Time To Go Bargain Hunting In Bitcoin? “Faith Index” calls wait a minute!

Although the popularity of Blockchain technology has increased, the recent crypto-currency market has encountered cold wind. The major crypto-currencies led by Bitcoin have fallen toward key support level. Is it time to go bargain hunting? Today, BABI Finance introduce a “Faith”-based quantitative model to analysis.

The stock market often uses the PE ratio (Price/Earnings ratio) to determine whether a stock is over or undervalued. To put it simply, using “market value” divided by “profit” to get a multiple which is generally greater than 1, and the part that is greater than 1 can be interpreted as the future expectations or “faiths” of the market participants for the company.

When some companies have poor profit number, and their market cap is high, the PE value will become very high, needless to say, investors have taken more risks for this. Therefore, a company that has conceptual speculation leads to PE reading reaches several hundred, also referred as the “market dream ratio.”

If Bitcoin viewed as a stock, intuitively, this ”company” established by Satoshi Nakamoto has no income, and cannot use PE to evaluate. But we can learn from construction logic of PE indicator: using Bitcoin’s “Market Value” divided by “Network Value” to obtain a “Faith Ratio”.

We calculate Network Value using Bitcoin’s “On-Chain Transaction Volume”. Because the actual “use” of Bitcoin mostly requires a wallet-to-wallet transaction. Speculative demand may be more on the exchanges, and most of trading behavior on exchanges will not conduct real bitcoin transfer, since it will not be recorded in the Bitcoin block-chain.

This “faith ratio” should theoretically be the same as the PE rate of stocks — — in the absence of unexpected news/event stimulus, the volatility range should be limited. Because the overall market is unlikely to have a considerable change in recognizing of a specific asset in the short-term, for no reason.

As can be seen in the chart below, the “real usage” of Bitcoin has been weak recently, at the end of May 27 this “on-chain transaction volume” has even refreshed 8 months low:

If there is no real demand for use, the price of Bitcoin naturally has no reason to explode. Therefore, we have upgraded the “faith ratio” model into the “Small Golden Coin” Indicator (SGCI), shown in the figure below.

When the red line (left axis) is closer to the green lower boundary, means Bitcoin price is “oversold,” better to buy, and when it close to the upper boundary means price may be “overbought,” better to cut your position.

The SGCI has continued to send overbought signals since the end of April and is still at a high level. This shows that the price is still facing an overestimation, which means that the current Bitcoin network transaction volume (or “real demand”) cannot carry the price. It expected that the probability of a sharp rebound within a short period is low, and investors need to pay attention to the downside risks.

Besides, from the traditional technical-analysis, Bitcoin prices are also moving in a large “converge triangle” consolidation, this chart pattern will bring a consensus in the minds of investors, lots of them won’t have motivations to push prices beyond the range without some significant good news:

The most significant event that could ignite the recovery of the digital currency market in the near future may be the state legislation of the digital currency, mainly from US Commodity Futures Commission (CFTC) and the US Securities and Exchange Commission (SEC). This time point has not set yet, but some analysts believe it may happen this fall.

The SEC has not yet introduced its crypto regulations like the Damocles sword hanging over the entire crypto-currency market. The watchdog may have defined the tokens of the ICO as securities.

Once it defined as securities, a large number of tokens, including Ethereum the second largest crypto currency, will face strict regulations including registration, disclosure, and investor certification.

Needless to say, the compliance work of these projects will not be easy. It may lead to a large number of tokens delisted from exchanges that want to receive regulatory approval from the United States. Therefore, until the regulation issue becomes more clear, many traditional large funds will also be on the sidelines.