Definition and Overview of PEG Ratio
The PEG ratio is an analytic tool traders and investors use to determine an asset’s value.
This is used both in crypto and stocks. It gives a more complete estimate than the standard P/E ratio.
Mario Farina originally developed the ratio in a 1969 book called “A Beginner’s Guide To Successful Investing in the Stock Market.” Later, Peter Lynch, an American investor and mutual fund manager, popularised the formula.
While the PEG ratio is a great tool for valuing crypto and stocks, it lacks accuracy. The metric makes assumptions that may or may not be true. Simply said, it is impossible to predict an entity’s future growth.
Consider the case of Tesla. In 2019, its stock was considered overvalued when it was priced at around $20. However, the stock’s price skyrocketed to a peak of ~$400, now trading at ~$162. This drastic change in value shows how the PEG ratio can sometimes be completely off the mark.
The same can be computed for Jupiter’s token. At its peak price of ~$1.4, the JUP token was highly overvalued, as the decentralized exchange didn’t have that much volume to cover its price. That’s why the price started to drop slightly, reaching $0.96 at the time of writing.
PEG Ratio Formula and Methodology
To calculate the PEG Ratio, an investor should first calculate the P/E ratio and the growth factor.
The P/E ratio is a price-to-earnings ratio. It is an equity valuation multiple calculated by dividing the market price per share by earnings per share (annually).
The growth factor is a little harder to determine, especially if you’re not a financial analyst and are unfamiliar with these terms.
Using historical growth isn’t the best idea because the result might not be accurate. The idea here is to estimate the growth rate for five years—not too long, not too short.
So, the final formula would look like this:
PEG Ratio = (P/E)/EPS Growth.
Significance of PEG Ratio in Cryptocurrency Analysis
While the classical PEG Ratio cannot be used with cryptocurrencies like Bitcoin and Ethereum, it can be modified and used for decentralized exchanges that remunerate liquidity providers with their tokens.
Calculating this for different dApps is impossible due to the lack of information and differences in the nature of their business. In other words, not all decentralized applications pay the so-called dividends, and others don’t have a governance token with the help of which they pay.
In this case, we’ll use the fees the decentralized exchange imposes for every trade to get the company’s EPS level.
The price-to-earnings ratio equals the market capitalization-to-total earnings ratioo
This means we can easily calculate a DEX’s P/E by dividing its market capitalization by the fees it received last year.
Now, the part that can confuse many is the earnings per share (EPS) growth rate. EPS Growth measures the rate at which a company’s earnings per share is increasing or decreasing.
It is difficult to accurately determine an EPS growth rate even for traditional finance products. For DEXs, it seems impossible.
However, we assumed that the EPS in our situation is the fees imposed by DEXs, so we can use historical data to predict future earnings growth.
And, with a simple touch of mathematics, the formula for evaluating stocks can now be used to evaluate cryptocurrencies like UNI, the native token of Uniswap.
This way, we can evaluate UNI’s performance using the DEX’s information and make informed decisions about investment portfolios, including this token.
Conclusion
Ultimately, the PEG ratio is a highly effective analytical tool that every investor should know how to compute and interpret.
In the cryptocurrency world, it is less used but can be used for platforms equivalent to earnings per share. In our case, these platforms are DEXs and other decentralized protocols.
Meher, B. K. (PhD). (PDF) Is PEG ratio a better tool for valuing the companies as compared to P/E ratio?
https://www.researchgate.net/publication/307871951_Is_PEG_Ratio_a_Better_Tool_for_Valuing_the_Companies_as_Compared_to_PE_Ratio_A_Case_Study_on_Selected_Automobile_Companies
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