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Crypto valuation (or lack thereof)

Relative Valuation Methods in Crypto

Pomegra Learn

Relative Valuation Methods in Crypto

Absolute valuation—deriving a "true" value for an asset from first principles—is challenging in cryptocurrencies because most have no cash flows, no earnings, and no contractual claim on future value. Relative valuation sidesteps this problem by comparing an asset's valuation metrics to those of other cryptocurrencies, to historical valuation levels, or to theoretical benchmarks. Rather than asking "what is Bitcoin worth?", relative valuation asks "is Bitcoin more or less fairly valued than Ethereum?" or "is Bitcoin more or less expensive now than it was in previous cycles?"

Relative valuation is practical and widely used by crypto investors. It provides frameworks for identifying outliers, for understanding whether sentiment is justified by metrics, and for making tactical allocation decisions. It is not absolute truth, but it is more reliable than pure speculation.

The Core Principle of Relative Valuation​

The premise of relative valuation is that similar assets should trade at similar multiples. In equity markets, companies in the same industry often trade at similar price-to-earnings ratios. If one company has a P/E of 15 while an identical competitor has a P/E of 50, investors should be skeptical of the expensive one unless there is a compelling explanation.

In crypto, this principle applies to Layer 1 blockchains, to stablecoins, to NFT platforms, and other classes. Two proof-of-work Layer 1 blockchains with similar network activity and security investment might be expected to trade at similar valuations. If one is dramatically more expensive, that represents either a trading opportunity or a signal that the expensive asset has fundamentals that justify the premium.

The challenge is defining "similar." Bitcoin is the most established cryptocurrency and has the deepest liquidity and longest track record; no other asset is truly comparable. Ethereum is a smart contract platform; comparing it directly to Bitcoin is difficult. Litecoin is often positioned as "digital silver" in parallel to Bitcoin as "digital gold"; comparing their valuations makes conceptual sense but can be misleading if adoption trajectories diverge.

Common Relative Valuation Metrics in Crypto​

Market Capitalization to Network Activity: The most widely used relative metric is the Network Value to Transactions (NVT) ratio, explored in depth in Network Value to Transactions. This divides an asset's market cap by its daily on-chain transaction value. A low NVT suggests the asset is cheap relative to actual utilization; a high NVT suggests it is expensive. By comparing NVT ratios across cryptocurrencies or across time periods, investors can identify relative valuation extremes.

NVT is most reliable when comparing assets with similar use cases and network maturity. Comparing Bitcoin's NVT to that of a new altcoin in a different use case category may produce misleading conclusions. However, comparing Bitcoin's current NVT to its historical NVT, or comparing two similar Layer 1 blockchains' NVTs, provides genuine signal.

Market Cap to Security Spend (Hash Rate or Stake): For proof-of-work coins, the amount spent on miners' hardware, electricity, and operation is a measure of real resource investment in network security. Assets with higher market caps relative to security spend are, in some sense, more efficiently valued—the network is confident enough in the asset to allocate security resources. This metric is examined in Hash Rate Importance.

Valuation Across Cycles: One of the most practical applications of relative valuation is comparing an asset's current valuation to its valuation at previous cycle peaks or troughs. If Bitcoin traded at an NVT of 8.0 at the peak of the 2017 bull run, and it now trades at an NVT of 6.5, this suggests either that Bitcoin is relatively cheap on this metric or that network adoption has accelerated (making transactions more valuable, and thus the asset cheaper on a relative basis).

This requires historical data and understanding of what changed between cycles. In 2017, Bitcoin's use case was primarily speculative. By 2021–2024, institutional adoption, the emergence of layer 2 solutions, and broader acceptance as store-of-value had matured. A lower NVT might be appropriate for a more mature, less speculative asset.

Velocity and Monetary Premium: Cryptocurrencies can be valued using concepts from monetary economics. The velocity of money (how many times a unit changes hands per year) relates to the monetary premium investors are willing to pay for a medium of exchange. Bitcoin, positioned primarily as a store of value (not frequently transacted), has low velocity. Stablecoins used for payment have higher velocity but typically have no monetary premium (they trade at or near $1).

