The ₿itcoin Price to Trend (P/T) Ratio

A simple and powerful metric to value bitcoin for investors

The Bitcoin Price-to-Trend Ratio (P/T) is a powerful indicator for identifying opportune moments to buy bitcoin the asset. Its past track record of success lies in its ability to determine when bitcoin is priced below its projected one-year forward return.

How does the Price to Trend Ratio work?

Bitcoin, a disruptive financial technology and protocol, challenges traditional monetary systems. Through its market adoption and monetization, the network's exponential growth aligns with other groundbreaking technologies. Leveraging the P/T ratio, a valuation metric can be derived from historical adoption trends. Doing so allows one to gain insight into Bitcoin's unique position as a transformative force in the financial landscape.

Bitcoin's rapid adoption exhibits exponential growth and the influence of network effects. Consequently, a power law model fits the price data well and enables calculation of the adoption trend.

By employing a trend price formula, we can mitigate price volatility and observe the underlying bitcoin adoption pattern. This approach is akin to how traditional Point and Figure stock charts eliminate time to enhance price analysis. Moreover, we can leverage the current price divided by the trend price to obtain the price/trend ratio, which provides valuable information on bitcoin's relative cheapness or expensiveness. This ratio also reveals relative adoption trends over time.

While the future remains uncertain, past trends have shown promise, and it is reasonable to assume their continuity unless significant changes occur.

The trend

The orange line in the figure below is the adoption trend for bitcoin as it was described in detail in September of 2019 [1]. By dividing the current bitcoin price (white line) by the adoption trend price (orange line), we can calculate Bitcoin’s Price to Trend Ratio. We can answer: Where is bitcoin, relative to trend?

Investing is a game of risk and time, though most market participants focus their attention on return. If we shift our focus to capital allocation, one should be able to positively impact returns over time by purchasing assets when they are cheap and trimming when expensive. That’s the power in removing emotion from investing.

The below table provides an investor with a simplified view of Bitcoin's P/T value based on past price movements. The heatmap along with statistics gives one a better idea of Bitcoin's relative valuation at different P/T values.

It's important to remember that all investing and investments carry inherent risks. By following a strategy of rebalancing and allocating capital to cheap assets, investors likely put themselves in a better position to reap future reward. The power of embracing a simple and disciplined approach is that it allows investors to remove themselves from FOMO which is commonly seen in markets like Bitcoin.

Remember that investing is a long-term endeavor, and while this strategy may enhance the chance of positive outcomes, it does not guarantee them. It's crucial to conduct your own thorough research, assess personal risk tolerance, and seek professional advice before making any investment decisions. All of these things are beyond the scope of the research provided by the Bitcoin Price to Trend. At the time of release, past performance of the P/T ratio shows that values less than 1 were associated with high returns 12 months later. The opposite has also shown to be true. Ratios extended to the upside, a P/T far above 1, were generally associated with poor returns 12 months later. While this metric has been useful, market behaviors could change at any point in the future.

The bar chart below visually represents average forward returns for the next 365 days. The orange color indicates bitcoin's P/T rating compared to its price a year ago. Historically, the expected future returns can be observed relative to each bar.

Bitcoin was in the orange bucket 12 months ago.

(While this metric provides a good fundamental data point, it does not guarantee future profits.)

A lower P/T ratio has indicated a higher probability of positive one-year forward returns. P/T readings greater than 1.25 have indicated an overheated bitcoin price, leading to 12-month forward returns that were typically negative.

Please Note: There's no guarantee this adoption trend will hold in the future. Past performance is not indicative of future results, bitcoin is a volatile asset and market conditions can change unpredictably. Price Valuation metrics are important for traditional investors and the lack thereof has been one of the loudest critiques by the TradFi community. By de-trending bitcoin price data, the P/T ratio provides a valuation metric this faction of the market can get comfortable with.

