In traditional markets, namely stocks, there are numerous ways to analyze the fundamentals of a company. Famously, Warren Buffet pointed out many that he learned years ago from Benjamin Graham; the P/E ratio, Price-to-Book Ratio, Change in Labor Costs, and so on. For Cryptocurrencies, we have a much smaller pallet to choose from and many ways of analyzing traditional currencies are not available to us, either. Luckily, due to the ingenious nature of the Bitcoin community, we have created a new way to detect the fundamental health of bitcoin markets; the NVT ratio (network value to transactions).
This ratio specifically points out the separation from market cap and total transaction value. When a large gap occurs, either positively or negatively, we have a bubble or a “recession,” respectively. This is notably similar to the P/E ratio in stocks. The P/E ratio will analyze the difference between a stock’s price and its earnings. With a high P/E ratio, it’s quite easy to tell if an equity is currently overvalued. One of the most famous examples is Yahoo’s P/E ratio during the tech boom. At that time, it had a 700 P/E ratio. This means that people were willing to pay 700 times the actual worth of the stock. But what about bitcoin?
Currently, bitcoin’s NVT sits at a very healthy 6.79 (21 day data). Now, this a far-cry from Tulip madness or the South Sea Bubble!
The Bitcoin network is processing transactions at an almost equal rate to the current worth of the entire network. If you look at current equity P/E ratios, the ones with the most volume have ratios in the hundreds. Even more so, the percentage increase of index prices (DOW) far outpace that of bitcoin.
Since the early 1980’s, we have had a new paradigm where stock prices would run up 150 percent to 250 percent before having a very small retracement of 25 percent to 50 percent; uneven retracement levels and vast differences between percentage change show the general stock market to be far messier and unpredictable than most believe. Before the early 80’s, the typical runs would be nearly equal to the retracements. During these times, we saw massive increases and decreases in P/E ratios for stocks as a whole. We could easily speculate on why that is, but it’s better to denote the relative health of Bitcoin.
Since the first major breakout in late 2015, bitcoin has had consistent increases of 150 percent and then retracements of 40 percent every three to six months. Price patterns in bitcoin as compared to major stock indexes have been harmonic and consistent during its ascent. Beside looking at the NVT, it would be wise to look for uneven and sporadic changes in these patterns as that could reasonably suggest a change to market structure. It’s important to note that bitcoin’s NVT has remained relatively stable, as well.
It’s safe to say that Bitcoin is in a healthy place, for now, but what will the future hold?