Bitcoin is about 13 years old, and as the digital currency’s prominence grows, so does debate around how to properly value it.
As of late Nov. 1, the largest cryptocurrency was trading around $61,000. That’s the price that markets assign to the digital asset. However, traditional valuation metrics, such as price-to-earnings or price-to-sales, aren’t relevant with crypto. At least, that’s the prevailing wisdom floating around among market participants.
ARK Investment Management analyst Yassine Elmandjra says that there are ways to better assess the value of bitcoin. In a "recent white paper":https://ark-invest.com/articles/analyst-research/valuing-bitcoin/, Elmandjra notes that cost basis metrics and profit and loss metrics can help investors get a better grip on valuing the premier digital asset. Cost basis metrics include the following: market-value-to-realized-value (MVRV) ratio, market-value-to-thermo-value (MVTV) ratio, investor capitalization, and short-to-long-term-realized-value (SLRV) ratio.
Cost basis metrics revolve around realized profits-to-value (RPV) ratio, short-term-holder profit/loss (STH P/L) ratio, and seller exhaustion constant.
“The MVRV ratio is market capitalization divided by realized capitalization, which measures the price of bitcoin relative to the average on-chain cost basis of all participants in the market,” says Elmandjra. “Historically, bitcoin has topped out when the MVRV ratio has surpassed 10, as shown below. Recently, on a volatility adjusted basis, MVRV ratio hit 8, at which point the price of bitcoin dropped 53%, perhaps suggesting a local as opposed to a global top. After May’s 53% correction, MVRV on a volatility-adjusted basis went from roughly 8 to below 2. Now at 4, the MVRV ratio is in a range typically associated with neutral territory.”
That could imply that bitcoin, even with a jaw-dropping showing this year, isn’t in a bubble as so many naysayers believe is the case. Bitcoin backers might also want to assess investor capitalization, particularly at times when the digital coin has rapidly retreated.
“Investor capitalization – realized capitalization minus thermo capitalization – can be a good gauge of capitulation during bear markets,” says the ARK analyst. “Investor capitalization subtracts the thermo capitalization from the market’s cost basis. By removing the outstanding value paid to miners from the overall cost basis, we can assess the fair value of bitcoin at the bottom of a market cycle.”
As many market participants already realize, short-termism is often at play in the crypto market. Put simply, many traders are quick to take profits while others get shaken out at the first hint of volatility. For savvy investors looking to see the forest through the trees, it pays to be able to contextualize this behavior, which the short-term-holder profit/loss ratio helps accomplish.
The ratio, “which is the short-term supply of bitcoin at a profit divided by the short-term supply at a loss. A ratio of 1 typically is associated with local bottoms in bull markets and local tops in bear markets. When the ratio is below 1, in the aggregate market participants who have moved coins in the last 155 days have losses. Conversely, when the ratio is above 1, short-term participants have an aggregate gain. When selling off around a ratio of 1, bitcoin typically has entered a bear market,” notes Elmandjra.
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