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Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

For those wondering whether bitcoin is in a bubble, the crypto-converts have a answer: It's not. The price, they say, can go much higher.

The answer is not all that surprising, or new. But recently bitcoiners have latched onto a metric they contend proves their sky-high predictions are not based solely on blind belief or an ideological bent against organized governments or fear of a massive financial collapse. The metric is called the network value-to-transaction ratio, or NVT. Some have dubbed it bitcoin's P/E. And, at least in the community, it's becoming something of an industry standard valuation metric. At least two websites are devoted to showing the daily value of bitcoin's NVT, which, as of Wednesday, was 119. That's above its historical average, which in bitcoin land is about eight years of data, of 87, but well below its peak of well above 400. Bitcoin by this analysis still has room to run.

Bitcoin's Climb
The price of a bitcoin has risen more than 350 percent in 2017

The question of whether bitcoin is in a bubble has come up before, but it has been getting louder and more frequent. The price is up 353 percent this year to a recent $4,330. The currency received a boost earlier this week from news that Goldman Sachs was considering launching a cryptocurrency trading desk, and a supportive quote for Goldman's CEO. It would be the first big bank to have dedicated bitcoin traders.

A number of Wall Street analysts have put out research reports on bitcoin, and a few have issued price targets. In mid-August, a Goldman analyst said the price of bitcoin was headed to $4,827. But nearly all of that research has been done by technical analysts, who watch charts. Technical analysis is generally based on price momentum. What is going up is assumed to continue to go up, until it doesn't. Then it is predicted to plunge, which leads to unsatisfying analysis like this: John Spallanzani at GFI Group Inc. predicts that the price of bitcoin could reach $6,000 by the end of the year, unless it doesn't cross $4,500, then it's likely to plunge to $3,000. Got that?

That's what makes the NVT ratio, or the crypto P/E, more satisfying. It's based on bitcoin use, not just its wild price swings. Unfortunately, separating bitcoin's real economics from hype is harder than it seems. NVT tries to mimic the stock market's price-to-earnings ratio, which is the most widely used method for valuing share prices. Of course, creating an actual P/E for bitcoin is impossible because, unlike a company, bitcoin, like any currency, doesn't produce earnings. It does have transactions, which is not quite earnings, but it's a measure of the demand or utility of bitcoins. The theory is that as the use of bitcoin goes up, so should its value. What's more, the faster that volume of transactions rises, the higher the NVT should be, similar to how tech and higher-growth companies get higher P/E's than say utilities or low-growth companies. On Wednesday, bitcoins had a network value, that is the total value of all bitcoins, of nearly $70.2 billion, and $591 million daily in transactions, for a NVT of nearly 119. That is lower than it was in 2014 and 2011, but that still doesn't signal that bitcoins are cheap now, just that the NVT is lower than it has been. 

Bitcoin's Value Trap
The NVT ratio, which some call bitcoin's P/E, is up this year, but it's not nearly as high as it has been, leading some to contend the cryptocurrency is not in a bubble
Source: Blockchain.info
Network value is the total value of all bitcoins in existence

The real problem with NVT, though, has to do with its denominator -- the transaction number. To determine the true use of bitcoins, the transaction number excludes the value of bitcoins bought or sold on Coinbase, Bitstamp and other exchanges. But when many bitcoins are being traded, those exchanges often get caught with too few, or too many, and they have to trade with one another. Those trades are recorded as bitcoin transactions, even though they are just the result of more people speculating on the price, not using bitcoins. Similarly, any bitcoin trading outside of the exchanges would also be considered actual transactions. Trading among exchanges can be significant, especially when the price of bitcoins, and the demand to trade them, is high. One bitcoin expert puts that trading as high as 30 percent of all transactions. Use that estimate, and bitcoin's current NVT is more like 180.

Nonetheless, that high NVT could be justified. Average daily transaction of bitcoins is up big this year, nearly 300 percent. But, again, a good portion of that increase is probably indirectly related to trading. And bitcoin transactions have fallen in the past month as prices slipped, before rebounding with the Goldman news. In addition, rapidly rising value of bitcoins could also be inflating transaction values as well.

Spare a Bitcoin
The value of daily bitcoin transactions climbed above $1 billion this year, but the growth in use is still slower than it was a few years ago
Source: Blockchan.info

But the bigger problem behind the NVT ratio could be its logic. Thomas Clarke, who runs a macro fund at William Blair and has a lot of experience in pricing currencies, says that it makes sense that if no one is using a currency it should be worth zero. But once people are certain they will be able to buy and sell stuff with a currency, more transactions shouldn't make the currency worth any more. It's not a linear relationship. Clarke says the Swiss franc, for instance, has traditionally done a remarkable job of holding its value, better than the U.S. dollar, even though the use of the Swiss franc is far smaller than the dollar.

Even bitcoin valuation metrics trying hard to be levelheaded have a bit of hot air blowing through them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Stephen Gandel in New York at sgandel2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net