Calculating Crowdloan Reward Profit Targets
Parachain Networks offer increasing rewards if you participate in their crowdloans. The main question for investors is, if it is profitable to invest in a certain crowdloan.
This article shows you how to find the break even ratio, break even price and break even market cap for your crowdloan rewards. This helps you determine if you will be profitable with a crowdloan. A video version is also available:
The article has 3chapters:
- Mental Framework
- Basic Calculation
- Market Cap Estimation
1. Mental Framework
Beginner crypto investors often compare their favorite token against fiat. I think this is a mistake, because it does not allow you to get a feeling of your actual alpha in comparison to just investing into Bitcoin.
Take a look at the following charts (BTCUSD and KSMUSD) and try to tell which token performs better:
It’s not easy to tell. If you compare the KSMBTC chart on the other hand, it tells a different story:
KSM has been appreciating against Bitcoin over the last year.
In Kusama, you compare against staking rewards
The main competitor of crowdloans in Kusama is staking. Staking rewards roughly amount to 15% APY for nominators. This defines the break even point that you have to reach.
Your token will either underperform or outperform against simple staking. Your job is to find out which tokens likely will outperform staking.
2. Basic Calculation
Our first job is the calculate the break even ratio. That is the ratio against KSM we have to reach to break even against staking. Since 1 stakes KSM will result in 1.15 KSM in a year, we need to outperform the 0.15 KSM staking rewards gained over the year.
For the following examples, we will take Karura from Acala Network and its corresponding KAR token. 1 KSM resulted roughly in 20 KAR (for most users it’s more, but we stay with 20 to keep things easy for the math)
Our break even point is therefore: 20 KAR = 0.15 KSM
By calculating 0.15 KSM / 20 KAR, we get a ratio of 0.0075 KARKSM.
So the break even ratio is 0.0075 KARKSM. Everything above this will be profitable for us.
The general formula to find the crowdloan yield break even ratio is therefore:
cyber = staking reward / crowdloan reward
3. Market Cap Estimation
With the ratio estimated, we can now proceed to calculate the break even market cap in todays prices. To do this, we find todays price with the break even ratio and todays KSMUSD price:
- KARKSM: 0.0075
- KSMUSD: 200
- KARUSD = KARKSM * KSMUSD
- 0.0075 * 200 = 1.5 KARUSD
We can then take the total supply of KAR and multiply it with the price:
- Total supply: 100,000,000 KAR
- Market Cap = KAR supply * KARUSD = 150,000,000 USD
Our break even market cap would therefore be 150 million USD. This would put the coin at place 227 on coingecko.com. We could now do fundamental analysis to find the realistic placement for this token. In the case of KAR I am pretty sure we will get a lot better than 227th place.
You now have a tool to find the break even ratio, break even price and break even market cap. This should give you enough material to compare the parachain against similar technologies and estimate a propable ranking and profitability.
Don’t let your KSM just sit while waiting for the crowdloans. Stake them!
With all those parachains still coming in, we need to keep our KSM ready for the crowdloans. But don’t just let them sit in your account doing nothing while you wait for the right moment. You can earn interest on your KSM and also support our channel. Get all the details here: