and relevance, and it’s actually a direct correlation. The growth in address count holding a specific asset will indicate the growing adoption and popularity, which increases the utilization of tokens and the number of buyers. Still, you’ve to remember that it’s not very challenging to create addresses and distribute different funds.
The Bottom Line
It doesn’t matter if you are just starting out in the crypto world or have years of experience; you must have a basic understanding of the commonly used indicators of DeFi. This is because the market is unpredictable, and these key indicators will help conduct proper research before you invest in a project.