There was an unbelievable piece of mainstream coverage on Bitcoin just a few days ago. It was CNBC’s Fast Money segment.
I’ve seen Fast Money cover bitcoin before. I can tell you this categorically; that segment on bitcoin is flat out wrong.
Now the interesting thing about this particular section was they had Chris Burniske talking. Chris is actually knowledgeable about bitcoin and crypto assets.
He was trying to explain to the fast money panel how to value bitcoin. After all here was a mainstream news channel that talks about stock valuations day in day out. They simply couldn’t get their heads around how bitcoin could even have a value.
As Chris was explaining about bitcoin’s transactional value and network value CNBC flipped up the following image.
What do see wrong with this picture?
Hopefully your answer is everything. Let’s break it down and then let’s look at what value bitcoin really has.
For a start drop every financial concept you know of. In particular drop the idea of price, market cap and P/E ratios.
It’s just wrong
A P/E ratio by definition is a price to earnings ratio. It’s a way of helping to evaluate the value of a particular company.
You figure it out by looking at the earnings, and assess that against the value of all stocks in the company. That gives you a P/E ratio.
For example, let’s say a company has net earnings of $50 million.
And they have 100 million stocks on issue. That (in simple terms) means earnings per share are equal to 50 cents. Each share adds 50 cents to the earnings, which gives a value of the company.
However the stock is currently trading at $25. That would give the stock a market capitalisation of $2.5 billion and a P/E ratio of 50-times.
This is perhaps because the market believes they have something in the pipeline that will see earnings rise in the future. The market may see potential in that stock. That’s a reasonably high P/E ratio. In this sense, traditional investing probably looks at that stock as ‘expensive’.
Conversely the stock could be trading at just $2.50. That would give it a market cap of just $250 million. Or that would equate to a P/E ratio of just 5-times. In this sense the stock may be seen as cheap or reasonably priced. Or the market doesn’t see much potential in their capability to generate increasing earnings in the future.
Either way these are perfectly acceptable ways to look at stocks.
But bitcoin is not a stock. It does not generate ‘earnings’. It does not have stocks on issue. It is not a company. These financial metrics do not apply here.
When you see something like Bitcoin’s P/E ratio is 50x, that is simply false.
Bitcoin cannot have a P/E ratio. It’s unbelievable they were even allowed to put that image on screen. Anyone that watched that segment and also has no clue about bitcoin could easily have got the wrong idea.
And what makes it worse is that Burniske wasn’t even talking about a P/E ratio. He was explaining you could get a value proposition by looking at transaction value.
And even at this, it’s just part of how you could possibly value bitcoin. If you look at the transaction value of bitcoin and the network growth of bitcoin you can get an idea of its possible value.
But even then it’s near impossible to put a value on it now. You have to also factor in the ecosystem that’s being built around it. You have to consider the potential of risks of upcoming forks. You have to consider the possible scaling and upgrades that are coming. You have to look at the possible use of smart contracts on bitcoin, which could open it up to even more possibility.
You have to realise it can be a medium of exchange, a store of wealth and a payment system, all wrapped into one. Nothing else on earth exists that’s like it. There’s no stock like that. No company.
And you have to understand that you can’t generate income from bitcoin. It doesn’t pay a dividend. You can mine it, help to create it and ensure the network continues to function. But again, it’s not a stock. It’s not a company.
When it comes on, switch off
When you see the mainstream cover bitcoin and apply mainstream thinking, you simply have to ignore it. Most of the mainstream coverage is flat out wrong.
You can’t apply traditional financial thinking to figuring out bitcoin’s value proposition. You have to go deeper and understand how it really works.
Without that base fundamental understanding, you’ll only ever see its price and market cap. And those two terms when applied to bitcoin or any crypto are the two most dangerous concepts out there.
It’s why the mainstream gets hung up on price. And why those in the know continue to pour resources into the development, distribution and decentralisation of crypto networks.
What can you do about all this? Simple. Ignore mainstream coverage of bitcoin. When you see it come on, switch off. Take the time to understand how bitcoin and cryptocurrency work. Get your information from reliable, credible, experienced sources.
And then you’ll start to understand the potential of a decentralised, distributed network — and all the possibilities that come with it.
Editor, Secret Crypto Network