Finding a reasonable valuation for Bitcoin from the number of daily transactions

Stocks have indicators such as price-to-earnings ratio and price-to-book ratio. The price-to-earnings ratio is sometimes high and sometimes low, but in the long run it always returns to a certain reasonable range. The price-to-earnings ratio can be used to determine whether a bubble exists.

Bitcoin is not a company, has no assets, and has no profits, so it is difficult to judge whether there is a bubble. News such as "Greek people are crazy about buying Bitcoin", "xx supports Bitcoin payments", and "xx received xxxx million venture capital" cannot be quantified into the price of the currency. Judging the bubble is basically "based on feeling". However, Bitcoin has a unique indicator - the number of daily transactions. This indicator reflects the economic scale of Bitcoin. In theory, the increase in the price of the currency should be equal to the increase in the number of daily transactions. The ratio of the price of the currency to the number of daily transactions is similar to the price-earnings ratio of stocks. It is an important reference for judging the rationality of the current price.

According to the data of daily transaction number and currency price on blockchain.info, a graph of the proportion of daily transaction number and currency price is drawn. Both data use 7-day moving average data, and the daily transaction number uses the data provided by blockchain.info excluding 100 popular addresses, because extreme values ​​are likely to affect the statistical results.

As shown in the figure, from 2010 to 2013, the ratio of transaction number to coin price has been declining, which means that the usage of Bitcoin has not increased as fast as the price. This may be a return from low valuation to normal valuation, or it may be a bubble. It should be pointed out that in April 2011 and before, the economic scale of Bitcoin was relatively small, and the data at that time was not very referenceable. The wave of rising to $31 in June 2011 attracted a large number of early players to enter the market, and the economic scale of Bitcoin increased greatly. The ratio of transaction number to coin price became stable, hovering around 1000 for a long time. After that, two waves of crazy bulls in 2013 pulled the ratio down to below 60. After the rise, in 2014, there was a seemingly strange situation of falling coin price and rising transaction number. This is the process of mutual return between coin price and fundamentals.

Of course, now we can say that valuations have returned, but how did we know that the ratio of 60 was a bubble? Why didn’t the ratio of 1000 in 2012 underestimate the fundamentals? After all, from 2010 to 2013, the ratio has been going down. This involves a question: Which ratio is a reasonable valuation? In the stock market, the reasonable price-earnings ratio is generally around 15 times. If it is too high, it will be lowered, and if it is too low, it will be pulled up. This has been verified by more than 100 years of history and multiple stock markets. Bitcoin has only been in existence for 5 years since the exchange appeared. The historical sample is insufficient and the reliability of the statistical results is poor, but there is no way to solve this problem at present. I personally think that before 2013, the long-term stable ratio around 1000 is more likely to be a reasonable ratio, but now it seems that the reasonable ratio may be lower than 1000, probably between a few hundred and a thousand. I think the two waves of the market in 2013 increased the number of coin hoarders rather than users. In other words, early coin holders tended to participate in mining, online gambling, black market, speculation, reward, commodity trading and other applications. Each coin holder created a relatively large number of transactions. Later coin holders, seeing that Bitcoin has risen a lot, tended to use Bitcoin as a means of value storage (hoarding coins) and rarely moved their wallets. In other words, many participants were added, but these participants did not increase the number of transactions by the same amount. The ratio before April 2011 was the highest in history. It is possible that the players who entered the market in that era were more for research and experience purposes and liked to send and receive Bitcoin frequently.

Bitcoin has been bottoming out for 14 months since it dropped from $1,242. During this period, the number of transactions and the price of the currency have been moving in opposite directions for a long time. Now the ratio has risen back to around 500. From the above chart, it is not far from the level in 2012, which is a reasonable valuation in theory. However, in the following chart, the gap has widened a lot.

This chart takes into account the increase in the issuance of currency and the daily mined data on blockchain.info. 3716386 is the date of the first data, which is the mined bitcoin on August 17, 2010. The value of the first data is still around 6000, but the value of the last data has dropped from 512 to around 128, because the current money supply has increased by about 4 times compared to five years ago. I personally think that the second chart is not as accurate as the first one, because the price of the currency itself contains expectations for the future. For example, if the total amount of currency was stopped in 2010 when the total amount was 3.7 million, how many times would the price of the currency increase? Now that the total amount of currency is more than 14 million, will the increase in the price of the currency be comparable to that of stopping the minting in 2010? Of course, here we are referring to the price that can be stable in the long term, not the price of short-term speculation and news. In other words, in fact, most of the coin hoarders and coin speculators subconsciously calculate the value of Bitcoin based on 21 million, not the dynamic mined amount. Therefore, there is no need to consider the change in the money supply here, and the description of the first chart is more accurate than the second one.