The crypto community is finally starting to understand, how to value crypto-assets employing the same techniques and methods used in traditional finance. An old financial data analysis technique employed for valuing capital assets – PE ratio was used by developer and crypto analyst Lucas Campbell, to determine which DeFi protocols are over or undervalued. The analysis works properly, because DeFi protocols have on-chain cash flows and generate direct profits from economic activity, rather than being solely of speculative nature.
3/ Like traditional capital assets we can look at PE ratios to see how protocols are valued relative to cash they generate@Bancor, @AaveAave, & @KyberNetwork have the lowest PE ratios
While @AugurProject & @0xProject have the highest
(lower implies more attractive valuation) pic.twitter.com/aTDBC04IH2— Ryan Sean Adams – rsa.eth 🏴 (@RyanSAdams) May 13, 2020
The analysis revealed interesting findings about the market valuation of prominent DeFi protocols, relative to the revenue they generate. The range of average annualized earnings data used was from April 2019 – April 2020 (trailing 12 months). Bancor was found to have the lowest PE ratio of all DeFi protocols – 56 pts, which indicates that the automated liquidity provider protocol is highly undervalued and a good investment option. The second most undervalued protocol is Aave at 74 pts and Kyber was third with 80 pts. On the contrary, Augur was found to be highly overvalued at 16,761 pts, followed by 0x at 6,935 pts. The full report can be found here.
Whats The PE Ratio?
The PE ratio refers to the price to earnings ratio. In finance, it is a method used to value a company, by measuring its current share price relative to its earnings per share (company’s profit over a period of time divided by total outstanding shares). It can be defined as a representative of how much the investors are willing to pay for a single dollar of the company’s earnings.
- A high PE ratio indicates that the share price is high relative to its earnings, the company or asset is overvalued and investors are expecting higher earning growth in the future.
- A low PE ratio indicates that the share price is low relative to its earnings, the company or asset is undervalued and investors are expecting lower earning growth in the future.
Why Bancor Is An Attractive Investment Opportunity?
The analysis shows that Bancor is clearly undervalued and an attractive investment opportunity, at this point. Before the mass sell-off event on Mar 13, the BNT token was trading in a range of $0.28 – $0.31. The BNT is currently stable in the $0.18 – $0.20 range. The protocol’s native token BNT has a low cap and it traded close to $1, during the last year with ATH at $10. Compared to the revenue it generates for its liquidity providers / stakers, the price per share is low and there is great potential for it to improve.
This is made even better by the fact that Bancor v2 is set to launch in Q2 2020 (around Jun). It will feature improvements and enhancements, which will likely increase the activity on the network, raising the revenue and thus the token price. The Bancor v2 will feature Chainlink oracle for tamper free and authentic price data instead of relying on arbitrageurs to level price, impermanent loss mitigation (stakers losing by providing liquidity than they would have, if they adopted a simple buy-and-hold strategy), facility to provide liquidity through a single token, reduced slippage design and support for lending pools to further increase liquidity provider’s earnings.
Bancor is an automated liquidity provider protocol in the Decentralized Finance (DeFi) category, which allows exchange or trade of multiple tokens without the need of a counter-party or order book based trading mechanism, through liquidity pools for which stakers earn fees from processing token conversions. The native token is BNT with a supply of 69.1M total shares. It supports token conversion on both Ethereum and EOS blockchain platforms. The service features easy sign up facility using mobile number, Messenger and Telegram.