What are the similarities and differences between stocks and Bitcoin valuations?

Source:The Daily Hodl

Is it time to buy Bitcoin? Or is there too much market bubble, so it makes more sense to sell Bitcoin? In other words, you have to wait for a sharp correction to clear the bubble, and then buy Bitcoin to hold it for a long time?

At any time, you can find opinions that support these and more about the Bitcoin market. The fact is, no matter how confident they seem to be in the market, no one really knows the answer.

Perhaps a better way is to determine for yourself whether the current value of Bitcoin is higher or lower than it should be, that is, to determine whether the value of BTC is overvalued or undervalued.

There is currently no seemingly best way to perform this analysis. From the long-term and broader perspectives of wealth management, economics, and our valuation of assets, BTC is still in its early stages. As a brand new asset class, there is no real consensus on how to determine the price of Bitcoin.

Nonetheless, perhaps we can apply some principles that provide a reference for stock valuations-starting from the first "stock" exchange in Antwerp in the 15th century, this market has continued to develop over the past 5 centuries.

How to value stocks

Perhaps the most important skill investors need to learn is how to value stocks. Without this skill, investors will be swayed by the noise of the financial media, inciting FOMO and emotional trading. But if you know how to value stocks, you can determine whether a company’s future growth forecasts are already included in the skeleton or whether the stock price is really undervalued.

There are two main ways to value stocks: quantitative and qualitative. The former involves a series of indicators and calculations to determine the intrinsic value of stocks, while the latter focuses on the background of business operations and gives relative meaning to the value of stocks. The combination of these two methods helps to value stocks.

Method of quantifying stock valuation

The price-to-earnings ratio (price-to-earnings ratio) is the most commonly used indicator for stock valuations. The calculation method of this formula is very simple, which is to divide the stock price by EPS (earnings per share). However, there is no number that can determine whether a stock should be bought or sold with one click. On the contrary, different types of investors will look for different signals. Value investors generally seek lower P/E ratios because they are interested in buying more profitability, while growth investors are more likely to buy stocks with higher P/E ratios because they believe that earnings growth justifies higher costs .

Growth investors target the other two indicators based on the P/E ratio. Replace the earnings per share of the past 12 months with the forecast earnings per share for the next fiscal year to calculate the forward P/E ratio. Another indicator is the PEG ratio, which is calculated by dividing the P/E ratio by the company’s expected earnings growth.

A more conservative way to measure the value of a company is to calculate the P/B ratio (book price) and compare the net value (assets minus liabilities) with the market value. The formula is calculated by dividing the stock price by the book value of each share-it can clearly show how much investors are willing to pay for each dollar or company's net worth. Value investors prefer the P/B ratio to be much lower than 1, because when the market changes its perception, a market value below the book value may become a profitable trading opportunity.

FCF (Free Cash Flow) refers to the cash generated by the company minus expenditure costs. If a company's FCF continues to rise, it may be due to sales growth, cost reduction, or a combination of the two. In other words, rising free cash flow is an early indicator for value investors, indicating that future profits may increase, which is why many investors value free cash flow as a measure of value.

There are many more indicators for evaluating the value of stocks, but these are some basic indicators that every investor should understand and use.

Qualitative methods to value stocks

Investment is a digital world, but when evaluating a company, numbers are not the only important thing. Qualitative factors are more difficult to quantify and more likely to have some subjective tendencies. However, qualitative factors cannot be ignored for this reason.

For example, it is necessary to study the company's core business model to understand how it generates revenue, and in the long run, whether this is a sustainable development method. Evaluate the quality of management by looking at the past performance of executives-if key people have previous industry experience, for example, they have successfully run a company before, this usually indicates that the company you are evaluating is good.

Then we must gain insight into the company's customer base and geographic distribution. For example, does the company rely on a few large customers or many small customers? Do they focus on the bonus market in a specific region or cover many market segments in each region? Are there any regulatory issues in any of their operating areas?

