How To Value Bitcoin (10 Methods Simply Explained)
Bitcoin’s price moves around a lot. But as crypto-skeptic Warren Buffett once said: “Price is what you pay, value is what you get.” In this guide, you’ll learn how to value bitcoin using 10 different methods. These can help you decide whether bitcoin’s current price is cheap or expensive relative to its value. So, here are 10 ways to value bitcoin (in no particular order).
1. Network value to transactions ratio (NVT)
You can think of the network value to transactions ratio (NVT) as a price-to-earnings ratio (P/E) for bitcoin. The P/E ratio divides a company’s stock price by its earnings per share. If the ratio is low, it means the stock’s current price is “cheap” relative to its earnings. The ratio is a favorite among traditional value investors, who like to pay a low price for good earnings.
P/E = company stock price ÷ company earnings per share
The NVT treats Bitcoin (the blockchain, with a big “B”) as a company – if that company were a payments network (like PayPal, for example). Since Bitcoin doesn’t have earnings per se, the NVT uses daily transaction volume to replace earnings.
NVT = bitcoin’s current market value ÷ daily bitcoin transaction volume.
If the NVT is low, it means bitcoin’s current market value (which is based on its current price) is “cheap” for the amount of daily transaction volume flowing through the network.
Crypto analyst Willy Woo came up with the NVT in 2017 and built an investment strategy around it. Check out my full NVT ratio guide to learn more about Woo and the NVT ratio.
2. Bitcoin hash rate
The Bitcoin hash rate is the amount of computer power miners use to process bitcoin transactions. The hash rate increases with mining competition. When the hash rate is high, it means miners see bitcoin as more valuable – since they’re willing to use more resources to mine new coins.
You can learn all about mining in my Bitcoin guide. But for the point of this guide, just understand that a high hash rate makes the Bitcoin blockchain more secure – and hence more valuable.
3. Stock-to-flow (S2F)
Many investors think of bitcoin as digital gold. Like gold, bitcoin has value because it’s scarce. For many years, investors have used the stock-to-flow (S2F) model to value scarce commodities like gold and silver. In 2019, crypto analyst “PlanB” thought to use the S2F to value bitcoin.
The S2F splits bitcoin’s supply into two groups:
- Stock: all the bitcoins that miners have mined (i.e. the current bitcoin supply).
- Flow: the number of new bitcoins that miners are expected to mine next year.
If you divide the stock by the flow, you get the S2F. This number compares how many bitcoins miners will create next year with how many they have already mined in total.
S2F = stock ÷ flow = total bitcoin supply already mined ÷ bitcoin mined next year
When the S2F goes up, it means fewer bitcoins will be created next year relative to the total supply. Put another way, it would take more years of bitcoin mining to mine the current supply. So, a higher S2F means bitcoin is scarcer – and more valuable according to the model.
Side note: with regular commodities like gold, the flow is usually the supply created last year (rather than next year as with bitcoin). Unlike with gold and other commodities, we can mathematically predict how many bitcoins will be created each year. This makes the S2F more “forward-looking” for bitcoin than for regular commodities.
PlanB used the S2F to create a statistical model to map out bitcoin’s future price based on its predicted scarcity. You can read more about this in my guide to the stock-to-flow.
4. Bitcoin 1+ Year HODL Wave
HODL stands for “hold on for dear life”. If investors don’t want to sell an asset, it means the asset is more valuable. That’s the logic behind the Bitcoin 1+ Year HODL Wave metric. Put simply, it measures the percentage of bitcoins on the blockchain that have not moved wallets in a year or more.
When you sell bitcoin, it usually moves to a new wallet. So if bitcoin hasn’t switched wallets, it implies that it hasn’t been sold. I.e. the higher the HODL Wave, the more HODL’ers be HODL’in.
The chart below shows how the 1+ Year HODL Wave (orange) has changed in relation to bitcoin’s market cycles – at least in the past.
- In strong bull markets (green): the metric tends to go down quickly, as holders start selling their coins for profit.
- In strong bear markets (red): the metric tends to rise quickly, as holders would rather hold on at lower prices.
5. Number of Bitcoin wallet addresses
A network is more valuable when more people use it. If more people use Bitcoin, the number of Bitcoin wallet addresses goes up. So assuming the total number of Bitcoin wallet addresses keeps going up, the network should (in theory) become more valuable over time.
6. Metcalfe’s law
Robert Metcalfe came up with Metcalfe’s law in 1980 as a way to value telecommunications networks. Here’s the basic idea: if more people use a network, it encourages even more people to join – since the network becomes more popular.
