The Wolf Den #873 - The P/E Ratio

Does it work in crypto?

Welcome to The Wolf Den! This is where I share the news, my ideas about the market, technical analysis, education and my random musings. The newsletter is released every weekday and is completely FREE. Subscribe!

In This Issue:

1. The P/E Ratio

2. Bitcoin Thoughts And Analysis

3. Legacy Markets

4. What Is Eigen Layer

5. Celsius Mining Company Earns Final Approval

6. ARK Fully Liquidates Its GBTC Holdings

7. The Bitcoin Dip You HAVE TO BUY Is Coming

The P/E Ratio

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Investors have a strong affinity for metrics, and while the metrics in the crypto space differ significantly from those in traditional markets, there is an interesting exception—the P/E ratio. If applied right, this legacy metric actually has some application in crypto.

The P/E Ratio is a commonly employed metric in traditional finance for quick evaluations aimed at gauging the value of an asset, typically associated with stocks. In our industry, we usually steer clear of using this metric because things operate a bit differently here. Nevertheless, there are exceptions to this norm. Crypto companies, decentralized exchanges (DEXs), and specific assets like Ethereum can indeed have operational P/E ratios.

In this newsletter, the plan is to narrow our focus to Ethereum, which is the exclusive digital asset exhibiting a positive P/E ratio in the space. That being said, I’m sure a quant and a degenerate altcoin enthusiast might, temporarily, uncover additional assets beyond Ethereum with a positive P/E. But for simplicity purposes, I will stick with ETH.

Before delving into Ethereum's P/E ratio, allow me to offer a brief summary on the concept. Many pure crypto investors may not be familiar with it.

Let's dive in.

The Price-to-Earnings (P/E) ratio serves as a rapid assessment tool for evaluating the valuation of a company's stock. It achieves this by comparing the current market price per share to its earnings per share (EPS) over a defined period. This metric is valuable, as it provides insights into whether the company is over or undervalued. Another way of looking at this metric is that it provides insights into how much of a premium an investor is paying to gain exposure to a company's profits.

In general:

A low P/E ratio (~10) implies that the stock is cheap (relative to the profit it makes)

A high P/E ratio (≥50) implies that the stock is expensive (relative to the profit it makes)

This is the formula:

P/E Ratio = Earnings per Share (EPS) / Market Price per Share

The significance of the P/E ratio becomes evident when comparing companies in the same industry, revealing their relative valuations. In our industry, Ethereum stands out as the sole credible chain boasting a positive P/E ratio. This leads us to draw comparisons by juxtaposing ETH against other tech stocks. While not a perfect analogy, it remains valid when considering ETH as a high-tech crypto startup.

I like this paragraph from CoinShares that better explains the crossover. “Each blockchain has a methodology for pricing transactions that are included in blocks and the aggregate value of these blocks is known as Total Network Fees. Viewing the Ethereum ecosystem as a marketplace for digital assets (blockspace), similar to that of Amazon (for physical assets), we begin to form a valuation framework for the network.”

Let’s now address ETH’s P/E ratio. 

According to UltraSoundMoney, ETH’s current P/E ratio is ~113.2.

And tech stocks from a Google search…

Google - 26.9

Meta - 31.1

Apple - 31.4

Microsoft - 36.1

Amazon - 78.2

Nvidia - 119

Setting aside the numbers for a moment and making a loose assumption that ETH is in the same industry as the mentioned companies (Google, Meta, Apple, Microsoft, and Amazon), it becomes apparent that these tech giants offer investors more profit potential than ETH (when looking at the P/E ratio). When comparing these companies to ETH, they seem more affordable relative to the profits they generate, while ETH could be perceived as relatively expensive in relation to its earnings.

Does this imply that ETH is overvalued when compared to these companies? I don't believe so, and here's why: In Ethereum's case, the elevated P/E ratio likely signifies that the market places a high value on ETH relative to its stock price. For Ethereum, the P/E ratio indicates that investors are willing to pay a premium for each unit of earnings.

This is a vote of confidence.

In the upcoming cycle, several scenarios are plausible. If the price of ETH rises while earnings remain constant, the P/E ratio will increase. Conversely, if earnings increase due to heightened ETH activity and a resurgence in DeFi, and the price remains constant, the P/E ratio would decrease. However, these scenarios might not be realistic because it's probable that both price and earnings will increase.

The key lies in determining which factor outpaces the other.

Speculating on the present ETH price, it appears restrained; however, a potential DeFi resurgence and the introduction of new applications may contribute to a lower P/E ratio as the bull cycle advances. Additionally, factors such as EIP-4844, projects like Eigen Layer, and the introduction of a spot ETH ETF will play diverse roles in influencing the P/E ratio, both lowering and raising it.

