Bitcoin Is Undervalued — Yes, we believe this!

As Bitcoin breaks above $60K, it is worth noting that recent returns are coming from fundamentals and not multiple expansion.¹ 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.² We can think of this "NVT" (network value to transactions ratio) as similar to a "price to GMV" (gross merchandise value) ratio for Web 2.0 or fintech comps.

Bitcoin Network Value to Transaction Ratio (NVT)

Source: Glassnode. Data as of 4/10/2021.

While it is possible that El Salvador's Bitcoin gambit or some other as-yet undisclosed institutional purchase led to chunky one-time transfers temporarily inflating the denominator of "NVT," our base case is that the momentum is sustainable. At least twenty-seven publicly-traded corporations now own 1.11% of all Bitcoin outstanding, or $10.6B at the current exchange rate. Add in exchange-traded Bitcoin funds and the number is 4.7%.³ This small but fast-growing percentage represents lumpy institutional demand. Subtract the coins which haven't moved in more than five years (another 22.5% of current supply) and the available liquidity at the current price shrinks even further.⁴

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.⁵ Credit card reward schemes should kick in with at least eight such cards already launched in developed markets.⁶ Crypto forensic specialists such as Chainalysis and Merkle Science are no doubt at work trying to identify and track the wallets associated with these accounts; for now, data is limited. Micropayments from Bitcoin gaming are also growing from a very low base: VanEck has made several venture investments in this space including Zebedee⁷ whose recent blog post "how to play games for Bitcoin" detailed six such options.⁸ Lastly, seasonals are highly supportive with the average 10-year return for Bitcoin in October and November at 33% and 47%, respectively.⁹

And yet, 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.¹⁰ Their market cap now approaches that of gold miners, reflecting the high growth and emerging profitability in the sector.¹¹

MVIS Global Digital Assets Equity Index PE Ratio

Source: MVIS, Bloomberg, VanEck. Data as of 30/9/2021.

Gold Miners vs. Crypto Enablers (market cap)

Source: MVIS, Bloomberg, VanEck. Data as of 28/9/2021.