James Stanley

Every cryptocurrency is over-valued relative to Bitcoin

Sun 27 August 2017

UPDATE: Just realised my maths is off. I posted this prematurely and the conclusion is actually wrong: not every cryptocurrency is over-valued relative to Bitcoin. The updated version of this article is available here.

I did a little analysis this evening to try to find cryptocurrencies that are under-valued relative to Bitcoin, based on Google Trends data, with the intention of buying whatever is under-valued and waiting for it to go up. But I found that all of the top cryptocurrencies listed on coinmarketcap.com are in fact over-valued.

The hypothesis here is that if the Google Trends score for "buy ethereum" is 50% of the score for "buy bitcoin" (i.e. about 50% as many people are looking to buy Ethereum as are looking to buy Bitcoin), then the Ethereum market cap should be approximately 50% that of Bitcoin. If the market cap is too low then it is under-valued and I should buy some Ethereum.

Unfortunately, I didn't find a single cryptocurrency that is under-valued based on this hypothesis. We'd be looking for a cryptocurrency with a "market cap over-valued factor" of less than 1, i.e. under-valued. Here's a table of my data:

Coin Google Trends score Score relative to Bitcoin Market cap Market cap relative to Bitcoin Market cap over-valued factor Bitcoin 75 1.00 $71,700,000,000 1.00 1.00 Ethereum 15 0.20 $32,000,000,000 0.45 5.00 Bitcoin Cash 8 0.11 $10,200,000,000 0.14 9.38 Ripple 14 0.19 $7,820,000,000 0.11 5.36 Litecoin 4 0.053 $3,300,000,000 0.046 18.8 Dash 5 0.067 $2,730,000,000 0.038 15.0 IOTA 4 0.053 $2,550,000,000 0.036 18.8 Monero 2 0.027 $1,970,000,000 0.027 37.5 Ethereum Classic 0 0.00 $1,520,000,000 0.021 ∞ ZCash 0 0.00 $568,000,000 0.0079 ∞

I also tried looking at Google Trends for just "bitcoin", "ethereum", etc. (instead of "buy bitcoin", "buy ethereum", etc.) but it just came up with an even higher "market cap over-valued factor" for each coin.

Either fair market cap of a cryptocurrency is not a linear function of Google Trends results, or every cryptocurrency except Bitcoin is over-valued relative to Bitcoin.

I intend to re-run this analysis periodically in case it throws up anything interesting. Although I admit it is likely that by the time the public at large are sufficiently interested in a cryptocurrency to start Googling about buying it, there will probably be much earlier and stronger indicators that it is about to increase in value.