Over the past 12 months, the hype around Bitcoin has drifted away as the value of the cryptocurrency has declined from its all-time high of nearly $20,000.
It took less than two months for the price to fall from around $19,300 to just under $7,000, and ever since, it has struggled to get back above $12,000.
However, while the price has languished over the past year, it has stabilised. This is arguably a better result for investors because the cryptocurrency’s volatile nature has been given as the main reason why it will never become a widely accepted and used monetary instrument.
People are much more likely to use it on a day-to-day basis if they know the value of their money won’t suddenly drop overnight. This new found stability could lead to increased usage of the cryptocurrency, which would ultimately lead to a higher price.
With this being the case, the question has to be, is Bitcoin worth buying today?
Time to buy?
As I have written before, trying to place a value on Bitcoin and its peers is difficult because there is no underlying fundamental value of each instrument. Unlike equities, which are relatively easy to value because we can look at the state of the underlying business, the value of cryptocurrencies is based purely on supply and demand.
But that doesn’t mean it is impossible to try and estimate the value of Bitcoin. Indeed, cryptocurrency experts have suggested that the network value-to-transactions ratio (NVT) is a good way to try and determine the fundamental value of cryptocurrencies.
This ratio is linked to the total amount of value being transacted in any cryptocurrency. As the price of Bitcoin is based on supply and demand, this seems to be a great way of trying to place an estimate of value on the crypto asset. Put simply, as the number of people using the cryptocurrency increases, its value should also increase.
Right now, the ratio suggests that the fundamental value of Bitcoin, based on the number of people currently using it as a method of exchange, is approximately $4,000. So, based on this metric alone, the asset appears overvalued today.
Nevertheless, as noted above, now that the price has stabilised, more people might be willing to use it for transactions. A higher volume of transactions would justify a higher price according to the NVT ratio.
Conclusion
Overall, while it is not possible to compute an exact underlying fundamental value for Bitcoin, according to the NVT ratio, the cryptocurrency looks overvalued by around 50% today.
However, as the number of people using it as a currency grows, it could only be a matter of time before the current price of $6,200 is justifiable. So, if you are interested in adding crypto assets to your portfolio now might be a good time to buy it as a speculative investment.