Deviation from Fair Value represents the quantitative difference between a cryptocurrency asset’s current market price and its theoretically calculated intrinsic or ‘fair’ price. It indicates whether an asset is overvalued or undervalued relative to a model-derived benchmark.
Mechanism
The fair value is determined using quantitative models that consider various factors, including underlying tokenomics, network utility, circulating supply, market capitalization, and discounted future cash flows or protocol revenues. The observed market price is then compared against this calculated value, revealing discrepancies.
Methodology
This concept is central to quantitative trading and institutional crypto investing, guiding strategies like statistical arbitrage or relative value trades. Algorithms monitor these deviations to identify potential trading opportunities, aiming to profit from the eventual convergence of market price toward the established fair value.
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