De-trending the Price

The P/T ratio allows investors to discern levels where capital can be more efficiently allocated to bitcoin. A value below 1 indicates that bitcoin is cheap, above 1 getting expensive, and below 0.40 suggests bitcoin is historically cheap or in deep value territory as traditional analysts might refer to it. Because bitcoin is a volatile asset, it has typically been either ahead of or below trend. P/T reading well above 1 has historically shown bitcoin to be expensive and below 1, cheap.

Based on past data, bitcoin trading below trend has proven to be much more common since price bubbles tend to be short lived. In Bitcoin, wild parabolic swings up have been much shorter in time than the deep and long bear markets that played out in Bitcoin halving cycles.

So far, buying bitcoin in the value range during bear markets has historically been rewarding. In the data, we can also see that bitcoin bull markets end by decoupling from the trend to the upside. In 2017, the P/T ratio exceeded 5 and touched 3 in 2021. To keep the chart readable it has been cropped. It is interactive, so users can zoom in and out to see the parabolic moves that have played out in this market.

What do subscribers get?

You might have noticed that the data was truncated 365 days ago. What is P/T right now? What is the trend price, right now? Is bitcoin cheap by this metric or is it expensive? As a subscriber, you can find out. Prices and data are maintained and up-to-date.

Premium subscribers can also set notifications if they do not want to check back daily. In the premium option, you can set email and nostr alerts for certain P/T ratios. Just leave us an email address or your nostr public key and notifications will be sent when your preferred ratio readings are triggered.

Is this predicting the future?

No. The future is not predictable, and the P/T ratio is not a prediction mechanism. The role of the P/T ratio is to provide investors with a form of valuation matric for Bitcoin. The P/T ratio would be better described as a probability tool. It is a valuation tool similar to metrics used by traditional stock market investors. Given bitcoin is a market, price can decouple from fundamentals in the short, medium and long term. Using past adoption trends, the aim of P/T is to view the asset and market in probabilistic terms. This approach aids investors in gaining a clearer understanding of what to anticipate.

Since this metric measures relative cheapness or expensiveness to past adoption, it can help investors make better capital allocation decisions relative to their investment time horizon, though it cannot guarantee success. It's simply a tool for viewing bitcoin the asset. Past adoption is not a guarantee that future adoption will follow the identified trends. The dynamics driving Bitcoin could easily change. The underlying adoption model could break or become invalidated at any time.

This model is only intended as a means of additional research. Hopefully it adds value in an investors decision making process. Bitcoin Price to Trend is not intended to be used for profit as a trading alert or trading system. Investors should use at their own risk. The goal with the P/T metric is to provide a means to better understand bitcoin price trends and to provide a valuation metric to the broader community. Based on past readings, a value below one is a desired value for positive future returns.

Past adoption is no guarantee that future adoption will follow the identified trend. The dynamics driving Bitcoin could easily change. Or, dollars could hyperinflate, in which case the underlying adoption model would most likely break or become invalidated. This model is only intended as a means to provide market participants with information that can help them make better decisions. It is not intended to be used as a trading alert or trading system.

How does this work, under the hood?

Bitcoin’s rapid adoption follows exponential math and the power of network effects. Thus, a power law is a great fit to the price data and we can use it to calculate the adoption trend. In doing so, we are removing the volatility from the price. In other words, by using a trend price formula we can remove volatility to see what bitcoin adoption looks like behind the volatility. This is similar to how traditional Point and Figure stock charts remove time to provide a better view of price.

With that, we can do something fascinating. We can divide the current price by the idealized trend price which provides the price/trend ratio. This ratio is what gives us better information relative to how cheap or expensive bitcoin is. Additionally, we can begin to see relative adoption trends over time. It is unknown if past trend will continue to provide insight into the future, but it has shown to be promising. We think it is reasonable to assume that the past adoption trend will continue unless something breaks or the variables change drastically.

Our goal with the P/T metric is to better understand and value bitcoin. Based on past readings, a value below one is a desired value for positive future returns. They have historically been associated with incredible returns. Values above 1.25 - 1.50 on the other hand have shown to be increasingly negative and are most often signs that price is approaching bubble territory. The further away from 1.50, the more potentially problematic things could get.