As Bitcoin's price swings wildly, many investors are left holding the bag, wondering what went wrong. The fluctuations in Bitcoin's price can feel shocking, and it's natural to want to know why. Is Bitcoin overvalued? You're in the right place if you're curious about this question. This article will help you understand Bitcoin supply and demand for true value through various valuation methods, enabling you to make informed investment decisions.
One way to help you achieve your goals is by using the Bitcoin Analysis tool from Bitcoin Magazine Pro. This valuable resource will help you get to the bottom of Bitcoin's price fluctuations so you can better understand this asset's value and make informed decisions.
Is Bitcoin Overvalued or Undervalued? A Closer Look at Valuation Methods
Bitcoin’s price surged to around $73,000 in mid-March after starting 2024 with a 68% gain in the first quarter. While a high price might sound exciting, many experts wonder if Bitcoin is overvalued. That’s because other financial assets are also rallying, including gold, while stocks are at a precarious point in the cycle. With many analysts suggesting Bitcoin is digital gold, it’s time to run through five ways to value BTC to see if the price makes sense.
Good as Gold?
J.P. Morgan compares Bitcoin to digital gold since both have limited supply, are easily divisible, not controlled by governments, and serve as stores of value. Gold’s total value is around $15 trillion, but only $3.3 trillion is held by private investors, while Bitcoin’s market cap is about $1.3 trillion. If Bitcoin is as valuable as gold, it could be worth more than double its current price.
J.P. Morgan lowers Bitcoin's value due to its higher volatility than gold. Reda Farran, an analyst at Finimize, argues that Bitcoin’s volatility is decreasing, its supply grows slower than gold's, and it offers more financial utility, which justifies a higher value. He raises an interesting point: If Bitcoin is truly as good as gold, shouldn’t that reduce gold’s price instead of it reaching record highs? Farran notes that private investors are shifting towards Bitcoin, but central banks keep gold prices high by continuing to buy it.
Miner Detail
Sometimes analysts use the cost of mining an ounce of gold as a peg for its price. This is possible with Bitcoin, which is “mined” using massive computing power. This means that the marginal cost of production is tied to electricity prices, the efficiency of the hardware, and the rate at which miners are rewarded for their computations. This reward rate is engineered to halve every so often, slowing supply growth until it eventually halts, and as it turns out, the next halving is in April.
The anticipation of this, combined with the new demand from ETFs, is part of what has Bitcoin bulls so abuzz. One researcher who has studied using Bitcoin’s production cost as a valuation guide, Adam Hayes of Hebrew University in Jerusalem, predicted last year that it will cost about $75,000 to mine a Bitcoin after the halving. Finimize’s Farran says that production costs should be considered a price floor, not a fair value.
Look at the US Dollar
So, how do we value Bitcoin’s monetary premium? As an alternative monetary technology, Bitcoin has to be assessed in the context of the prevailing monetary system: the US dollar. These is all influence Bitcoin’s valuation:
- Real interest rates
- Money supply growth
- Fiscal policy, among other factors
Elevated real interest rates and constrained money supply growth are indicators of sound monetary and fiscal policy. They help gauge whether the authorities are protecting the dollar's value. Such factors should constitute headwinds for Bitcoin prices. If policymakers are protecting the existing monetary regime, investors are less likely to look for an alternative.
Of course, monetary policymakers often adopt profligate measures that debase the dollar's value. The quantitative easing (QE) and other monetary stimulus of the last 15 years created low and negative real interest rates and rapid growth in the money supply. These were ideal conditions for Bitcoin. Under tighter macro conditions, Bitcoin is less valuable. Under loose conditions, it is more valuable.
Measure the Conviction of Bitcoin Holders
Taking a more behavioral approach, we can also evaluate the underlying conviction of long-term vs. short-term Bitcoin holders for clues to Bitcoin’s value. The share of long-term holders tends to increase during bear markets and decrease during bull markets.
This suggests that Bitcoin is overvalued when short-term speculators hold more of the supply and undervalued when long-term holders predominate.
Chart Envy
You know those Ibbotson charts that financial advisors point to that show the long-term performance of stocks, bonds, bills, and inflation? If they showed Bitcoin, too, the customers would say, “Give me some of that.” We should all say that, says Raphael Zagury, chief investment officer at Swan Bitcoin. He reckons a 20% allocation is the ideal risk/return tradeoff, or as he puts it, “the optimal point on the efficient frontier.” This isn’t so much an argument for a higher price. But Zagury has two more models…
Gobble Gobble
The world’s real estate is worth $320 trillion. Some of that reflects a “monetary premium,” or pure investment value beyond the practical value of the land and structures themselves. Call it 30%. There’s a chance, according to Zagury, that Bitcoin will become the world’s apex monetary asset, and devour this premium not just from real estate, but also from:
- Stocks
- Bonds
- Gold
- Silver
- Fine art
Zagury has created a website, nakamotoportfolio.com, that allows users to enter their own assumptions. The default assumptions show, for example, a 5% probability that Bitcoin captures real estate’s 30% monetary premium over the next 20 years, and a 90% probability. Using those default assumptions, the calculator produces a fair value for Bitcoin of over $620,000.