This gives rise to a concept sometimes called the "monetary premium"—the amount above any transactional utility that an asset trades for due to expectations that it will be accepted as money. Bitcoin's price far exceeds what would be justified by its transaction value alone; the difference represents a monetary premium. Changes in this premium as sentiment shifts can be tracked and compared across assets or cycles.

Supply Dynamics: Relative valuation can incorporate an asset's inflation schedule. Two assets with identical network activity and adoption but different issuance rates will have different valuations. The one with higher inflation must work harder to maintain its valuation, as new supply continuously dilutes holdings. Conversely, assets with decreasing or zero future inflation will tend to maintain higher multiples if adoption is stable.

Bitcoin's fixed supply of 21 million coins and its halving schedule are factors in its valuation premium over altcoins with higher, unbounded supplies. The halving itself—when new supply is cut in half—historically correlates with valuation expansion, as the inflation rate suddenly decreases.

Building a Valuation Framework​

Rather than relying on a single metric, professional investors construct dashboards incorporating multiple relative valuation measures. A typical Bitcoin valuation framework might include:

  • Current NVT versus historical average and versus 2017 peak
  • Hash rate investment relative to market cap
  • Percentage of supply held by addresses dormant for >1 year (suggesting conviction)
  • Velocity relative to historical trend
  • Dominance versus altcoins
  • Price relative to moving averages and historical support/resistance

When multiple metrics align—for instance, when NVT is at historical lows, hash rate investment is growing, whale accumulation is occurring, and price is near support—confidence in a valuation judgment increases.

Here is how these metrics might interact to suggest market extremes:

Limitations of Relative Valuation​

The most significant limitation is that relative valuation is relative, not absolute. If an entire asset class becomes expensive, relative valuation metrics will not capture it. During the 2017 bull run, all cryptocurrencies became stretched on virtually every valuation metric, yet relative valuations (NVT, etc.) were not dramatically out of line with 2016. The signal came from the fact that the entire sector was expensive, not from relative comparisons within the sector.

Fundamental changes can make historical valuations irrelevant. Bitcoin in 2024 is a different asset than Bitcoin in 2017, with institutional participation, regulatory clarity in many jurisdictions, and established market infrastructure. Comparing current valuations to 2017 valuations may be misleading if the asset's fundamental profile has improved.

Network effects and first-mover advantage are difficult to quantify but crucial to long-term valuation. Bitcoin may deserve a higher relative valuation than alternative proof-of-work coins not just because of current network activity but because of its network effects, security heritage, and established position. A purely metrics-based comparison might suggest Bitcoin is expensive relative to rivals without accounting for these factors.

Finally, relative valuation is most useful when comparing genuinely comparable assets. Comparing Layer 1 blockchains to each other makes sense; comparing a Layer 1 to a privacy coin makes less sense. Comparing Bitcoin and Ethereum requires accounting for their fundamentally different use cases (store of value vs. programmable platform).

Integration with Other Valuation Approaches​

Relative valuation is most powerful when integrated with Valuation Fundamentals, with On-Chain Analytics for Crypto, and with Stock-to-Flow Critique. Use relative metrics to identify candidate assets that are statistically cheap, then validate using on-chain metrics (are large holders accumulating?) and fundamental analysis (has adoption actually increased?).

When an asset is extremely cheap on relative valuation metrics and on-chain signals align, conviction builds. When an asset is expensive on relative metrics but fundamentals are improving rapidly, skepticism is warranted but not certainty. Relative valuation alone never justifies a position; it points the direction for further investigation.

Practical Application​

For retail investors, the most useful relative valuation approach is simple: compare current valuations to historical cycles. Track Bitcoin's NVT over time. Track its price relative to moving averages. These simple metrics, because they account for repetitive cycles in crypto markets, provide genuine information about whether you're in an overheated market or a depressed one.

For Bitcoin specifically, a useful framework is to treat NVT readings below 5.0 as likely bottoms, readings above 10.0 as likely peaks, and readings between 5.0 and 10.0 as "fair value." This is not magical—cycles can be different—but it has captured meaningful signals across multiple cycles.

Institutional investors use much more sophisticated relative valuation models incorporating dozens of metrics, cross-asset correlations, and regime-dependent weightings. But the principle remains: no single metric is dispositive; alignment across multiple relative measures provides conviction.

References​