network annual revenue & psr

network annual revenue & psr explained

Typically, business and for-profit organizations must earn more in operating revenues than they spend in operating expenses, over an extended period of time. In order to provide value for themselves and keep serving their customers, their on-going operations must be profitable. Basic.

To understand the long-term viability of blockchain networks such as Bitcoin, it would be helpful to understand how profitable these blockchains actually are in total, on a network-wide level. Unfortunately, this is very difficult to determine. The reason is that each miner individually, and each mining pool collectively, have vastly different capital costs and expenses from one another. They could be paying much more, or much less, than their competitors for mining equipment, maintenance, servers, and electricity. So at least for now, attempting detailed analysis of network-wide expenses is akin to scanning the entire grocery store industry, without access to any grocers' operating financial statement history.

With this in mind, these charts do not reflect the profitability of blockchains.

However, the operating revenue side of the profitability equation is remarkably clear and transparent. As discussed in the block reward section, though the following is a network-wide cost for all users—for miners, the block reward is actually their industry's revenue. Again, typically this consists of:

  1. Newly "mined" coins, and

  2. Transaction fees

These charts attempt to dig deeper into how valuable this operating revenue is for Bitcoin’s miners.

TTM Revenue. The first thing to understand is that it makes most sense to analyze a blockchain’s revenue on an annual basis. This is not often done in the blockchain world, but it is typical in the financial world. The first chart above lays out the rolling, trailing 12-month revenues for Bitcoin, updated daily. Analyzing revenue on a trailing 12-month (or TTM)—or rolling—basis gives the reader more understanding as to what the "addressable market" is. In the cryptocurrency world, this means how much money really is there to be gained by mining and securing the network, at any given time.

Both the market cap (left axis) and TTM revenue figures (right axis) are measured in the generally accepted unit of account today; that is, US dollars.

The keen observer will notice that, as newly "mined" coins are indeed the vast majority of the block reward, then the TTM revenue of the mining industry is very close to the network's issuance rate over the past year—if this trailing 12-month revenue was measured in bitcoins. However, since we are looking at this revenue in terms of today’s unit of account—that is US dollars, which accounts for Bitcoin’s price appreciation (or deprecation) over time—then the picture becomes much more interesting.

PSR. There is one additional valuation metric we can utilize in understanding network revenue—the "price-to-sales" ratio. Note again—"price-to-sales" has nothing to do with profitability. As well, since it's a term borrowed from the financial world, the word "sales" isn't exactly most appropriate for the "mining" industry. What it does do, however, is help us understand the relative value of one blockchain network's revenue compared to another. Above you will see the two metrics of "price-to-sales" that we are using:

  1. Trailing PSR = market capitalization 12 months ago / TTM revenue

  2. Current PSR = market capitalization today / TTM revenue

Note that the "TTM revenue"—the trailing 12-month revenue—figure is the same variable in each ratio. That is also what is graphed in green (left axis) above. Essentially, if you look at any point in time across the green-shaded area, the value that you see is the trailing 12-month (annual) revenue of that chain's "mining industry," at that date.

The "PSR" then is the annual multiple, or how many years it takes, for the network's annual mining revenue to pay back and equal the total "value" (market cap) of the network. We could also do this on a "per share" or "per coin" basis, by the way, and get the same PSR result—interpreted as how many US dollars of mining revenue it would take to equal the market price of Bitcoin in US dollars.

This is extremely oversimplified, but a PSR of 50 or 100 therefore typically reflects an "expensive" asset. A PSR below 10 could generally be considered fairly valued or even undervalued. But remember, at no point here are we talking about profitability, because we haven't even factored in those mining expenses!

This is only a comparative metric of value in the financial world. As well, it is probably best to use these metrics above only comparing Bitcoin among other blockchains. Comparing Bitcoin’s PSR versus say the PSR of an electric car company like Tesla may be insightful, but not adequate, as there are many other financial data points to consider if you are looking across industries.

One final point. Understanding the difference between Current PSR and Trailing PSR. If you look at any given date on a network’s revenue chart, and the Trailing PSR is lower than the Current PSR, then you could say that miners who got into the game a year before are getting a "better deal" than miners who get in on the day you are looking at. Conversely, if you see the Trailing PSR is higher than the Current PSR, it suggests that miners starting that day are getting a "better deal" than miners who got into the game a year before.

Remember, these are just guidelines to determine the total addressable market for Bitcoin mining.