How to Make Sense of Cryptocurrency Valuations

Bitcoin is the largest and best-known cryptocurrency, but there are dozens of other major products and hundreds of minor ones, as well as cryptoassets and tokens. Yet there is no method or established tool that allows investors to analyze and value the assets that are being created seemingly every day.

What if we applied factor analysis? This powerful quantitative tool is generally used to break down the stock market1523977128831 into three to six factors,1523977158255 each a specially constructed portfolio. The “value” factor, for example, is long stocks with low price-to-book ratios and short stocks with high price-to-book ratios. The claim is that the long-term expected return of a diversified portfolio is explained by its exposures to these factors, so you don’t need to understand each individual stock holding to predict performance.