Traditional Metrics in Digital Assets

Traditionally, financial metrics use numerical values extracted from financial statements to gain information about a company. Numbers found on a company’s financial statements – balance sheet, income and cash flow statements – are used to perform quantitative analysis to assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation and more. The analysis serves two main purposes; to track and to make comparative judgements regarding company performance. In this article, we cover the traditional metrics in digital assets and how key ratios are utilised to analyse trends in Bitcoin and Ethereum.

The Metrics behind Digital Assets

When purchasing cryptocurrencies, individuals must first understand that they are not buying currencies in the strict sense. Instead, for cryptocurrencies like Bitcoin and Ethereum, they are buying a share in a network. BTC and ETH can then be considered to be a fractional ownership in such a network.

Though the following principles may be applied to most network layer cryptocurrencies, for this article, we have chosen to focus exclusively on Bitcoin and Ethereum. The large scale adoption of these two networks have led to higher fees paid by users, making Ethereum and Bitcoin the top revenue generators of the space. Ethereum is the most popular smart contract network, with the largest network effect and decentralised application (Dapp) ecosystem. On the flip side, Bitcoin is the preeminent store of value in the cryptocurrency space.

The metric in question is the Price to Sales ratio (P/S), traditionally used to show how much the market values each dollar of the company’s sales. It is particularly effective in valuing growth stocks such as companies that are yet to turn a profit or have suffered a temporary setback. 

In terms of applying P/S on cryptocurrencies, it is an ideal valuation method for early-stage protocols, which have little or no net income as well as being highly useful for relative analysis. For example, a higher ratio indicates that the network is generating lower revenue relative to the historical market capitalisation, and thus may be overvalued.

P/S ratio crypto is calculated by dividing a project’s fully-diluted market cap by its annualised revenues. In this context, revenue is the total amount of fees paid by the blockchain’s or Dapp’s users.

P/S = Market Capitalisation / Total Revenue

With a constant influx of early-stage and high-growth startups operating transparently on-chain, we are currently in a historically unique period to use traditional metrics in digital assets. For investors, this transparency allows for protocols to be sorted with ease according to their usage relative to market cap.

Ethereum

Why is this chart relevant?

The market cap of Ethereum has reached new highs, yet its P/S ratio crypto has trended over the past six months on par with some of the leading DeFi protocols. Ether’s P/S of 40x is historically on the low end, indicating higher revenue relative to Ether’s historical market capitalisation, and thus may be undervalued. In other words, Ethereum has had significant growth in the number of transactions and Dapp users over the past six months.

Why is this chart relevant?

Ethereum’s daily revenues have been consistently high during 2020 Q2-Q4, as well as after entering 2021, with the market cap only catching up recently in early January 2021 with substantial growth in the Ethereum ecosystem. The higher revenue is a function of higher fees and the rise in volume, alluding to the willingness to use and pay for projects as well as the perceived utility of the Ethereum platform and its projects.

Bitcoin

Why is this chart relevant?

Recently, Bitcoin’s market cap hit all-time highs and has pulled back since then, yet its P/S ratio crypto has trended on its historical lower end over the last six months. BTC’s P/S of 477x is one of the highest which can be attributed to its large market cap relative to revenue.

Why is this chart relevant?

This chart shows that Bitcoin’s daily revenue has shown notable growth towards the second half of 2020 and entering 2021. However, not substantial. This can be explained by the market perception of Bitcoin being ‘digital gold’ or a ‘store of value’, rather than used as a medium of exchange. With most Bitcoin being kept in cold wallets or custodies, fees have been relatively low. 

Final Remarks

With the influx of institutional and retail investors, market participants are constantly trying to gain an edge using a variety of tools – ranging from charting tools to technical analysis and news aggregators. In the midst of these conventional tools, we believe that using traditional metrics in digital assets such as the P/S ratio crypto hold merit in providing a historical perspective of the token as well as an ideal valuation tool. The P/S ratio crypto also particularly shines with high revenue-generating networks such as Ethereum, and Uniswap. All things considered, we strongly urge investors to test out unique ratios and metrics either as a thought experiment or to gain a unique edge.

---

About Us

Zerocap provides digital asset investment and custodial services to forward-thinking investors and institutions globally. Our investment team and Wealth Platform offer frictionless access to digital assets with industry-leading security. To learn more, contact the team at [email protected] or visit our website www.zerocap.com

FAQs

What are Traditional Metrics in Digital Assets?

Traditional metrics in digital assets are numerical values extracted from financial statements to gain information about a company. They are used to perform quantitative analysis to assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more. In the context of cryptocurrencies, these metrics are used to analyse trends in digital assets like Bitcoin and Ethereum.

What is the Price to Sales (P/S) Ratio in Cryptocurrency?

The Price to Sales (P/S) ratio in cryptocurrency is a valuation method for early-stage protocols, which have little or no net income. It is calculated by dividing a project’s fully-diluted market cap by its annualised revenues. In this context, revenue is the total amount of fees paid by the blockchain’s or Dapp’s users. A higher ratio indicates that the network is generating lower revenue relative to the historical market capitalisation, and thus may be overvalued.

How are Traditional Metrics Applied to Bitcoin and Ethereum?

Traditional metrics like the P/S ratio are applied to Bitcoin and Ethereum to analyse their market trends. For instance, Bitcoin’s P/S ratio of 477x is one of the highest, which can be attributed to its large market cap relative to revenue. Ethereum, on the other hand, has had significant growth in the number of transactions and Dapp users over the past six months, indicating higher revenue relative to Ether’s historical market capitalisation, and thus may be undervalued.

What is the Significance of the P/S Ratio in Cryptocurrency?

The P/S ratio in cryptocurrency is significant as it provides a historical perspective of the token and serves as an ideal valuation tool. It is particularly effective in valuing growth stocks such as companies that are yet to turn a profit or have suffered a temporary setback. The P/S ratio also particularly shines with high revenue-generating networks such as Ethereum, and Uniswap.

How Can Traditional Metrics Provide an Edge to Market Participants?

With the influx of institutional and retail investors, market participants are constantly trying to gain an edge using a variety of tools. In the midst of these conventional tools, using traditional metrics in digital assets such as the P/S ratio can hold merit in providing a historical perspective of the token as well as an ideal valuation tool. These unique ratios and metrics can be used either as a thought experiment or to gain a unique edge.