I hadn't intended for this intro to morph into an ETH bull post, but sometimes that happens anyways. I hope this added to your understanding of the P/E ratio and its workings in the crypto space. Wishing all of you a fantastic weekend! Wolf out.

Bitcoin Thoughts And Analysis

DAILY CHART

That's it, nothing to see here. I am waiting for Bitcoin to break out of this pennant to give us some direction. Enjoy the rest of the holiday, we are going to have a crazy year!

Legacy Markets

• Stocks Have Last Hurrah as Year Draws to a Close: Markets Wrap

Some of the main moves in markets:

Stocks

• S&P 500 futures were little changed as of 5:58 a.m. New York time

• Nasdaq 100 futures rose 0.1%

• Futures on the Dow Jones Industrial Average were little changed

• The Stoxx Europe 600 rose 0.3%

• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.1066

• The British pound was little changed at $1.2732

• The Japanese yen fell 0.2% to 141.70 per dollar

Cryptocurrencies

• Bitcoin rose 0.7% to $42,752.51

• Ether rose 0.9% to $2,368.01

Bonds

• The yield on 10-year Treasuries advanced four basis points to 3.88%

• Germany’s 10-year yield advanced seven basis points to 2.02%

• Britain’s 10-year yield advanced seven basis points to 3.56%

Commodities

• West Texas Intermediate crude rose 0.5% to $72.12 a barrel

• Spot gold was little changed

What Is Eigen Layer

• Click HERE To Read The Eigen Layer Docs

In my effort to avoid being a crypto boomer, I'm proactively staying ahead of trends rather than letting them catch me off guard. There's been considerable buzz about Eigen Layer's potential impact on Ethereum in 2024, prompting me to conduct my own research on the matter and share here.

On my quest to understand Eigen Layer, I initially turned to the white paper but soon realized its technical depth was overwhelming. Opting for a more user-friendly approach, I explored Eigen Layer's documentation on their website. The content, which I've copied below, proved to be much more accessible for the average crypto user.

If you're considering skipping this, be mindful that it's likely to be a significant topic of discussion next year.

Indeed, Eigen Layer essentially relies on rehypothecation for security—a choice that, if not executed carefully, carries inherent risks but aligns with the project's overarching goals. It's worth noting that the 2022 collapse was triggered by the rehypothecation of customer funds held by crypto firms. Hopefully, the developers have drawn valuable lessons from that experience.

This is not a sponsored post, and I have no affiliation with Eigen Layer.

Celsius Mining Company Earns Final Approval

• Objections to Celsius' new mining company were overruled but new company must hit 23 EH/s within 3 years.

The United States Bankruptcy Court for the Southern District of New York granted approval for the "MiningCo Transaction" involving Celsius and its affiliated debtors on Dec. 27. This green light paves the way for Celsius to transition into a publicly traded mining company. Rebranded as Mining Newco or simply Newco, the company, now owned by Celsius customers, will operate under court-mandated stipulations. These include achieving the designated Exahash Target of 23 EH/s within the first three years.

This likely concludes the Celsius chapter, and creditors can now hope to turn a new page and start to recoup their losses. It's quite a twist—from Celsius collapsing last June to now creditors securing ownership in a Bitcoin mining company. Now that the wind-down is proceeding, let's contemplate the dream scenario: Wall Street becomes enamored with Bitcoin mining companies, leading investors to secure an unexpected ‘W.’ A creditor can certainly dream.

ARK Fully Liquidates Its GBTC Holdings

• ARK Invest Sells Its Remianign $200 Million GBTC Holdings

Yesterday morning, ARK opted to liquidate its entire remaining holdings in GBTC, totaling a significant $200 million, possibly in anticipation of the ETFs going live. Out of the proceeds, $100 million was utilized to acquire ProShares Bitcoin Strategy ETF (BITO), propelling ARK to become the second-largest holder of the Bitcoin futures ETF. Erich Balchunas on Twitter provided an intriguing perspective on the move, suggesting it is “likely as a liquid transition tool to keep beta to BTC while it legs into $ARKW or $ARKB.” Just an FYI, with the ETF approval seemingly on the horizon, if there's an unexpected rejection, I'm fully anticipating a substantial and rapid drop in BTC’s price.

The Bitcoin Dip You HAVE TO BUY Is Coming

In anticipation of the potential approval of Bitcoin ETF, I am joined by Eric Balchunas, Senior ETF Analyst at Bloomberg. Together, we will delve into the potential implications for the short and long-term price movements of Bitcoin and explore the reasons why the approval of Bitcoin ETF could be an opportunity to buy Bitcoin at a discount.

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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.