Trading north of $56,000 and up about 9% over the past week, bitcoin doesn't exactly exhibit the hallmarks of an asset that's cheap, inexpensive or a value play.
No, digital currencies aren't value assets. Perhaps that status will change in the future, but don't bet on it happening anytime soon. After all, bitcoin and its bretheren are shiny new objects meaning they're young by the standards of financial assets and disruptive. Those traits, particularly the latter, rarely if ever come cheap.
However, a case can be made that even at $56,200 (as of late Oct. 12), bitcoin is undervalued. The network value to transactions (NVT) ratio, which is comparable to the gross merchandise value (GMV) ratio used in the fintech and online retail industries, indicates bitcoin likely should be trading higher.
No, not many of us had “bitcoin is undervalued” on our 2021 bingo cards, but it's a surprisingly credible theme and, importantly, it's actually supported by fundamentals. Despite what the critics assert, bitcoin does in fact have fundamentals and they look constructive today.
Assessing Bitcoin's Undervalued Status
As Matthew Sigel, head of digital assets at VanEck, points out, there's a crucial element in the bitcoin's recently sturdy price action.
“As Bitcoin breaks above $50K, it is worth noting that recent returns are coming from fundamentals and not multiple expansion,” he notes. “What we mean by that is that the ratio of network value (market cap) to on-chain volume (value transferred) is close to a 3-year low at 23x.”
One way of looking that at the above scenario is that while the usage case for and adoption of the bitcoin network is expanding, the price of the digital asset itself isn't yet fully reflecting those positive traits. It might not be reflect supply issues, either.
As is widely known in crypto circles, bitcoin supply is capped at 21 million and while it's likely to be awhile before the remaining 2.23 million coins are mined, there are some interesting supply forces currently at play. First, it's clear some institutions stepped back into the market following Bitcoin's latest sell-off. Second, as Sigel notes, globally listed exchange traded products are swallowing up more bitcoin and 22.5% of the total supply hasn't moved in more than five years. Demand factors also suggest the largest digital asset may be undervalued, as well.
“Meanwhile on the demand side, there are several developments. Media reports suggest Brazil may be next to declare Bitcoin legal tender as soon as this month,” adds Sigel. “Credit card reward schemes should kick in with at least eight such cards already launched in developed markets.”
Alright, so if a critic wants to laugh off El Salvador recently embracing bitcoin as legal tender, that's his or her right to do so. However, extending that assessment to Brazil would be foolhardy because Brazil is Latin America's largest economy.
Equities Hold Clues, Too
Before going any further, I'll elaborate on that sub-header. Not all stocks hold bitcoin clues. However, those with crypto correlations do. That's a rapidly expanding universe with some already familiar names such as PayPal (NASDAQ:PYPL) and Square (NYSE:SQ).
As advisors well know, fintech names like PayPal and Square are growth stocks. They're rarely inexpensive. Amplify that sentiment for bitcoin miners and the like. Interestingly, stocks with above-average crypto correlations may themselves be undervalued, perhaps cementing a similar view of bitcoin.
“I believe the Bitcoin network is undervalued by recent historical standards, and the relevant equities even more so in my view. Digital asset enablers, as tracked by the MVIS Global Digital Assets Equity Index, now trade at an average PE of 40x, down from a recent peak of well over 100x,” concludes Sigel. “Their market cap now approaches that of gold miners, reflecting the high growth and emerging profitability in the sector.”