Of course, no company operates in a vacuum. You also need to look at your competitors to find out what the company’s competitive advantage is—for example, what they do particularly well that others cannot easily imitate. What is the situation of the entire industry? Does this company lead in any way? Every industry has industry experts conducting trend analysis to help you judge whether the company is following the trend or lagging behind the trend.

Use the above method to value Bitcoin

This is where things get tricky. Bitcoin is not a company stock. There is no revenue, no cash flow, no management, and no competition like two companies competing for customers.

Along the quantitative thinking, you can look at the "cost of production" of Bitcoin and deeply study the dynamic changes of mining Bitcoin. Since the algorithm can only mine one block every 10 minutes or so, the more miners join the competition, the higher the cost of'producing' Bitcoin, which in turn affects the price, as research has shown. Or by measuring the hash rate-the unit of Bitcoin network processing power-to evaluate the performance of the underlying technology. Supply and demand will also have an impact on prices, which is why halving events tend to affect the price of Bitcoin on the macro level.

Obviously, these qualitative factors cannot satisfactorily explain Bitcoin's price trend. This can be said to explain why many traders like to conduct technical analysis to determine the entry and exit positions in different time periods, similar to foreign exchange trading. There are many trading indicators that can formulate trading ideas for day traders and methods for long-term trading of BTC. However, technical analysis does often have shortcomings in the overall view. In 2014, no Bollinger Band signals will indicate the BTC price range we are in today.

For this reason, the qualitative part of the valuation of Bitcoin certainly plays a vital role. How does it compare with altcoins (BCH, BSV)? In the face of evolving technology, can the security of cryptography still stand (think: quantum computing in 20 years) Is Bitcoin playing a role in the current trend, or is it lagging behind the world in the near future? Will there be more demand?

Perhaps the most important question is what Bitcoin does and what it is used for. It was originally used as a currency, but with the soaring price and other overall better crypto alternatives entering the market specifically for payment, BTC has evolved into an asset for storing wealth, with the qualities of a safe haven , Just like gold-but maybe more complicated.

BTC is likely to replace gold as a modern safe haven asset, and its correlation with the stock market is extremely low. Many financial institutions now allocate part of their investment portfolios to Bitcoin, and it is said that many other companies keep part of their cash reserves in BTC just to fight inflation-inflation will devalue their cash reserves.

Or, fast forward ten years, Bitcoin may have a whole new meaning, more like an index fund that symbolizes the value of the entire crypto industry. Although S&P index funds actually hold companies listed on the U.S. stock exchange, and Bitcoin does not “hold other currencies,” the S&P 500 index is considered a symbol of the U.S. economy. Similarly, Bitcoin may Become an asset that represents the market’s sentiment towards the crypto industry. In this case, if you think the crypto industry will continue to grow in the future, you will buy Bitcoin.

Truth

In short, there is no clear way to evaluate the price of Bitcoin. The combination of quantitative factors and technical analysis can help determine entry and exit positions within a shorter time frame, while qualitative factors are used to form a broader view of the future development direction of Bitcoin.

In this sense, there is not much difference between Bitcoin valuation and stock valuation. Even if there are more industry-recognized formulas, all they do is provide advice and there is no absolute answer. As long as you know the forward price-earnings ratio, you can buy or sell a stock. This is also similar to foreign exchange trading. Technical analysis plays a big role in it. Combined with some fundamental analysis, it is believed that the economy is linked to currency. But if BTC does further replace gold as a safe haven, then the background surrounding Bitcoin-meaning uncertainty in the global market and rising inflation rates-will only play a greater role in sending funds to BTC.

If you really want to expand your knowledge and understanding, then a blog post cannot provide all the answers to such a complex topic. Don't look for shortcuts. There is no shortcut. Apply the principles of stock valuation to determine your position, try not to be incited by FOMO sentiment, ignore the noise of the media, read analysis reports and BTC research reports to strengthen or change your views, and then execute your transactions with precision, focus and rigor idea.

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