Is Now a Good Time to Buy Crypto?

The current crypto craze has been outstanding to watch, with BTC prices breaking the $16,000, $17,000, $18,000, and $19,000 (USD) levels in a single day, and then falling to the mid $15,000 range with the next hour. If you like exhilarating thrills and gut wrenching free falls, then this is this the roller coaster to ride! However, the question we are all asking is what is a reasonable price for this confounding currency?

The fan boys will say that this is the future of currency, so there is no end to the upside, and any price is a great time to buy. The naysayers argue these rises are unsustainable, and a correction is certainly due. Both of these arguments don't hold any empirical truths, but rather are emotional reactions based on one's view of the future. Let's try to do better.

In the equities world, one reasonable way to determine whether a stock is over or under valued is to look at its P/E ratio. A P/E ratio measures a companies stock price to it's current earnings. A P/E ratio of 10 loosely says the current price of a stock reflects the companies ability to earn 10 times what it earned today over the course of its future. The higher the P/E ratio, the more optimistic equity owners are of the prospects of the company. A new emerging technology could justifiably command a P/E ratio over 100, while a more traditional operation wouldn't expect their P/E ratio to be much greater than 15.

In the crypto world, 'earnings' doesn't apply, and perhaps a better way to think about when talking about the price of cryptocurrencies, is something like a Price to Adoption ratio, or P/A for short. With any currency, the strength of it is dependent on both the underlying economy and the perception of its stability and value. The U.S. dollar doesn't have value only because people believe it has value, but also because there is a large economy that transfers utility through the good ol' greenback. To say that the U.S. dollar isn't backed by anything, and is only a piece of paper, fails to recognize that there is a massive economy that supports its use.

As it stands today, crypto currencies are estimated to have actual commerce usage of about $2.45B - $3.0B, which represents .3 - .6% of the total activity committed on the blockchain. As of December 13th, 3:16pm PST, the total market cap for cryptocurrencies currently sits at ~$494B, making the current P/A ratio between 165 and 201. Is this a reasonable entry point?

Well for the future of transactions, it might a ratio worth buying into, especially if adoption grows dramatically. On the other hand, there is a lot of uncertainty and volatility in this market which brings into question whether these cryptos (and the entire crypto market) will survive at all. My personal opinion is that crypto will be around in one form or another, and the better plays will emerge once we see this market cycle through a bear period. At that point, it will be much easier to see who is Pets.com and who is Amazon, and something like a P/A ratio will help us better make those buying decisions.