Eric Elliott
May 14 · 8 min read
Image: Sunova Surfboards (CC BY NC ND 2.0)

On April 10, 2019 I wrote an article titled “Inside the Crypto Recovery” which laid out a theory of the November crash and predicted recovery of Bitcoin’s value from its 2018 low of about $3,200 up to $6,500. I laid out the case and the growing pattern among the alt coins, and then confidently predicted:

“With all this supporting data, I’m making a prediction: BTC to $6,500 USD soon.” — Published April 10, 2019.

The events described in it have since played out as predicted.

When I wrote it, the value of Bitcoin was struggling to overcome resistance at $5,300. 10 days later, it broke through resistance at $5,500. By early May it was fighting resistance at $6,000, and a few days ago, broke through $7,000. It’s currently pushing against $8k resistance.

To say that Bitcoin’s bulls are excited is an understatement.

People try to predict bullish breakouts using all kinds of forecasting methods, like moving averages, chart shapes, or bullish news in the press.

If you want to learn why Bitcoin bulls are so bullish, check out Kyle Samani’s summary of his Multicoin Capital 3 thesis for Nathaniel Whittemore’s Long Reads Sunday:

My theory was not based on technical analysis, gut, or bullish optimism. It was based on the value fundamentals of the Bitcoin network, and the fact that Bitcoin’s price drop was not reflecting any of the historical value metric correlations.

Bitcoin’s price was temporarily artificially depressed by news whose impact was wildly exaggerated, which led to a huge buying opportunity that lasted for months.

At the time, Bitcoin’s value indicators did predict continued decline in Bitcoin’s price, but not the overnight halving that we saw, or the protracted lows.

The accuracy of the forecast I made on this basis should serve as a reminder that Bitcoin does have some value indicators which, while they can’t always be used to predict price movements and timing precisely, have historically told us a bit about whether or not Bitcoin is currently overpriced or underpriced — allowing us to anticipate its natural rhythms.

Bitcoin’s value is strongly correlated with a few fundamental metrics, including transaction volume, hash rate, active addresses, and transaction counts:

Transaction Volume

Source: Coinmetrics.io

Transaction volume is the most tightly correlated single metric I have found for Bitcoin valuation. If you want to know if a Bitcoin bear market is truly over, transaction volume is your friend. Currently, it’s predicting a potential drop in Bitcoin’s price, or a potential climb in transaction volumes. If volumes fail to climb, the price could drop or move sideways until volumes catch up.

How could BTC transaction volumes catch up? More institutional investment activity in Bitcoin would be a good signal. News like Fidelity’s plans to open over-the-counter Bitcoin trading to institutional customers in a few weeks could have an impact. Fidelity currently has $6.7 trillion in assets under management (AUM).

Transaction volume is interesting enough that we should take a look at a bigger picture.

As you can see, this is a log chart delineated in orders of magnitude. Each horizontal tick represents a 10x increase, and each time they cross another 10x increase, the volume and value both backslide, dropping back as much as 90% before climbing to a new all time high 10x higher than the last.

Source: Woobull.com

What this chart predicts is that our next peak will likely be in the $100k — $350k range, but we could see a curve that somewhat resembles 2015–2017, starting out with lots of sideways up and down motion before going parabolic again. I don’t know when the next 10x climb will really begin, but I‘m almost certain that it will be preceded by strong growth in transaction volumes. Transaction volume is absolutely the key metric to watch if you want to understand Bitcoin valuation.

Hash Rate

Source: Woobull.com

Bitcoin’s hash rate growth curve tends to look like a very smoothed out version of its price growth curve. Historically, price lags behind hash rate growth for a while and then catches up in short, fast, 10x price bursts.

Active Addresses

Source: Coinmetrics.io

Metcalfe’s Law states that the value of a network is proportional to the square of the number of users using the network (n²).

Active addresses significantly under-count the number of users, because many users are holding Bitcoin long-term as a speculative investment and store of value, rather than transacting in it frequently, but this number is still a good proxy and a solid leading indicator of Bitcoin’s long-term value growth.

This indicator is currently predicting a higher future value for Bitcoin, but it can lead price growth by almost a year. The recent crossing may be a good indicator that it’s a good time to accumulate for a future bull run.