A global collapse of so many financial assets at once brings to mind societal chaos on a Mad Max level. I’m not clear on how, in that world, internet coins will be the thing everyone covets. I mean, beef jerky, I could see. But then, I’m the guy who didn’t buy Bitcoin at $10.
Swap Thing
There are financial instruments that pay off in the event of a bond default. They’re called credit default swaps. There is CDS for treasuries, even though the U.S. government can make new money if needed. A Treasury CDS market implies some risk of default, however small. You can use the pricing in that market to calculate a default probability.
If you assume that Bitcoin wins if Treasuries go kablooey, you can also use CDS pricing to calculate a fair price for Bitcoin. Zagury has. He gets between $75,000 and $100,000, “depending on your assumptions.”
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Top 5 Bitcoin’s Supply-Based Value Indicators
1. Stock-to-Flow: Measuring Bitcoin Scarcity
Stock-to-flow (S2F) is one of Bitcoin’s most popular valuation models, focused almost exclusively on supply metrics. S2F measures how much new supply of an asset is being created over time (flow) relative to the existing supply (stock). It measures how many years, at the current production rate, it takes for production to achieve the current stock of an asset. The higher this number is, the higher the expected price.
For instance, a commodity where the current stock takes 100 years to produce, S2F suggests, is more valuable than a commodity where the current stock only takes 20 years to produce. The more difficult it is to produce a commodity and the less of it there is, the more inherently scarce it becomes and the more its assumed value rises.
Stock-to-flow was around before Bitcoin. It was a model to determine the intrinsic value of mined hard assets like gold and silver. The stock-to-flow model only works for Bitcoin because of its scarcity. Bitcoin’s scarcity means it has value as money. Computer scientist Nick Szabo says scarcity creates “unforgeable costliness,” which in itself creates intrinsic value for an asset.
2. NVT Ratio: A Bitcoin Valuation Indicator
The Network Value to Transactions (NVT) ratio is a key indicator for evaluating the correlation between the market cap and transfer volume. Numerous commentators, including Willy Woo, the model’s developer, compare NVT to the price-to-earnings (PE) model, which determines the worth of company stocks in conventional markets.
NVT is one of the earliest developed on-chain valuation models. It combines Bitcoin's utility and value. Bitcoin was primarily built as a network that enables payment and settlements, and this characteristic should drive its intrinsic value outside of speculation.
On-chain transaction volume (the value of transactions, not the number of transactions) measures how much Bitcoin is being used as a settlement layer for payments by whales or everyday users in developing countries. When combined with market cap, it offers a useful tool to determine whether there may be an active divergence between BTC's intrinsic value and market value.
3. Thermocap Multiple: How Much Are Miners Making?
Thermocap is an indirect metric that measures the intrinsic value of Bitcoin based on how much miners are being paid. The model has been developed by an anonymous analyst named GeertJanCap. The metric measures the implied value paid to Bitcoin miners in charge of validating transactions and securing the network. Miners are the workhorses of the network and the thermocap measures how much they earn for their services, they are the entrepreneurs of Bitcoin.
Price and market cap measure the investor side of Bitcoin—the investors, savers, and speculators. Thermocap may be equivalent to a fundamental metric used in traditional finance valuations—Enterprise value-to-earnings Before Interest, Taxes, Depreciation and Amortization, or EV-to-EBITDA. The thermocap of Bitcoin is calculated by taking the miner reward and transaction for each block and multiplying it by the BTC price at the time the new Bitcoin was minted.
4. MVRV Ratio: Understanding Bitcoin Investor Behavior
We can also measure Bitcoin's fair value based on investor behavior using metrics like Market Cap/Realized Cap (MVRV). These metrics view Bitcoin as an asset that is likely to be sold cyclically, and the size of profit, more than utility, determines whether BTC is bought or sold.
The MVRV was developed by analysts Murad Mahmudov and David Puell, and soon after Realized Nic Carter and Antoine Le Calvez of the Coinmetrics team developed Cap. Market Cap in the context of the digital currency space is the total number of coins mined or in circulation multiplied by the price of a single coin. Realized Cap is a variation of Market Cap, instead of multiplying every coin by the current market price of BTC, it multiplies each coin based on the price it last moved. Accurately knowing the price of a coin when it last moved is possible because of Bitcoin’s UTXO technology.
5. Mayer Multiple: How Does Bitcoin's Price Compare To Historical Trends?
Bitcoin pioneer Trace Mayer developed the straightforward Mayer Multiple indicator, for which the 200-day moving average is used to compare the current Bitcoin price to a long-term historical price range for BTC. Like many other indicators, the Mayer Multiple reveals Bitcoin as potentially under or oversold in the context of longer time frames.
An indicator called a moving average (MA) averages out the value of any quantity over a predetermined amount of time. The “moving” aspect of the average refers to how frequently it is updated depending on fresh pricing information received. Any period can be used to calculate a moving average. Historically, the 200-day MA has been a well-liked time frame in Bitcoin for identifying the bull and bear cycles in the market.
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