Crypto has its own version of TradFi’s popular valuation metric, the price-to-earnings ratio. In this week’s “Crypto Long & Short,” GWilliamsJr_CMT explains how it works.
One of the things I enjoy most about penning this column is the ability to engage with readers and join them on a journey of learning more about this nascent asset class of crypto. Sure I know some stuff, but there is still plenty to explore. Of particular interest to me is tying crypto to my background in traditional finance .
Unlike companies, bitcoin and many other crypto assets don’t generate cash flows upon which to base a fundamental analysis. But bitcoin isn’t a company. Bitcoin is a peer-to-peer cash system that allows the transfer of value from one entity to the next, without the need for third party validation. People see value in that, so valuations should be explored.
In my view, for P/E and NVT to be comparable you must decide that observers value something about both. For companies , shareholders value earnings. For BTC , it’s the ability to store value in a digital asset, which I view as space on the blockchain itself. And as demand for that space grows, the value of bitcoin increases. If you can get your arms around that, then the NVT ratio is worth including in your analytic framework.
The highest NVT ratio for bitcoin that I found on record was 448.15 on Aug. 29, 2010. Was it overvalued? Well, BTC traded for about 6 cents at the time, and is around $22,000 now, so the relevance of this reading is a bit dubious in my opinion. What if we toss out all data before 2014? That gives a maximum NVT ratio of 98.52, which I think is more sensible. Bitcoin’s lowest NVT on record was 0.22 on Jan. 24, 2016, when BTC was trading at $403.
Between 1926 and 2016, just five out of 25,300 publicly traded companies drove 10% of the entire U.S. stock market’s $35 trillion of total wealth creation: Exxon Mobil , General Electric , International Business Machines , Microsoft and Apple . Ninety stocks accounted for more than half. Just shy of 1,100 generated the entire gain; the rest collectively returned less than U.S. Treasury bills.Stock returns don’t fall along a normal distribution.
Each of the five firms that drove 10% of all wealth creation since 1926 were market leaders of a recent Revolutionary Age:
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