With all the media attention and the skyrocketing price of bitcoin of late, it is common to hear that bitcoin is in a bubble. However, some analysts disagree, offering reasons why the digital currency has more room to grow.
Some Say Bitcoin Is in a Bubble
As the price of bitcoin surged over 180% this year, some speculate that the digital currency is in a bubble. Earlier this week, Shark Tank star and billionaire Mark Cuban gave his opinion of bitcoin’s price. “I think it’s in a bubble. I just don’t know when or how much it corrects,” he tweeted.
Last month, Bitcoin.com reported on Charles Hayter, CEO and founder of the cryptocurrency data analysis firm Crypto Compare, calling the Asian bitcoin price rise a bubble. As the price of bitcoin climbed higher in Asia than most western exchanges, Hayter said he “believes the increase is a bubble formation but questions the level of speculation.”
P/E Ratio Analysis Suggests Bitcoin is Not in a Bubble
In an article published by Market Watch on Thursday, ARK Invest’s blockchain analyst Chris Burniske explained why the “rally still has room to grow,” the publication wrote. Burniske used a modified price-to-earnings (P/E) ratio method which he helped develop.
“The reason I call it a P/E ratio is because when I think about what a P/E signifies for equities, it is basically the function of market cap and earnings,” he said. “The earnings are the underlying utility—the cash flow of the company.”
From it, he derived a healthy outlook. “Bitcoin’s ‘P/E ratio’ looks at the digital currency’s network value—the number of outstanding bitcoins multiplied by price,” he calculated. “This figure is currently $44.69 billion—against its daily transaction volume,” the article explained. Burniske’s metric currently gives bitcoin a P/E ratio of roughly 50.
He told the publication:
On a stock, a P/E ratio of 50 would be pricey. But I don’t know if it should be considered pricey for bitcoin…It looks to be in a comfortable range, it isn’t an outlier and right now the broad takeaway I have is that it doesn’t look like we’re due for a mean revision.
Three More Reasons Bitcoin May Not Be in a Bubble
Financial blogger and author Charles Hugh Smith recently offered three key reasons why bitcoin is not in a bubble, Market Watch reported. Smith’s popular blog oftwominds.com is #7 on CNBC’s top alternative financial sites. His articles are often republished on other popular blogs including Zero Hedge, the Mises Institute, Financial Sense, and Peak Prosperity.
Firstly, Smith said bitcoin and other cryptocurrencies “have utility value,” unlike Beanie Babies. There are many uses of bitcoin such as to facilitate international payments for goods and services.
Secondly, bitcoin is not a scam. A scam would advertise a too-good-to-be-true product where sellers know “the product is garbage” but buyers were led to believe the opposite, Smith explained. Bitcoin, on the other hand, has transparent rules for exchanging currency and both buyers and sellers know exactly what to expect.
Thirdly, even with the rising number of investors, they still represent just a fraction of the total number of potential investors. He noted how very few people he knows have actually invested in bitcoin. “When only one of your circle of acquaintances, colleagues, friends, neighbors and extended family own an asset, there is no way that asset [bitcoin] can be in a bubble,” he believes, adding that:
The pool of potential [bitcoin] buyers is thousands of times larger than the pool of present owners.
Do you think bitcoin is in a bubble? What do you think is the best indication of whether bitcoin is/is not in a bubble? Let us know in the comments section below.
Images courtesy of Shutterstock, Mises Institute, Ark Invest