For investors in any market, historical data and projections are important guidelines that shape everyone’s future plans. Various tools are used for this purpose. One of these is price-to-earning ratio. Price-to-earning ratio reveals how much an investor is willing to pay for every $1 the company has earned in the given year. P/E Ratio is generally calculated annually. In the cryptocurrency market, most analysts do not like to take into account P/E Ratio, but the following discussion explicates that it is as important for the blockchain networks as it is for the stock markets.
How Price-to-Earning Ratio Is Calculated
When we understand how P/E ratio is calculated for the traditional market, it will get easier to apply the concept on the crypto market. When you intend to put your money in a company you are in a better position to decide the size of your investment if you calculate the P/E Ratio. You can use the following formula to calculate the ratio:
P/E Ratio = (Share Price / Earnings Per Share)
To put things in some context, let’s suppose the share price of the stock is $100 and the Earning Per share (EPS) is $20.
P/E Ratio = $100 / $20 = $5
The stock price is already available readily for anyone to see and use in calculation. As for the EPS, there are a few companies that make it available in their annual reports or on popular financial sites like Yahoo Finance, TradingView, Bloomberg, etc. If it is not given, you can calculate it by using the following formula:
EPS= (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding
- Net Income = the company’s profit after taxes (from the income statement).
- Preferred Dividends = money owed to preferred shareholders (subtracted because EPS is about common stock).
- Weighted Average Shares = accounts for share buybacks, splits, or new issues during the period.
Price-to-Earning in Crypto
Since P/E is an important piece of information as its higher value depicts uptrend and lower value forebodes decline, there must exist some method to apply it to the crypto market. In crypto, there’s no universal EPS, but some analytics providers adapt P/E by dividing a token’s market value by a protocol’s earnings (value retained after costs) or by its revenue (fees generated). The closer those cash flows actually accrue to token holders or the treasury, the more the ratio resembles equity P/E.
How Earning is defined for tokens
Two common denominators are used:
Protocol revenue: fees paid by users of the app or chain. This often proxies sales in the stock market.
Protocol earnings: revenue minus costs like validator incentives or liquidity mining; this reflects value the project actually retains.
Because token designs differ, Earning should be read alongside the token’s value-capture mechanics (does the token receive fee share, buybacks/burns, or nothing?).
An improvised formula for the crypto projects can be as given below:
Crypto P/E ≈ Market Cap (or FDV) ÷ Annualized Protocol Earnings
Where to Find the Inputs
On-chain data platforms publish fees, revenue, and sometimes earnings per protocol, which you can pair with market cap to compute a P/E-style ratio. Examples include Token Terminal (methodology pages for fees/revenue/earnings) and DefiLlama’s fees/revenue trackers.
NVT: Crypto’s P/E for Base-Layer Coins
For assets like BTC that don’t have clear “earnings,” analysts sometimes use the Network Value to Transactions (NVT) ratio: market cap ÷ on-chain transaction value. It’s not earnings-based, but it’s used as a utilization proxy. Higher NVT can signal valuation outpacing activity. Be aware that NVT has known limitations and several proposed fixes.
How to Interpret Crypto P/E
1. Compare like with like. Cross-protocol comparisons are meaningful only when Earning is defined consistently (e.g., earnings vs revenue) and protocols have similar business models.
2. Mind token economics. Dilution, emissions, and fee switches can change who actually receives value, breaking the equity analogy if holders don’t capture cash flows.
3. Use trailing vs forward carefully. Many sites annualize recent 30-day fees/earnings (a trailing snapshot). Forward views require explicit assumptions and are less standardized in crypto.
Strengths
Simple yardstick. It lets you rank protocols by how much you’re paying per unit of value they generate, especially when earnings truly accrue to holders.
Comparable inside categories. It works best within categories (DEXs vs DEXs, CEXs vs CEXs).
Limitations
Not universal. Many tokens have no direct cash flows, so a P/E label can be misleading. In such cases, consider P/S-style ratios, user growth, or activity metrics instead.
Accounting choices matter. Whether incentives are treated as costs can swing the ratio wildly. On-chain activity proxies are imperfect. NVT and similar measures can be distorted by churn, spam, or L2 migration, so they’re best used with other indicators.
Types of P/E Ratio
There can be four types of price-to-earning ratio.
1. Trailing P/E Ratio: As is clear from the very nomenclature, it reveals the P/E value for the last financial year. This is the most commonly reported figure and reflects actual performance.
2. Forward P/E Ratio: Using the data from previous years, forward P/E ratio predicts the performance of the company for upcoming year.
3. Absolute P/E: It is the basic P/E calculation—current price divided by the latest EPS. It does not take into account any other value or record.
4. Relative P/E Ratio: It compares a company’s P/E ratio to a benchmark, such as its industry average or historical performance.
Why P/E Ratio Matters
When looking at a P/E ratio, it’s important to remember that numbers alone don’t tell the whole story. If a company has a high P/E ratio, it usually means investors are optimistic, expecting profits to grow and are willing to pay more for those future gains. A low P/E might mean the stock is undervalued or that the company is going through a rough patch.
But what counts as “high” or “low” really depends on the industry. For instance, technology companies tend to have higher P/E ratios because people believe in their potential to grow quickly, while utility companies usually have lower ratios due to their steady but slower growth.
Conclusion
P/E Ratio is an important tool up the sleeve of an investor to judge whether the company or the crypto coin is worth considering or not. You can use trailing P/E ratio to assess the performance of a company for the outgoing year, or forward P/E ratio to forecast the performance for the upcoming year. The higher the value, the better the company or the coin. For crypto, the earning of the blockchain network can be considered for the calculation.
Frequently Asked Questions
It shows how much investors are willing to pay for every $1 a company or crypto project earns in a year.
In crypto, it’s often calculated by dividing a token’s market cap (or FDV) by its annualized protocol earnings or revenue.
Why does the P/E Ratio matter for investors?It helps investors decide if a stock or crypto token is undervalued or overvalued, and compare opportunities across projects.
Source: https://blockchainreporter.net/price-to-earning-ratio-a-guide-for-beginners/
