Overview
Everyone asks “is now a good time to buy bitcoin?” – what is the answer? It doesn’t take a genius to understand there is no “best” time to buy Bitcoin. If you’re asking this question, you are either a newb focused on short-term price for quick gains or a professional trader who probably isn’t reading this post for direction.
Serious adopters of bitcoin view it as a form of sound money, not a get-rich-quick scheme. Traders view it as an obsession given the crypto markets never close, there are no off-hours, and a trader never gets time off the clock. That said, a crypto trader has the chance at every hour of the day to be making money, so it is somewhat addictive. Without skills and the right mindset, a crypto trader can quickly get in over their head. Care must be taken not to allow anxiety or frustration to drive poor trade decisions.
Valuation
The valuation of crypto assets is in its infancy, and many investment gurus have proclaimed bitcoin to have no value at all. This is starting to change and now many are trying to figure out how valuable crypto assets really are. First, one must understand that crypto assets are not companies, and they don’t have cash flows, so using discounted cash flow analysis is unproductive. Each crypto asset serves within its native protocol as 1) a means of exchange, 2) a store of value, and 3) a unit of account. Thus, each asset serves as a currency in its own economy. An equation of exchange is used to understand money flow that supports an economy.
Describing the price of a crypto asset can be broken into two components: utility and speculative values. Utility value is the intrinsic usefulness, and the speculative value is what investors think it is worth at the moment. Bitcoin’s NVT (Network Value to Transactions) ratio is somewhat similar to the P/E (Price-Earnings) ratio used in equity markets, which measures current share price relative to per-share earnings.
When a crypto asset’s NVT is high, it indicates its network valuation is overtaking the value being broadcast on its payment network. When the network is experiencing high growth, investors are valuing the asset as a high return investment. Number of Wallets, Supply Schedule, and Consensus algorithm are also useful metrics.
The value investing approach results in a very concentrated portfolio because the number of undervalued crypto assets is scarce. When the market prices are declining and the total market cap of the crypto-industry falls, it brings pain to one investor and screams opportunity for another. The majority of cryptocurrency prices as of Jan 2019 have returned to their original value before the meteoric rise to all-time-highs Dec 2017. Investors now have an opportunity to enter the market at favorable prices for crypto assets with promising futures that may be considered undervalued.