Network Value to Transaction Volume Ratio: ETH vs BTC
The following Network Value to Transaction Volume Ratio charts arefrom Coinmetrics.io https://coinmetrics.io/nvt/#assets=btc,eth_log=false_roll=7_zoom=1477882074074.0742,1526256000000:
The purple line is ETH and the red line is BTC. The first chart is from late 2016 to May 2018. The chart plots Network Value to Transaction Volume Ratio. Coinmetrics gathers and manages its own data and they are a very insightful team that do a very good job. I highly reccomend their Wordpress blogs https://coinmetrics.io/.
Network Value is the price of the coin times the number of coins outstanding. Transaction Volume is the net amount sent on-chain as calculated by Coinmetrics. When the ratio is high, relative value vis-a-vis usage is high. One would prefer to invest in a platform with increased usage and then to buy it when this ratio is low while the growth is still good.
There are some data quality issues often cited but we could for the time being assume the data is at least internally consistent thus perfectly usable even if not 100% accurate.
An even bigger issue is about the importance of the transaction volume. To illustrate the point, assume that Token X is used for an internet based transaction and has ample supply that is increasing faster than other coins and has no upper boundary. Token X value over a time period that would smooth out short term factors should be highly correlated with its usage.
However the same analogy can’t be made for BTC as its transactional nature is being surpassed as a store of value. Consequently BTC could become even more valuable with declining transaction volume if the holders ascribe this value unto it. On the other hand; in store of value of metrics, ETH would score lower than BTC and as the proponent of the ICO bloom, ETH has a very solid transactional nature.
Thus I will surmise that when BTC and ETH are compared on this Network Value to Transaction Volume Ratio: BTC would be higher than ETH and that this difference will increase over time.
The reality is in fact totally different. At least for the moment..
The Daily Transaction Value charts below are from bitinfocharts.com https://bitinfocharts.com/comparison/ethereum-sentinusd.html and https://bitinfocharts.com/comparison/bitcoin-sentinusd.html.
Prior to March 2017, ETH was 20 to 100 while BTC was 10–15. This can be attributed to ETH’s actualy usage not picking up. From USD 10 million ETH sent per day in this period, the figure shot up to USD 2b billion to USD 20 billion range. We would basically infer that the investors bet that ETH usage was going to spike and bought up beforehand in relative value to BTC.
In the 2nd phase from April 2017 to February 2018, both coins fluctuated around 5–15 in lockstep. Both saw significant transaction volume growth as well as price appreciation.
In the last phase from March 2018 to May 2018, things take a very different turn. First of all, ETH daily transaction volume falls to around USD 1 billion — around 1/5 of the mid-cycle 2017 averages. However BTC maintains around USD 5-10 billion which is at par with mid-cycle 2017 averages.
As there is a big divergence in the transaction volume, one would expect the price of ETH to decline rather steeply and the Network Value to Transactiob Volume Ratio to remain in the previous range. That is unless the ETH holders expect an even bigger pick-up in usage later.
As it stand reality is significantly different with ETH going up to 50–75 range while BTC hovers around 25. One could say that it’s pretty much like late 2016 and this is a precursor for a massive adaption round which would propel ETH usage and normalize the ratios.
I have no idea. But I am naturally a skeptic with a constructive atitude. However in this case, I find the relative valuation of ETH too steep vis-a-vis BTC. That is apparent in raw figures but it is even more accentuated if one takes account of the store of value aspect. Unless there is an impending adaption boom for ETH, then the store of value prevalence in BTC should drive this ratio higher in favor of BTC.
Consequently, this is a relative bullish perpsective on BTC versus ETH. However, you should note that in this universe BTC has the lowest multiple (after DOGE and ADA). Thus perhaps in the here and now liquidity plays a greater role than relative metrics and that many of the altcoins are benefitting price-wise from lower liquidity in an overall positive environment for crypto currencies.