{"id":29640,"date":"2017-12-09T15:22:51","date_gmt":"2017-12-09T15:22:51","guid":{"rendered":"http:\/\/www.bnreport.com\/the-problem-with-bitcoins-own-pe-valuation-measure-2\/"},"modified":"2017-12-09T15:22:53","modified_gmt":"2017-12-09T15:22:53","slug":"the-problem-with-bitcoins-own-pe-valuation-measure-2","status":"publish","type":"post","link":"https:\/\/www.bnreport.com\/en\/the-problem-with-bitcoins-own-pe-valuation-measure-2\/","title":{"rendered":"The problem with bitcoin’s own ‘P\/E’ valuation measure"},"content":{"rendered":"

As the perceived worth of a single bitcoin criss-crossed its way around the $10,000 (\u00a37,455) mark for much of last week, on The Value Perspective<\/a> blog, we revisited articles from 20 June 2017<\/a> and 20 October 2017<\/a>, when one bitcoin respectively bought you $2,779 and very nearly $6,000.<\/p>\n

Each time our primary concern was there was just no way of assessing its true value \u2013 but could we have been wrong?<\/p>\n

Assessing value<\/h3>\n

One of the most basic ways of assessing how a company is being valued by investors is to look at its price\/earning (P\/E) ratio \u2013 that is, its share price divided by its earnings-per-share \u2013 and comparing that, for example, with history, with its peers or with the wider market.<\/p>\n

Now it turns out aficionados of bitcoin and other so-called \u2018crypto assets\u2019 have started to refer to their own kind of P\/E ratio.<\/p>\n

At first glance this might sound odd \u2013 after all, bitcoin and the others do not actually produce any earnings \u2013 but, on closer investigation \u2026 well, it is odder still.<\/p>\n

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Aficionados of bitcoin and other so-called \u2018crypto assets\u2019 have started to refer to their own kind of P\/E ratio.<\/p>\n<\/blockquote>\n

The measure\u2019s actual name is the Network Value to Transactions (NVT) ratio, which \u2013 to take bitcoin as an example \u2013 is essentially the market value of all the bitcoins in the world divided by the US dollar value of transaction activity.<\/p>\n

So the first curious things about the NVT is it includes a reference to the value of the crypto-asset on both sides of the equation, which is redundant.<\/p>\n

Another curiosity is that the ratio effectively boils down to considering the value of an asset relative to how much speculation there is in it \u2013 meaning, if you want the NVT valuation of a bitcoin to fall, you just need to trade it more and more.<\/p>\n

The metric fuels more speculation and more interest<\/h3>\n

This may of course be why bitcoin investors are so keen on the metric \u2013 the more they speculate, the \u2018cheaper\u2019 their favourite asset becomes and the more they can encourage fresh interest in the market.<\/p>\n

As an example, according to Woobull.com<\/a>, the bitcoin\u2019s NVT stood at around 60x at the time of our June article, close to 100x at the time of our October one and is back down to around 60x now.<\/p>\n

While its advocates may argue the NVT ratio is similar to the P\/E ratio, it is actually akin to looking at the market capitalisation of a company \u2013 put simply, its size \u2013 divided by the value of the shares being traded daily.<\/p>\n

Doing the maths on three arbitrary well-known companies tells us GlaxoSmithKline<\/a>, Centrica<\/a> and Proctor & Gamble are respectively on 550x, 193x and 321x \u2013 in other words, just random numbers.<\/p>\n

So we would argue that, while the NVT may be gaining greater currency (sorry) among crypto-asset investors, it does not tell anyone a great deal about anything \u2013 or at least not about the asset under consideration.<\/p>\n

It might, however, tell us something about the human race\u2019s inherent need for reassurance they are not doing something silly.<\/p>\n