Cardano (ADA) is currently down more than 90% from its all-time high. Motley Fool’s crypto expert Dominic Basulto evaluates the altcoin project based on various metrics. As a result, he explains whether it makes sense to invest in ADA.
TVL could be key to understanding altcoin project
cryptocoin.comAs you follow, Cardano (ADA) has undergone a major technological upgrade to its Blockchain in 2022. Thus, it has become the world’s #1 Blockchain when measured by development activity. It also became one of the top three players in the Non-Fungible Token (NFT) space. But nothing he did during the year seemed to matter. Cardano fell more than 80% during the year. The altcoin is currently trading at a bargain price of just $0.27, which is 90% lower than its all-time high of $3.10.
Of course, you can blame the wider market selling for Cardano’s woes. But there seems to be something else deterring investors from buying. To put it bluntly, many crypto investors consider Cardano to be a ‘ghost chain’ with nothing. And usually the only number they point to to support their argument is Locked Total Value (TVL). This convinced me that TVL is the only metric you need to understand if you are considering buying Cardano.
What is Locked Total Value (TVL)?
The crypto market is notorious for real metrics to value cryptocurrencies and tokens. However, the only metric that many investors use is Total Locked Value. In layman’s terms, TVL measures the amount of activity that occurs on a Blockchain. More specifically, it measures how much of a given crypto is locked in decentralized finance (DeFi) protocols. Generally speaking, the higher this number, the better for a Blockchain. Therefore, blockchains that issue high TVL numbers attract more investors.
In fact, some crypto investors use market capitalization and TVL the same way equity investors use current share price and book value. Just as stock investors use the price-to-book ratio to see which stocks are overvalued or undervalued, crypto investors can use TVL to determine which cryptos are relatively overvalued or undervalued. All you have to do is divide the market cap of a crypto by its TVL and compare it to other cryptos.
TVL of Cardano and altcoin project
The fairly simple problem is that Cardano is way down when it comes to TVL. It is currently ranked 30th among all Blockchains and is admittedly quite embarrassing. Cardano has been around since 2017. Also, it is currently the ninth largest cryptocurrency by market cap. However, it claims to be one of the best Tier 1 Blockchain networks on the planet. So shouldn’t Cardano be in the top 10 when it comes to TVL?
The answer is yes, and that’s why investors are so fed up with Cardano. On the surface, based on a price of just $0.27, Cardano looks wildly undervalued. But when you do the math, Cardano seems to be overvalued as the TVL is so low. Using the ratio of market cap to TVL, you’re essentially dividing a very large number ($9.28 billion in market cap) by a small number ($54.61 million in TVL). In fact, you could rightly argue that Cardano should be trading at a much lower price. This is why many buyers are wary of altcoins.
What is Cardano doing to increase TVL?
There is no easy way to increase TVL as there is no way to force people to use Blockchain, right? Remember: TVL is a measure of Blockchain activity. This is why you need to provide incentives for people to use your Blockchain. For example, since crypto staking counts as part of TVL, you can offer higher staking rewards as a way to encourage people to use your Blockchain. And indeed, Cardano seemed to be having some success in crypto staking in 2022.
But this is just the tip of the iceberg. Cardano is currently doing other things to increase TVL. This includes the transition to decentralized finance (DeFi). Being active in DeFi is the best way to increase TVL. One of the success stories in Cardano in 2022 was the sudden flowering of DeFi offerings, including the launch of the first decentralized exchange (DEX) on the Cardano Blockchain.
We’re already hearing some success stories from Cardano about the upcoming launch of DeFi and new stablecoins that are absolutely vital to DeFi in early 2023. But do you know? Almost all analyzes of these new offerings always end with something like ‘Yes, but it hasn’t done anything to raise TVL yet’. In other words, no one will credit Cardano until TVL develops.
Should I invest in the altcoin project now?
For all this reason, investors should make TVL the #1 metric when deciding whether to buy Cardano. Do not buy if the TVL is flat or falling. Buy if TVL is rising. It really is that simple. I’m still bullish on Cardano in the long run. Because I think Cardano’s recent push on DeFi will have a big payoff in 2023. If TVL finally starts to rise, it could also yield gains for investors.
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