In 2022, Cardano (ADA 5.58%) pulled off a huge technological upgrade of its blockchain, became the No. 1 blockchain in the world as measured by development activity, and became one of the top three players in the non-fungible token (NFT) space.
But nothing it did throughout the year seemed to matter. Cardano was down more than 80% for the year, and currently trades at a bargain-basement price of just $0.27, which is more than 90% off its all-time high of $3.10.
Of course, you could blame the broader market sell-off for Cardano’s woes, but something else seems to be deterring investors from buying. To put it bluntly, many crypto investors think Cardano is a “ghost chain,” where nothing happens. And the one number they typically point to in support of their argument is Total Value Locked, or TVL. So that has me convinced that TVL is the one metric you need to understand if you are thinking about buying Cardano.
Image source: Getty Images.
OK, so what is TVL?
While the crypto market is notoriously short on real metrics to value coins and tokens, the one metric that many investors use is Total Value Locked. In layperson’s terms, TVL measures the amount of activity happening on a blockchain. More specifically, it measures how much of a certain crypto is locked up in decentralized finance (DeFi) protocols.
Generally speaking, the higher this number is, the better it is for a blockchain. For this reason, blockchains that post high TVL numbers get the most investor attention.
In fact, some crypto investors use market capitalization and TVL in the same way that equity investors use current share price and book value. Just as equity investors use the price-to-book ratio to see which stocks might be overvalued or undervalued, crypto investors can use TVL to determine which cryptos are overvalued or undervalued on a relative basis. All you have to do is divide the market cap of a crypto by its TVL, and you have a number to compare with other cryptos.
Cardano and TVL
The problem, quite simply, is that Cardano ranks very low when it comes to TVL. It is currently No. 30 among all blockchains, which is admittedly quite embarrassing. Cardano has been around since 2017, currently ranks as the ninth-largest crypto by market capitalization, and lays claim to being one of the top Layer 1 blockchain networks on the planet. So shouldn’t Cardano rank somewhere in the top 10 when it comes to TVL?
The answer is yes, and that’s why investors are so frustrated with Cardano. On the surface, Cardano would appear to be wildly undervalued, based on a price of just $0.27. But when you do the math, Cardano appears to be wildly overvalued because the TVL is so low. Using the ratio of market cap to TVL, you’re essentially dividing a massive number ($9.28 billion in market cap) by a tiny number ($54.61 million in TVL). In fact, you could legitimately make the case that Cardano should trade at a much lower price, which is why many buyers are wary.
What is Cardano doing to boost TVL?
There’s no easy way to boost TVL, since there’s no way to force people to use your blockchain, right? Remember: TVL is a measure of blockchain activity, so you need to provide incentives to people to use your blockchain.
For example, since crypto staking is counted as part of TVL, you could simply offer higher staking rewards as a way to incentivize people to use your blockchain. And, indeed, Cardano seemed to be having some success with crypto staking in 2022.
But that is just the tip of the iceberg. Cardano is doing other things right now that will boost TVL, and that includes a move into decentralized finance (DeFi). Becoming active in DeFi is the single best way to boost TVL. In 2022, one of the success stories at Cardano was the sudden blossoming of DeFi offerings, including the launch of the first decentralized exchange (DEX) on the Cardano blockchain.
In early 2023, we’re already hearing some Cardano success stories about DeFi and the impending launch of new stablecoins, which are absolutely vital to DeFi. But you know what? Nearly any analysis of these new offerings always ends with something along the lines of, “Yeah, but it’s done nothing to boost TVL yet.” In other words, nobody is going to give Cardano credit for anything until TVL improves.
Should I buy Cardano now?
All this is why investors should make TVL the No. 1 metric for deciding whether to buy Cardano. If TVL is flat or falling, don’t buy. If TVL is rising, buy. It’s really that simple.
I’m still bullish on Cardano long term, and I think Cardano’s recent foray into DeFi is going to pay off big in 2023. It could pay off for investors, too, if TVL finally starts trending up.