Having considered various other metrics in the estimation of overbought and oversold conditions of Bitcoin, namely The Mayer Multiple and having considered Bitcoin’s Stock to Flow ratio. Today we will consider a metric that helps us gauge to a reasonable degree tops and bottoms in Bitcoin. In traditional markets- in the stock market. One of the easiest metric to determine and evaluate how overpriced and underpriced an asset is the Price per Earnings ratio. The P/E ratio. It is a quick guide that helps investors understand how undervalued or overvalued a stock is. The ratio is arrived at by dividing the price per share by the earnings per share. The value arrived at gives a rough guide to the state (either overvalued or undervalued) of the stock. Well, the Bitcoin’s Network Value to Transaction Ratio is Bitcoin’s own Price to Earnings Ratio
Bitcoin’s unique position
Unlike traditional stock. Bitcoin is not a company. It does not produce any product and therefore it does not earn. Thus, there are no earnings against which the price of Bitcoin can be compared.
Bitcoin is simply a payment network that has also established itself as a digital store of value asset. Therefore, we can only develop a metric similar to the P/E ratio by dividing the overall market capitalization of Bitcoin (i.e its overall valuation) by its daily transaction volume i.e the volume of money that flows through its network for a given day. This is the ratio of Bitcoin valuation to the amount of money moving through its network (which is the utility it provides)
Breaking it down
The lower the NVT of Bitcoin, the more undervalued its price. A high market capitalization and a low daily volume will result in a high NVT and thus an overvalued Bitcoin.
You want to buy Bitcoin when the overall market capitalization is as low as possible and the daily transaction volume is as high as possible. For example, if you take today, 14th of February 2019 when this article was written. The total market capitalization for Bitcoin is $63,621,415,310. The total transaction volume for the day was $6,287,694,325. Therefore the NVT for the 14th of February 2019 is $63,621,415,310/$6,287,694,325 which give a value of 10.1184.
To get some perspective on this figure, we would want to compare it with some historic values of the Bitcoin NVT. Let’s choose an arbitrary date of the last peak/ all-time high of Bitcoin. Let’s say we choose the 17th of Dec 2017. On that day, Bitcoin was valued at $19,140.2 per Bitcoin. It had a total market capitalization of $320,575,829,568 and a 24hour volume of $13,314,556,928. If you divide this market capitalization by the 24hour transaction volume you would get a value of 24.07104. if we compare these values, we will see that we had a higher NVT figure (24.07104) at the height of the bull market in Dec 2017 than we have now 14th Feb 2019 (10.1184). It shows that now is a perfect opportunity to accumulate Bitcoin and other cryptocurrencies.
Historically, looking at the chart above. Anytime the NVT value reached 15 and above, Bitcoin was overvalued and it was wise to begin to take profit gradually. Whenever the NVT value fell to 10 and below, it was a great time to buy and hold the asset. From our own calculation, it is interesting to note that Bitcoin’s NVT is currently 10.1184. right now is a perfect opportunity to buy and hold Bitcoin, it is currently undervalued and it won’t be for much longer. Another point to note as seen on the chart above is that the NVT is a lagging indicator. The price moves and peaks before the NVT peaks. A sure way to get the best result with the NVT is to note when the price peaks and turns and the NVT, lagging behind the price, peaks and turns too. Then we sell the majority of ones position and cash out. The fundamentals of Bitcoin have not been stronger and the next halving event of Bitcoin (when the block reward for miners are halved from 12.5 Bitcoins to 6.25 Bitcoins) is May of 2020. This will increase the scarcity of this asset and the price will skyrocket. I am already accumulating Bitcoin and other cryptoassets. Have you started accumulating yours?
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