Jurrien Timmer, Director of Global Macro at investing giant Fidelity, has been investigating the price-earnings ratio (P/E) for Bitcoin, which is equivalent to a price-network ratio given that Bitcoin is not a firm. The graphic shows that the ratio has reached the same levels that it had at the cycle peaks that occurred in 2013 and 2017. He summed up his thoughts by saying that “value is often more important than price.”
In conventional finance, the valuation of a firm is accomplished with the use of a ratio known as the price-to-earnings ratio (P/E ratio). This ratio compares the current share price to the earnings per share. Since this is not possible with cryptocurrencies, the price is determined by the amount of activity on the network. Willy Woo, a technical analyst, illustrated a comparable method of looking at it called the network value to transactions ratio, which is abbreviated as NVT.
Is BTC cheaper than it looks? If we consider a simple “P/E” metric for BTC to be the price/network ratio, then that ratio is back to 2017 and 2013 levels, even though BTC itself is only back to late 2020 levels. Valuation often is more important than price. /THREAD pic.twitter.com/6XMPrtRUzF
— Jurrien Timmer (@TimmerFidelity) June 15, 2022
Timmer went on to say that another approach to bring attention to it is by superimposing Bitcoin’s non-zero addresses against the price of Bitcoin. He made the observation that “Price is currently below the network curve.” After that, he demonstrated how oversold the asset currently was by using the Bitcoin Dormancy Flow model that was developed by Glassnode. Since the capitulation episodes that took place in 2011, 2014, and 2018, Bitcoin has not been oversold to this extent.
bullish miner selling explained pic.twitter.com/ALsyYW1ehR
— nic carnival barker carter (@nic__carter) June 16, 2022
This may be a sign that we are very near to the bottom of this market cycle, and the enormous selloff that took place this week may have been the last flush-out. Bitcoin miners are an extra aspect that should be considered since they have the potential to create a last leg down, similar to the one that occurred during the market collapse of 2018.
This week has seen a record number of transactions from miners sending Bitcoin to various exchanges. According to data provided by CoinMetrics, yesterday saw a new all-time record in terms of monetary value, with a net amount of BTC worth $1.94 billion being delivered to exchanges. This resulted in a new daily record of 88,000 coins being collected.
Miners have no choice but to liquidate their holdings in order to continue operating through the crypto winter and pay the ever-increasing cost of electricity. Because of this massive liquidation, there is a possibility of another large dump, similar to the drawdowns of over 80 percent that have happened in earlier cycles.
If anything like this does place, the price of Bitcoin might very rapidly and realistically fall to roughly $12,000. This would represent a decline of 82 percent from its all-time high. Nic Carter, a partner at Castle Island Ventures, recently tweeted an explanation of the factors that contributed to the miner liquidation incident.