How should we evaluate the value of bitcoin, which is booming from time to time?

GoPax shares several usage indicators in recent report
There is a prospect that the value of bitcoin will be comparable to gold [Photo: Shutterstock]
[Photo: Shutterstock]

[Digital Today Reporter Chi-gyu Hwang] Evaluating the value of a highly volatile virtual asset (cryptocurrency) is not an easy task for those playing in the cryptocurrency market. There are many cases where the price did not flow as expected. That doesn’t mean that you can’t even rely on investments that don’t ask if you feel unfounded.

In the midst of this, cryptocurrency exchange Gopax released a report that introduces indicators that can be used to evaluate the value of Bitcoin and Ethereum, a one-two-punch cryptocurrency ecosystem. The company explained that the methods mentioned in the report are not correct answers for evaluating the value of Bitcoin and Ethereum, but they can be a reference factor.

According to the report, measuring the fair value of Bitcoin is still a challenge, but there are several methods in use.

First, the relative value is inverted after comparing various indicators with other assets used as a means of storing value. However, in order for Bitcoin to replace or supplement other assets such as financial assets, cash, and gold, there are many mountains to overcome such as penetration and usage, trust of the general public, and clear regulations.

You can also evaluate the value of Bitcoin with a balance between supply and demand. Since bitcoin is mined, issued, and traded on the public blockchain, investors can measure the price of bitcoin by analyzing how the supply and demand of bitcoin changes in the bitcoin network.

The amount of bitcoin supply is set at 21 million in total. Not all bitcoins have been mined yet, and the mined bitcoins are not circulated on the market or used for transactions. There are also many bitcoins stored in wallets.

The report introduces several indicators that you can refer to divided into supply and demand, for supply, including active assets, measuring the number of days Bitcoin is kept, capital realization method, stock flow model, and looking at bitcoins stored on exchanges. . The active asset is the degree to which Bitcoin is active.

According to the report, bitcoins that have never had a transaction for one to three years are classified as being in a holder wallet, and a bitcoin that has been transactional at least once in 90 days is classified as being held by speculators.

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The increase in the number of keeper bitcoins means that the number of bitcoins is expected to rise and the number of bitcoins will increase. can do.

Also, looking at the bitcoin blockchain data, the amount of bitcoins that have not been traded for more than a year is the highest ever. It means that there are many people who see bitcoin as a store of value rather than a transaction, the report analyzed.

Bitcoin days destroyed (BDD) is the sum of the ages of all bitcoins traded on a specific day.

For example, suppose A sends bitcoins to B, and B stores the received bitcoins in a wallet for 10 days and then uses them. In this case, since B kept without using bitcoin for 10 days, the bitcoin BDD written by B would be 10 days. With BDD, you can catch when old bitcoins are released on the market.

The report said, “If the BDD is high, it means that investors who have held bitcoin for a long time will move, and it is sometimes interpreted as a precursor to a change in the long-term market price. Usually, BDD surges before the price of bitcoin reaches a high or low. Bitcoin price. Investors who judge that they have reached this peak are trying to realize their profits by selling bitcoins that have been stored for a long time.”

The realized capitalization is a method of calculating the price as a cost when all bitcoins that have been traded at least once are last transferred on the blockchain and collect them.

When calculating the price using the realizable capital method, the bitcoin in the holder’s wallet after the last transaction on the blockchain in 2012 is inevitably less contributing to the bitcoin market capitalization than the bitcoin last traded in 2020.

If 2012 is the last transaction record, this is because the Bitcoin price at the time is recognized as cost. “The advantage of the Real Capital Act is that bitcoins that have been mined but no longer accessible can be excluded from price analysis. For example, bitcoins lost due to the loss of their private key by the owner of a bitcoin can be traded. “Because there is no bitcoin, it is excluded from the supply and has little effect on the price of bitcoin. In a sense, the market capitalization calculated using the realized capital method is closer to the real value,” he said.

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The stock-to-flow ratio is the product supply in circulation divided by the annual production increase rate. Precious metals such as bitcoin, gold, and silver have a high share flow rate. However, the report ordered that the stock flow ratio model should not give too much significance to this correlation as it does not take into account demand, which influences the price increase.

The amount of bitcoin held on an exchange can be interpreted as a real supply that is willing to provide liquidity. If there are a lot of bitcoins stored on the exchange, it can be interpreted as a bearish market, and conversely, if there are not many bitcoins on the exchange, it can be interpreted as a bullish market.

According to the report, the amount of bitcoin stored on the exchange in July of last year was the lowest level since May 2019, and the price of bitcoin has risen.

Demand-based indicators can take into account daily active addresses, whale index, and bitcoin production cost. Daily Active Addresses (DAA) is the total number of Bitcoin wallet addresses that participated in Bitcoin transactions during the day.

According to the report, while the daily active address is not useful for a full picture of the Bitcoin market, it can be a good indicator of the growth of the Bitcoin network. It is known that as the number of active addresses increases and the blockchain becomes active, the price of bitcoin also increases.

Whale refers to a’big hand’ investor who holds more than 1000 bitcoins. Mainly institutional investors are whales in the virtual asset market, and virtual asset exchange wallets are also classified as whales. When counting the number of whales, the unit is a virtual asset wallet, so one person or one exchange can manage multiple wallets, so it is difficult to determine exactly who owns how much bitcoin by looking at the whale index alone. This means that there could be only one owner of more than 2,000 whale wallets.

As of July 30, 2020, the number of bitcoin whales is the highest ever, according to the report. As expectations for rising bitcoin prices grow, the number of wallets holding large amounts of bitcoin is also steadily increasing. The cost of producing bitcoin is to calculate how much it will cost to mine bitcoin based on the bitcoin network power consumption.

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It is to evaluate the value by applying the concept that commodity prices rise and fall based on the unit price of production. In particular, if you know the cost of producing bitcoin, you can predict that bitcoin will not fall below a certain price. The relationship between bitcoin price and production cost is also important in that it provides a clue to calculating mining profits, the report explained. .

The report outlines several ways to assess the fair value of bitcoin, and draws a line that it is not a trustworthy approach.

People’s interest in the price of bitcoin is growing, but it is still difficult to see that there is a reliable way to evaluate the fair value. It means to see it as a usable indicator. In addition, the report pointed out that the more bitcoin transactions processed outside the blockchain, in other words, off-chain, the less accurate the analysis using on-chain data will be.

Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.