Connecting the HNT price to demand for using the Helium network by analyzing data credit burns
Helium is a network of hotspots that provide long-range, low-frequency wireless coverage for internet of things (IoT) devices. The Helium network is secured by the Helium blockchain which compensates hotspot owners with the crypto asset HNT. A variety of activities performed by hotspots are rewarded with HNT, such as verifying their location and issuing challenges to other hotspots to verify their locations, but more importantly routing data from devices using the Helium network.
Devices using the Helium network pay transaction fees for their network usage with data credits. These data credits are pegged to the dollar and are produced by burning (spending) HNT. If the amount of burned HNT exceeds a limit specified by the blockchain, it is removed from the supply. Demand for using the Helium network drives purchases of data credits which burns HNT, and can be thought of as sales by the Helium network. Data credit burns reflect demand for using the Helium network.
I used the requests package in Python to access Helium’s API containing data credit burn data. The code I wrote below pulls daily data credit burn totals and exports this data to Excel.
A number of data credit burn categories are included in the data. I focused on the “Fee” and “State channel” categories to best approximate sustainable external demand for using the Helium network (the other categories are one-off fees or costs associated with establishing a new hotspot within the network). I started the analysis in October 2020, after the initial fees to open state channels have passed.
Immediately, we see usage of the Helium network has grown exponentially in the last year.
Helium’s market cap (HNT price x outstanding supply) has similarly surged.
Growth in data credit burns has recently outpaced growth in Helium’s market cap, causing the ratio of the two to fall back to late-2020 levels. This can be thought of as similar to a stocks price-to-sales ratio.
Absent the growth in data credit burns, it’s not surprising that HNT’s market cap has risen significantly considering the entire crypto market has experienced explosive growth over the last year. This strong relationship between HNT and BTC prices is evident in their high correlation (.61 since August 2020).
To better understand the fundamental relationship between data credit burns and HNT prices, we can adjust for broader sentiment in the crypto market by examining the HNT market cap relative to the BTC market cap.
The HNT/BTC market cap ratio divided by daily data credit burns can offer us key insight into price of HNT relative to demand for data usage on the Helium network. This ratio has historically had a strong relationship with forward changes in the price of HNT.
Currently just off all-time lows, at the 2nd percentile, this ratio indicates HNT’s market cap over BTC’s is low relative to Helium’s daily data credit burn. In the past, HNT prices have risen significantly when this ratio is low, suggesting HNT prices adjust to the fundamental demand to use the Helium network.
We have forward return data for a few separate occasions in the past that this ratio has fallen below the 10th percentile, and each time it has led abnormally high returns. Forward returns have typically been weak when this ratio is above the 90th percentile, indicating Helium’s market cap is high relative to the network’s daily data credit burn.
This is just a start to establishing a relationship between the HNT price and indicators of fundamental demand for the Helium network. The growth rate of data credit burns needs to be considered as it stabilizes, but it remains highly volatile (unpredictable) today as the network is still experiencing exponential growth.
For now, the HNT/BTC market cap ratio is low relative to the daily data credit burn of the Helium network which has typically led to above average forward returns on HNT.
