Is There A Price To Earnings Ratio For Ethereum?

Ether (ETH) has rallied from $2,000 to a record high of $3,500-plus in the past 10 days. If this didn’t catch your attention yet, just wait till you discover what the network volume says about the future price momentum of the world’s second-largest cryptocurrency.

In the world of equities, investors rely on the price-to-earnings ratio (P/E ratio) to value a company. P/E is a popular ratio that measures the current share price relative to its per-share earnings. In other words, a high P/E suggests that investors expect higher earnings growth in the future compared to similar companies with a lower P/E.

Easy enough, right?

Now, what’s the “P/E for cryptocurrency”? For cryptocurrencies like Ethereum, investors use the Network Value to Transaction (NVT) ratio to measure the fundamentals of a cryptocurrency. Here’s why the ratio of Network Value to Transaction can help investors understand where Ether and other cryptocurrencies may be headed: Simply put, NVT measures the ratio of investor activity to market capitalization.

When NVT is high, it suggests that the network value of a cryptocurrency is outpacing the value being transferred within the network. High NVT usually represents legitimate bullish sentiment for a new all-time high price. But it could also be a sign of a price bubble. On the other side of the spectrum, low NVT values suggest the opposite. Despite an increased interest, which is measured by a higher number of gross transactions, the network value is lagging behind.

This means the transaction volume is surging but the price of crypto hasn’t been rising to meet its higher activity. As a result, there could be big growth potential in the future.

As you’ve most likely seen in the news recently, Ethereum’s price quadrupled this year. Several factors drove the surge in Ethereum’s price: The upcoming Ethereum 2.0 version and reports of issuance of $120 million in bonds on the Ethereum blockchain by European Investment Bank. What’s more, the general crypto market bull-run and investors’ buy and hold strategy are also driving the gains in Ethereum.

Of course, buying a digital asset on speculations, rather than fundamental analysis, isn’t a wise move. Buying or selling decisions based on fundamental or on-chain data intelligence is the approach deployed by institutional investors.

So, where to start?

For a simple and most effective fundamental approach to gauge the price of crypto assets, we will use Network Value to Transactions (NVT) ratio in this article to value Ether’s price.

Network Value to Transactions (NVT) Ratio — The P/E Ratio of Crypto

The NVT ratio of Ethereum helps to find the relationship between the overall network value and how it relates to the network’s activity. On-chain analyst Willy Woo is attributed for creating the NVT ratio for crypto — no doubt influenced by P/E.

The formula is based on dividing the network value of Ether (market cap) by the network transactions (USD value settled by the chain). The quantitative valuation method will highlight three possible scenarios:

NVT Uptrends are more bearish, indicating transaction flows are getting smaller relative to the market cap. The network may be overvalued and in a price bubble.
NVT Downtrends are more bullish, indicating transaction volumes are increasing relative to the market cap. The network may be undervalued.
NVT Trading Sideways are supportive of the prevailing trend, indicating transaction volumes and market cap are growing equally. The network may be fairly valued.

The Current NVT Ratio Suggests Further Upside for Ethereum

Ethereum price recently breached the $3,500 level, and the NVT ratio suggests more gains are ahead. The chart below demonstrates Ethereum’s NVT has been trending strongly downward since the beginning of this year amid increasing transactions. The downward trend in NVT is a bullish signal.

Ethereum’s transaction volume hit the 1500K mark this week, up significantly from 1252K in January 2020. Possibly, the upcoming release of ETH 2.0 likely incentivized some users to stash ETH outside exchanges.

That said, the massive growth in transaction volume is the outcome of investors’ increasing interest in the second most valuable cryptocurrency. In addition, the data suggests that Ethereum’s balance on exchanges has been declining at a robust pace, meaning that investors have started holding the ETH instead of selling it on exchanges.

Ether now has a market capitalization of around $416 billion, which exceeds Bank of America (BAC), the largest U.S. bank, as well as the entertainment giant Walt Disney (DIS) and ecommerce stalwart Walmart (WMT).