Transaction Count

Source: Coinmetrics.io

Transaction count is a count of the number of on-chain transactions recorded on the Bitcoin blockchain. There’s currently a theoretical maximum of about 6 transactions per second, or about 518,000 transactions per day. A higher number of average transactions per second represents higher network utilization. The last time transaction counts were this high, BTC was valued at almost $20k. Transaction count is a strong indicator of healthy network activity.

When a high transaction count is coupled with low fees (like we currently have), it’s also a good indicator of Bitcoin network efficiency.

Average Transactions Per Second

Source: Blockchain.com

Average transactions per second is a good way to measure the Bitcoin network’s efficiency. The closer we get to 6 tx/sec, the higher the bitcoin network throughput.

Average Transaction Value

BTC Average Transaction Value. Source: Coinmetrics.io

Transactions per second and transaction count are currently capped, but if the speed limit worries you, it shouldn’t. Remember, transaction volume is a function of both bandwidth and throughput. You can think of bandwidth as Bitcoin’s average transaction value, and throughput as the average number of transactions per second. Both numbers come together to form network transaction volume, which is the metric most likely to predict BTC valuation (the first metric we discussed).

As we get closer to maximizing transactions per second, each transaction becomes more valuable. You might think that means that Bitcoin becomes less usable because you can’t use it to buy coffee, but that’s not the case, for two reasons.

First, Bitcoin is becoming more efficient, leading to lower transaction fees. In spite of being very close to the all-time-high in transaction counts, Bitcoin fees have been under control since segwit transactions (segregated witness — essentially less computationally expensive signatures) hit a critical mass around January 2018 and (separately, but also material) more exchanges started batching more transactions.

The current average fee is $1.52. The last time the network was this busy, the average fees ranged between $30 and $50.

Average Bitcoin Transaction Fee

Source: Coinmetrics.io

Even $1.50 is too much to use Bitcoin to purchase coffee, but increasingly, Bitcoin is being used to store and transfer larger amounts.

Bitcoin as a Settlement Layer

Bitcoin is acting as crypto’s exchange liquidity and settlement layer rather than a direct retail payment network.

But as the settlement layer, Bitcoin still plays a critical role in both retail and protocol payments.

2nd layer payment solutions like the lightning network are growing quickly, and they use Bitcoin to provide security and trust for off-chain transactions:

Lightning Network Capacity Growth. Source: Bitcoin Visuals

Bitcoin still has considerable room to grow as a settlement layer. Off-chain transactions and record anchors already represent a significant share of Bitcoin transactions. Payment solutions such as the lightning network and side-chains can handle coffee-sized transactions.

Sub-penny micropayments are happening today, and have the potential to scale off-chain to millions of transactions per second. In the age of machine-to-machine transactions, smart contracts, and payment protocols, Bitcoin may someday form the security foundation of the internet of value.

As you can see, Bitcoin has a variety of very clear value indicators and real world service use-cases, so when Warren Buffet says “You can stare at it all day, and no little Bitcoins come out or anything like that,” you can confidently tell him that the Bitcoin network provides the important service of trust and security for the internet of value. Basically, it acts like the bedrock and foundations which we can build many great things on top of.

Bitcoin’s value as a security layer is something we can measure with objective value indicators. When Bitcoin’s price strays far from the price those indicators predict, it’s like plucking a string on a guitar — there’s a natural force pulling in the opposite direction, and when you release the string, it’s bound to return to its centered position. It will bounce up and down around the center on its way there, but there is order to Bitcoin’s chaotic volatility. When that order is disrupted, it represents an arbitrage opportunity.

When I predicted Bitcoin’s price recovery (and a variety of high-traction alt coins, as well), all I did was predict the return to its natural price center.


Eric Elliott is a distributed systems expert and author of the books, “Composing Software” and “Programming JavaScript Applications”. As co-founder of DevAnywhere.io, he teaches developers the skills they need to work remotely and embrace work/life balance. He builds and advises development teams for crypto projects, and has contributed to software experiences for Adobe Systems, Zumba Fitness, The Wall Street Journal, ESPN, BBC, and top recording artists including Usher, Frank Ocean, Metallica, and many more.

He enjoys a remote lifestyle with the most beautiful woman in the world.

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