Bitcoin has dropped by 27 % in the last week, reaching an 18-month low of $ 20,111 on June 15. It has regained some of its value, trading at $ 21,765 at the time of writing, but the asset remains in a downward spiral, down 69 % from its all-time high.
Jurrien Timmer, who is the Director of Global Macro at Fidelity Investments, has been researching the price-earnings ratio (P/E) for Bitcoin, which translates to a price/network ratio because Bitcoin is not a firm.
“Is BTC cheaper than it looks? If we consider a simple “P/E” metric for BTC to be the price/network ratio, then that ratio is back to 2017 and 2013 levels, even though BTC itself is only back to late 2020 levels. Valuation often is more important than price,” he said.
In classical finance, a P/E ratio values a firm by comparing its current share price to its earnings per share. Because this isn’t possible with cryptocurrencies, the price is determined by network activity. The network value to transactions ratio (NVT), as represented by technical analyst Willy Woo, is a comparable method of looking at it.
Another method to emphasize it, according to Timmer, is to overlay Bitcoin’s non-zero addresses against its price. He noted, “Another way to highlight this is by overlaying Bitcoin’s non-zero addresses against its price. Price is now below the network curve.”
He then demonstrated how oversold the asset was at the time using Glassnode’s Bitcoin Dormancy Flow model.
“The next chart shows how technically oversold Bitcoin is. Glassnode’s dormancy flow indicator is now to levels not seen since 2011.”
Has Bitcoin bottomed out?
Since the capitulation episodes of 2011, 2014, and 2018, Bitcoin has rarely been this oversold.
This could indicate that we are nearing the end of the market cycle, with this week’s big selloff serving as the final flush-out.
In an interview with Fox Business Monday, Morgan Creek Digital co-founder Anthony Pompliano had a similar sentiment, saying that Bitcoin’s “worth and price are diverging” and that “weak hands are selling to powerful hands.”
“Right now, we’re watching the transition from weak, short-term oriented people with weak hands to strong, long-term oriented people with strong hands.”
On Wednesday, Bitcoin’s Fear and Greed Index plummeted to 7, signaling “Extreme Fear,” its lowest level since Q3 2019. Low index numbers have typically signaled a purchasing opportunity in the past.
The capitulation of the miners
One other element, identical to the one that caused the 2018 market meltdown that could bring a final leg down, are the Bitcoin miners.
This week, miners have moved a record amount of BTC to exchanges. According to CoinMetrics, there was an all-time high in dollar terms yesterday, with a net $1.94 billion worth of BTC delivered to exchanges. This amounted to an all-time high of 88,000 coins in a single day.
Miners need to sell their assets to offset their rising power costs and stay afloat during the crypto winter. This huge liquidation could result in another major drop, similar to the over 80% drawdowns in recent cycles.
If this occurs, Bitcoin values might drop to roughly $12,000 in a few days, representing an 82 percent drop from peak levels. In a recent tweet, Nic Carter, a partner at Castle Island Ventures, highlighted the factors underlying the miner liquidation event.