Crypto Hedge Funds and Indices

Investors who are invested in cryptocurrencies through vehicles such as hedge funds should be aware that there is no dominant or established valuation model for cryptocurrencies. But there are three valuation models which have gained popularity in the recent years:

1. Network to Transaction Ratio (NVT Ratio)

This is was derived from Metcalfe’s law, which values telecommunication networks by taking the square of the number of users on the network. It is calculated by dividing the market cap of a cryptocurrency by its daily transaction volume. Historically, the relationship between the NVT ratio and bitcoin prices have displayed little correlation.(1) This is could be due to the challenges in obtaining the relevant data i.e. transaction volume. Even in calculating the market cap of bitcoin, it is hard to accurately determine the number of bitcoin in circulation as many bitcoin have been lost due to owners misplacing their private keys. Such bitcoin should arguably be left out in the calculation.

2. Bitcoin as Gold 2.0

This is one of the most popular narratives, one which has been popularized by the Winklevoss twins (2) and Mike Novogratz(3)