If this is your first time reading a Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC) Value Indicator report, you may want to refer to the original article, where I explain the three strongest corollaries with Bitcoin’s market cap. You also may want to read the first Bitcoin Value Indicator report, published in July of this year, where I explain further how I turned those metrics into a consolidated system.
If that’s too much work for you, I can sum up. With Bitcoin you need to think log scale. When you do that, strange things happen, like you start to understand what’s going on. All of the sudden the price of Bitcoin becomes less of a mystery, and something you might build a career by writing about. Thank you, I’ll be here all week.
Recall that unique addresses are a proxy for the number of users, because they indicate how many non-zero Bitcoin addresses are in use. This metric has its strengths and weaknesses, which I wrote about here. Also, I have reviewed several other pricing methods which attempt to do the same thing using Metcalfe’s Law. You can find those here and here.
What does the data say?
Well, the more people use Bitcoin, the more it’s worth. Essentially the value is in the network, much like with Facebook (FB) or Twitter (TWTR). Let’s have a quick recap of where we’ve come from and where we are now.
That low point in unique addresses is a point where Bitcoin was hovering around $6,900 USD back around April 11, 2018. Using the seven-day average of the number of unique addresses (which smoothes out low points caused by low volume on the weekends), you can see that growth has returned since April to this underlying fundamental. The price today is lower, but the number of users appears to be growing again, and this time the network can support more transactions than before due to the rise of Segwit Adoption. If I had to guess I would say Bitcoin could now handle 50% to 100% more transactions per second than when we had the last peak in December/January.
The hash rate of the Bitcoin network represents the amount of computing power securing the PoW process which mints new Bitcoins. Today, you have to be at scale to compete as a miner. So, this figure represents a culmination of the capex invested in mining operations multiplied by the speed of the individual machines.
This metric is more stable than others, because of the length of time it takes to recover mining investment and the length of time it takes to deploy new infrastructure.
By the way, next time someone tells you Bitcoin mining is a waste of energy and “inefficient,” show them this chart.
Image Source: Medium
It turns out human development requires power, and you can predict GDP if you know a country’s energy consumption. Besides that, Bitcoin miners are a purchaser of last resort since they need cheap power, but I digress.
Hash Power and Bitcoin Market Cap so far
Recall that the hash power of the Bitcoin network in log scale is highly correlated with the market cap of the network in log scale. You can verify this for yourself in Excel if you like. This is what you will find if you take the monthly average price and the monthly average hash power, take the log of each and run regression analysis.
The relationship is undeniable. The data in the set goes from 2010 to 2018. So, what price does the hash rate of the Bitcoin network predict right now? We’ll get to that in the summary section.
Bitcoin’s total transactions – why they matter
This is one of my favorite quotes from Hal Finney, an early Bitcoin pioneer who has since passed on.
Every day that goes by and Bitcoin hasn’t collapsed due to legal or technical problems, that brings new information to the market. It increases the chance of Bitcoin’s eventual success and justifies a higher price.- Hal Finney, June 4th, 2011 – Bitcoin Talk Forum
The longer Bitcoin lives, it is pushed toward its destiny of either global disruption or total failure. I wrote about this here, in case you want to know more. Basically the more transactions get completed on chain, the older Bitcoin is (total transactions is a proxy for time), and we can use this growth rate to understand the current valuation levels, wow!
What does the data tell us?
I’m so glad you asked, let’s have a look.
Image Source: Author’s Charts
As you can see, the total number of monthly transactions was up for the sixth month in a row. This is a very bullish sign, showing that the price is coming back into alignment with the natural growth rate of the Bitcoin network.
Remember also, that the total bitcoin transactions, when converted to log scale, has a similar relationship with the Bitcoin market cap when converted to log scale. As with the hash power regression, you can verify this yourself in Excel if you’re so inclined. In fact, this relationship is even stronger than the one we saw with the hash rate. See below:
Bitcoin’s price over the last month
The Bitcoin Value Indicator uses monthly averages to reduce noise, specifically since I use a long-term approach and I only have the ability to process a certain amount of information. Therefore, I’m Thin Slicing to reduce my cognitive overhead (or maybe I’m just lazy).
If you have dollars, and you want to turn those dollars into Bitcoin, the best time to do that is when the value is high, but the price is low. Therefore, if you bought on a random day in the last month, your future returns will be related to the ratio of the current price divided by the predicted price, in much the same way that buying a stock at a lower multiple of sales or book value would increase your chances of capturing that elusive alpha on the day you sell.
The Big Chart
Let’s pull all of this data together for perspective.
Image Source: Author’s Charts
This view of the last two years shows that the Bitcoin market cap has finally scraped the predicted value generated by the network hash rate. However, the total transactions and unique addresses paint a different picture.
Stacked Z-Scores are fun
The Bitcoin Value Indicator methodology involves converting data to log scale, running regression, predicting price (or market cap) based on the regression, and then taking the price/predicted and putting that into a standardize function that yields the Z-scores we use to identify how rare or common our current position is. An extremely high Z-score is an optimal time to sell, and a low Z-score is the best time to buy.
When we take all these Z-scores and graph them, we get an interesting visualization. Take a look.
Image Source: Author’s Charts
Back in December of this year, the combined Z-scores hit a peak of 5.91, while today we’re looking at a modest 2.03. Essentially, the price is still too high but we are no longer at the peak of a bubble.
Summary of Market Cap by Model
|Indicator Name||Unique Addresses||Hash Power||Total Transactions|
|Predicted Market Cap||$23,490,336,319.45||$110,663,098,313.50||$62,704,059,632.48|
|Actual / Predicted||4.848x||1.029x||1.816x|
October, 2018 Signal
Based on the data through September of this year, the October signal is Overbought.
Bitcoin is probably still overpriced, but the fundamentals are steadily improving while the average price of Bitcoin has continued to fall. Make sure you’re ready to make your move when the time is right. If you want more, check out Crypto Blue Chips and see how deep the rabbit hole goes.
One final thing, I now have a Twitter account. Please be aware that already people are impersonating me, so if you get a direct message from an account that appears to be mine, please verify by sending me a direct message on Seeking Alpha. There are scammers and bots all over social media, it’s a jungle out there.
If you like the Bitcoin Value Indicator, check out the Bitcoin Value Indicator – Professional Edition, or BVIPE. The BVIPE is a more advanced report with a data set 20x larger, that’s updated every week. It can be found exclusively in Crypto Blue Chips.
Disclosure: I am/we are long BTC-USD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.