Equity markets, for the trading of stocks, traditionally utilize fundamental analysis to evaluate an asset and measure its intrinsic value by examining different qualitative and quantitative factors.
While these equities, or stocks, have valuation metrics such as the Price-to-Earnings ratio (the measurement of a stock’s price compared to its earnings per share); Earnings per Share (a measurement of how much the company earned per share of the company’s stock); Enterprise Value (a measurement of a company’s aggregate value beyond just market capitalization including debt, preferred shares, and cash); and many more, it is difficult to find an appropriate valuation metric for crypto assets in a space where there are no earnings, equity, dividends, or any of the other metrics normally used in traditional valuation analysis.
There are, however, a few metrics that have been useful in providing valuable insight into the valuation of crypto assets.
One such metric is called the NVT Ratio, formally known as Network Value to Transactions Ratio, which is commonly referred to as the “Crypto P/E Ratio.” First introduced and popularized by Willy Woo and Coinmetrics and later modified by Cryptolab Capital, instead of measuring the price of a crypto asset against earnings (which crypto assets don’t have), the w NVT ratio measures crypto asset’s network value against its utility (its intended use within the crypto asset’s network) to detect whether a crypto asset is over- or undervalued compared to its utility value. Using Bitcoin as an example, the ratio measures the network value (otherwise known as the current total market cap) of Bitcoin against Bitcoin’s utility as a store of value and medium of exchange.
One of the best ways to measure Bitcoin’s utility is through the daily volume of on-chain transactions on the network. We utilize only on chain transactions since most trading activity that occurs on or between exchanges is speculative and has no value in determining the actual utility of a cryptocurrency. Therefore, measuring only those transactions that occur within the Bitcoin network will provide us with a more useful representation of Bitcoin’s utility value. However, using just the daily transaction volume would provide a fair amount of volatility, or fluctuation, to the calculation. To help combat this, a moving average is utilized in the formula.
A moving average is a calculation to analyze data points by filtering out the “noise” from random fluctuations that occur throughout the series of data points. This is completed by creating a series of averages based on a certain time period. For this specific case, a 90-day moving average works well to provide a smoothed series of daily transaction volume based on the average of the previous 90 days. We feel the e modified version of the NVT ratio as presented by Cryptolab Capital provides a better, real-time indicator for whether a crypto asset is overvalued or undervalued.
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