There’s a fair bit of maths behind Metcalfe’s law. But essentially, the value of a network grows faster and faster until it reaches “critical mass”. At that point, pretty much everyone you know is using the network.
Metcalfe’s law is commonly used in the tech industry. Think about how billions of people now use Amazon, Facebook, and Twitter. These companies all started out small but gained critical mass over time. The more people used them, the more people used them.
Bitcoin is a technology too. And that makes Metcalfe’s law a good way to value it. In theory, you could apply Metcalfe’s law to the number of bitcoin wallet addresses (see point 5, above).
7. MVRV Z-Score
The MVRV Z-Score uses blockchain data to find the Realized Value (RV) of bitcoin and compare it with the Market Value (MV).
The MV is the easy part. It’s the current bitcoin price times all the coins on the blockchain. You can look up the MV on coinmarketcap.com. With MV, all bitcoins have the same price (i.e. the current market price you see on a crypto exchange).
The RV is a bit trickier to work out. Here, each bitcoin (or fraction of a coin) could potentially have a different price – its market price when it was last moved on the blockchain. This movement could represent the last time that coin was sold. So, the RV takes the price of each coin at that time and adds them all up.
Side note: you can move bitcoin to a different wallet without selling it. So the RV is only an estimation of the last selling price of a coin.
Dividing the MV by the RV gives you the MVRV Ratio. If the ratio is low, it means the current market price of bitcoin on an exchange (MV) is low relative to the last sale price of all the bitcoins in existence. In that case, bitcoin’s current price might be a bargain, according to the indicator.
Think of it like buying a house on a street where all the houses are the same. If you can buy a house today for a price that’s cheaper than what your future neighbours paid, you’re getting a good deal.
Then there’s the MVRV Z-score. This uses statistics to make the MVRV ratio a more reliable measure of bitcoin’s value. You can read my MVRV Z-Score guide for a deeper explanation.
8. Crypto Fear and Greed Index
I get the irony of using yet another Warren Buffet quote in the context of bitcoin. But here’s another one you probably know: “Be fearful when others are greedy, and be greedy when others are fearful”.
Buffet’s sentiment makes perfect sense as a bitcoin valuation tool. If everyone is panic-selling their satoshis, bitcoin is probably trading at a decent bargain. And if everyone is lining up to buy bitcoin, it’s probably time to take some profits off the table.
The Crypto Fear and Greed Index gives you an actual indicator to measure how much fear or greed there is in the crypto market at any time. It does this by taking a bunch of different market sentiment factors and making an index with them. This includes things like market volatility, momentum, bitcoin dominance, and the general crypto vibe on social media.
When the index is closer to 100, crypto investors are extremely greedy. When the index is closer to zero, they’re extremely fearful. Be fearful when others are greedy, and greedy when others are fearful.
9. Bitcoin open interest
The bitcoin game has 2 teams:
- Investors who buy and hold actual bitcoin (i.e. “spot”) for the long run.
- Traders who use crypto derivatives to profit from bitcoin’s volatility in the shorter term.
Both teams can make money if they know what they’re doing. But when too many traders start piling into bitcoin with high leverage, it’s usually a dangerous sign. When traders buy bitcoin with high leverage, they’re a lot more likely to get “wrecked” if the price moves against them. So, they become forced sellers much faster than long-term investors.
That’s why you’ll often see bitcoin have 20 – 40% drops (even in a strong uptrend). It’s mostly leveraged traders getting forced out of their positions – as investors buy their coins.
The bitcoin open interest measures the number of open derivatives contracts on bitcoin exchanges. This can give you a good idea of how much leverage is in the market at any time (since derivatives use leverage). When open interest is low, it typically means there’s less hype in the market, which could mean bitcoin is trading at a better value.
10. Technical analysis
Last but not least, there’s technical analysis (TA). TA seems to work especially well for bitcoin, given how many people use it in crypto. For example, here’s a quick video taken from a TA course I built, where I describe the bitcoin top of April/May 2021. You can learn more about that technical analysis course here.
Wrapping up: How to value bitcoin
When it comes to valuing bitcoin, there’s no one-size-fits-all approach. So, your best bet is to use a mix of the above 10 methods. While timing bitcoin’s volatile moves is never easy, buying bitcoin at good value can give investors a “margin of safety” – something Warren Buffett does believe in…
About the author: Jonathan Hobbs holds the Chartered Financial Analyst ® designation. Jon once managed the investments for a boutique crypto hedge fund, and is the author of three investment books. Before that, Jon came from the traditional finance world, working at firms like Morgan Stanley, HSBC, and M&G Investments.