Our very first contribution to the body of research on cryptoassets is one we think will become mainstream as this discipline matures. It has intuitive strength – the market to transaction value ratio makes diverse cryptoassets easily comparable. This ratio wasn’t summoned out of thin air; we put careful thought into its legitimacy and usefulness. Read on for a discussion of why we chose this ratio above all.

1. Market cap and price – when taken alone – aren’t particularly useful

A common fallacy among investors is that cheaper assets have more “room to run” and are therefore attractive. This isn’t really the case. Investors could point to the tendency of smaller assets to outperform larger ones, but that requires that assets in a class pass a threshold of legitimacy, which is absent in crypto.  To my knowledge, no empirical work has been done to determine whether the size anomaly, so prevalent in equity markets, exists in crypto. Put simply, smaller assets tend to outperform larger ones in the aggregate, because size is a fundamental source of risk. This may be the case in cryptoland but simply looking at price is not sufficient to make an informed decision. And since there are arbitrarily many units of each crypto issued, price itself is meaningless. “Market cap”, or mcap, must instead be considered.

However, mcap has its own set of issues. Repeatedly mentioned is the fact that anyone can mint a billion coins, sell one on the open market for a dollar, and then boast of a billion-dollar market cap. This is an exaggerated example, but it isn’t too far from reality. Devising a better variant of mcap is one of our essential goals here. The Market to Transaction Value ratio goes some way towards resolving this issue, by exposing low-volume currencies.

2. It makes cryptoassets comparable

Comparable metrics are the backbone of a sound analysis. Our chart radically expands the quality of information available to cryptoasset investors. This is due in part to the difficulty in procuring on-chain transaction volumes. Our numbers are scraped directly from chain explorers. Other attempts have been made with exchange volume, which is close to useless, as exchange transactions do not evidence actual crypto use and can be easily inflated.

Other analysts have determined the MTV ratio for bitcoin, and we are in their debt. However to the best of our knowledge, this is the first attempt to devise it for a much larger set of cryptoassets. It is useful on a cross-sectional basis – clearly evidencing that NEM and Dash have lower volumes per unit of value – and a time series basis – showing that bitcoin is trading roughly in line with its historical mean. Bitcoin, litecoin, and ethereum are the current standouts in terms of relative value in this set.

3. It is a measure of utility

If you believe that cryptocurrencies can serve as substitutes for traditional currency, then you will want to consider their actual use as currency. The cryptoasset market is heterogeneous, and so not all cryptoassets ought to be judged on this metric. Thus the coinmetrics team carefully selected an initial basket of cryptocurrencies, intended primarily as means of exchange, to populate our graph. Ethereum was included because it is a de-facto exchange unit at present. This is due to a user desertion of bitcoin due to high fees, and the demand for ethereum as an on-ramp to numerous token offerings.

Interestingly, ethereum’s MTV ratio has come down (meaning: its utility has gone up relative to its price) even while its price has skyrocketed, evidencing its truly staggering increase in transaction volumes. By this metric, the utility “flippening” happened in early April 2017. Whether this will persist is another matter entirely.

The other "flippening"
The other “flippening”

While you may think of MTV as comparable to a PE ratio for a stock, there are serious disanalogies to consider. The denominator in the equation – transaction volumes – does not represent cashflows that investors can recoup. It simply evidences that it is used. Of course, we’re talking about currencies (or commodities), and investors stand to gain if they achieve significant adoption and a network effect. Thus, everything else equal, a rational investor would prefer a cheaply valued (low MTV) cryptoasset over an expensively valued one.

4. It satisfies many of the properties of comparable asset indicators

Equity markets have cyclically adjusted price to earnings ratios (CAPE) as popularized by Robert Shiller, which reliably forecasts long term returns with decent accuracy. Even more accurate is Tobin’s Q, which is a ratio between equity market values and replacement cost. When Tobin’s Q is elevated for the market index, future returns tend to be lower. This is because market values are comparatively high, relative to the inherent value of the companies composing the index. The MTV is inspired by these ratios. Both of them enshrine some essential properties:

  • They are directly measurable
  • They mean revert (over a long enough time scale)
  • They make economic sense
  • They can, to some degree, predict future returns
  • They are fundamentally stable

This is a subject for more robust data analysis and future posts. Additionally, since we’re working with roughly two years of data, it would be naïve to assert that MTV reliably mean reverts. However, an initial look at bitcoin’s MTV, for instance, shows that it trades in a remarkably narrow range. As for economic sense, cryptocurrencies indeed ought to be judged by their actual on-chain volumes, especially as transactions are costly. So volumes can’t be faked, like they can in exchanges. Whether MTV peaks coincide with lower future returns and vice versa is trickier, as the general trend has been up. We will need to wait for a bear market to see whether the MTV has any predictive weight.

I encourage you all, at this early stage, to examine the fluctuations of the MTV for our cross-section of cryptoassets. We do not have all the answers – we are instead trying to spark a debate and democratize information flows in this new asset class. If you find anything useful, reach out to our twitter account @coinmetrics.

Posted in MTV

2 comments

  1. Very interesting article, thanks. In my mind on chain transaction value provides a measure of Bitcoin’s use as medium of exchange (MOE). So tracking the Bitcoin price relative to this use case makes a lot of sense. I am wondering if there is a way to measure Bitcoin’s use as a store of value (SOV), and then track the price versus some measure of that fundamental use case. Maybe this is non sensical and circular since Bitcoin’s use as a SOV is dependent on a rising price over time but would love to hear any thoughts on this.

  2. Thanks for the comment Daniel. In our mind bitcoin’s use as a store of value hinges on negative or neutral correlations with other asset classes (presently the case), declining volatility (which has been observed over the last few years), and security and predominance (its immutability is currently secure but a chain split would threaten that). Bitcoin’s case as decent SOV is fairly well established at this point.

    One interesting metric is the transaction/exchange ratio where you take on-chain txn volumes and divide them by the value of currency traded on exchange. You could argue that this is a way to quantify real versus speculative use of the currency. You can find the data for this at https://coinmetrics.io/data-downloads/, although it’s worth being mindful of the shortcomings of transaction value figures that we detail in our latest post.

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