For those wondering whether bitcoin is in a bubble, the crypto-converts have a answer: It's not. The price, they say, can go much higher.
The answer is not all that surprising, or new. But recently bitcoiners have latched onto a metric they contend proves their sky-high predictions are not based solely on blind belief or an ideological bent against organized governments or fear of a massive financial collapse. The metric is called the network value-to-transaction ratio, or NVT. Some have dubbed it bitcoin's P/E. And, at least in the community, it's becoming something of an industry standard valuation metric. At least two websites are devoted to showing the daily value of bitcoin's NVT, which, as of Wednesday, was 119. That's above its historical average, which in bitcoin land is about eight years of data, of 87, but well below its peak of well above 400. Bitcoin by this analysis still has room to run.
Bitcoin's Climb
The question of whether bitcoin is in a bubble has come up before, but it has been getting louder and more frequent. The price is up 353 percent this year to a recent $4,330. The currency received a boost earlier this week from news that Goldman Sachs was considering launching a cryptocurrency trading desk, and a supportive quote for Goldman's CEO. It would be the first big bank to have dedicated bitcoin traders.
A number of Wall Street analysts have put out research reports on bitcoin, and a few have issued price targets. In mid-August, a Goldman analyst said the price of bitcoin was headed to $4,827. But nearly all of that research has been done by technical analysts, who watch charts. Technical analysis is generally based on price momentum. What is going up is assumed to continue to go up, until it doesn't. Then it is predicted to plunge, which leads to unsatisfying analysis like this: John Spallanzani at GFI Group Inc. predicts that the price of bitcoin could reach $6,000 by the end of the year, unless it doesn't cross $4,500, then it's likely to plunge to $3,000. Got that?
That's what makes the NVT ratio, or the crypto P/E, more satisfying. It's based on bitcoin use, not just its wild price swings. Unfortunately, separating bitcoin's real economics from hype is harder than it seems. NVT tries to mimic the stock market's price-to-earnings ratio, which is the most widely used method for valuing share prices. Of course, creating an actual P/E for bitcoin is impossible because, unlike a company, bitcoin, like any currency, doesn't produce earnings. It does have transactions, which is not quite earnings, but it's a measure of the demand or utility of bitcoins. The theory is that as the use of bitcoin goes up, so should its value. What's more, the faster that volume of transactions rises, the higher the NVT should be, similar to how tech and higher-growth companies get higher P/E's than say utilities or low-growth companies. On Wednesday, bitcoins had a network value, that is the total value of all bitcoins, of nearly $70.2 billion, and $591 million daily in transactions, for a NVT of nearly 119. That is lower than it was in 2014 and 2011, but that still doesn't signal that bitcoins are cheap now, just that the NVT is lower than it has been.
Source:
https://www.bloomberg.com/gadfly/articles/2017-10-06/bitcoin-value-metric-doesn-t-lie-but-it-can-obfuscate
