Bitcoin Price May Not Be Overvalued Yet Based On Thermo Cap Ratio

The CEO of the on-chain analytics firm CryptoQuant explained that Bitcoin's price isn't currently overvalued based on its network fundamentals.

Bitcoin’s price has seen a massive surge in 2021, climbing from lows of around $29,000 at the beginning of the year to highs of nearly $70,000 in recent weeks. This rapid ascent has sparked a debate among analysts over whether the cryptocurrency is now overvalued.

One metric that can be used to assess Bitcoin’s valuation is the Thermo Cap Ratio. The Thermo Cap is a capitalization model for BTC that calculates the total value of the asset by taking each token’s value as the same as the spot price when it was mined on the network.

In essence, this model calculates the cumulative value of the coins mined by the miners since the inception of the blockchain. This is different from, say, the market cap, which takes the current spot price and multiplies it by the total coins in circulation.

Since the coins that miners mine are the only way to increase the cryptocurrency’s supply, the Thermo Cap can be thought of as a measure of the “true” capital inflows coming into the network.

Now, the Thermo Cap Ratio is simply the ratio between the Bitcoin market cap and the Thermo Cap. A high value of this ratio indicates that the market cap is large relative to the Thermo Cap, suggesting that coins are trading at a higher rate than they were mined at.

The following chart shows the trend in the Bitcoin Thermo Cap Ratio over the asset’s history.

As the above chart shows, the Thermo Cap has seen an accelerating growth curve, reflecting the increasing capital flowing into the asset over the years. However, for the context of this topic, the indicator of interest isn't the Thermo Cap itself but rather the Thermo Cap Ratio.

This metric tracks the ratio between the Bitcoin market cap and the Thermo Cap. The following chart shows the trend in the Thermo Cap Ratio over the asset’s history.

An interesting pattern is visible in the graph. It appears that very high values of the Thermo Cap Ratio have coincided with highs in the cryptocurrency’s price. At high values, the Bitcoin market cap is large compared to the Thermo Cap, indicating that coins are trading at a much higher rate than they were mined at.

It’s also apparent that bottoms in BTC occur when the ratio assumes low values. The recent trend in the indicator has been that of a rise, but its value has not touched the levels where bull run tops would have happened in the past.

"Bitcoin is not currently overvalued based on network fundamentals," the CryptoQuant founder noted.