Why Bitcoin is Still Underpriced

Eric Elliott
Apr 11 · 9 min read
Photo: Naql — Sunrise (CC-BY-2.0)

The value of Bitcoin famously crashed from almost $20k to a low of about $3,200 — a drop of nearly 84%.

Most of this is just normal Bitcoin market cycle: a series of 10x micro-bubbles followed quickly by short-term corrections before launching into another 10x burst. This is the nature of fast-growth cycles. The market does a double-take and reality check every time the asset grows another order-of-magnitude in value. Bitcoin has done this consistently on repeat since 2010.

Previous performance doesn’t always predict future performance, and this is just too much growth to be sustainable much longer, but as the Bitcoin network grows, it’s value as the security and final settlement layer of the internet of value is unfolding. How big could Bitcoin get?

The total addressable market for value transfer settlement is in the trillions of dollars per day. Bitcoin on-chain volume is currently hovering around $2.5 billion/day.

BTC price (line) vs on-chain transaction volume (solid color) [source]

As you can see, Bitcoin’s price (the line on the graph above) closely tracks daily on-chain transaction volume. What this means is that if Bitcoin succeeds as the secure settlement layer of the internet, it could 10x 2–3 more times.

So far I’ve been talking about Bitcoin’s normal growth patterns, but in November, 2018, Bitcoin’s price fell off a cliff. Let’s zoom in for a better view:

November Crash: $6.52k -> $3.24k in a month

What’s interesting about this event is that it had a trigger: The BCH/BSV split. Bitcoin Cash is a fork of Bitcoin, which at the time was valued at about $11 billion compared to Bitcoin’s then $112 billion cap. The split ignited a hash war between BCH and BSV, and the network leadership on both sides of the split threatened to move their mining assets to mine on their respective forked chains. Craig Wright claimed he was Satoshi and said he’d be willing to burn down BTC to win the hash war in this now-deleted tweet:

To all BTC miners…

If you switch to mine BCH, we may need to fund this with BTC, if we do, we sell for USD and, well… we think BTC market has no room… it tanks.

Think about it. We will sell A Lot!

Consider that….
And, have a nice day

(BTC to 1000 does not phase me) pic.twitter.com/oUScEahtWc

— Dr Craig S Wright (@ProfFaustus) November 14, 2018

Of course, these threats were all bark and no bite. Bitcoin has been forked thousands of times. In the open source software ecosystem, forks are common, and generally not a big deal. The difference here was that the fork champions were influential and could bring significant hash power with them — but not that significant.

No previous fork of the main Bitcoin chain has ever had a lasting impact on Bitcoin’s price or hash power — let alone a fork of a fork. While the BTC price dipped for several months, and hash power dipped with it (mostly because mining became less profitable when the price dipped, not because BCH/BSV ever controlled enough hash power to actually hurt Bitcoin), it’s a barely visible blip on the radar of the big picture: Bitcoin’s exponential growth in hash power over time:

The combined hash power of BCH and BSV doesn’t even account for half of Bitcoin’s dip in hash power during peak hash-war just after the split:


In other words, the entire impetus of the November crash was much ado about nothing.

So what really matters to the long-term value of Bitcoin? Transaction count is a great value indicator, but leads by several months.

BTC Price (line) vs Transaction Count (solid color)

What’s interesting about this metric is that it’s currently approaching a new all-time high. The last time we saw values like this, Bitcoin was priced in the $10k-$20k range. But there’s a lot more to Bitcoin price valuation than this. The number of active addresses also tends to be a leading bullish indicator, which signaled several months ahead of the previous 10x climb:

BTC Price (line) vs Active Addresses (solid color)

Transaction volume is the tightest correlation I’ve been able to find. Let’s take another look at that, 7-day smoothing on:

BTC Price (line) vs Adjusted Transaction Volume (solid color)

You can see that when the price is above the transaction volume after curve-fitting, it mirrors a continued downward trend. While the price line is below the transaction volume, it mirrors a continued upward trend. I say mirrors rather than predicts because unlike the metrics we just discussed, this is normally a pretty tight correlation.

While these metrics pretty closely track Bitcoin’s exponential price growth, all of these metrics under-value the Bitcoin blockchain in a sense: Bitcoin has achieved a significant milestone in its maturity. It’s use-cases now include:

  • Base trading pairs for nearly every other exchange-traded cryptoassets — these transactions are often batched, and therefore under-counted in on-chain metrics.
  • Settlement layer for layer-2 scaling solutions, such as the lightning network (growing exponentially but still an insignificant source of Bitcoin value exchange).
  • Settlement layer for alternative blockchains (e.g. Veriblock’s Proof of Proof) and databases that require trustless consensus and immutability, but want to piggyback on the most secure blockchain in the world.

Off-chain transactions can potentially batch millions of transactions into a single on-chain anchor. How do we value the Bitcoin network then? I believe that’s an open question. Likely, we’ll see higher Bitcoin valuation per on-chain transaction over time, and a dramatic reduction in average on-chain transaction values, unless we filter out anchor transactions from our metrics. You can already see this effect. Here’s price vs average transaction value:

BTC Price (line) vs Average Transaction Value (solid color)

As the network matures, we’re also likely to see a lot more algorithmic trades shifting smaller amounts of money. Market making and trading arbitrage bots will supply cheaper liquidity over time, allowing for smoother value flow on the Bitcoin network. This is also a bullish indicator, because increased liquidity attracts more institutional investors, who can then invest or sell more at a time without moving the price and causing slippage on their orders.

Let’s talk about Bitcoin as a base trading pair. Since the 2017 ICO explosion began to settle, Bitcoin has maintained 30% — 60% dominance. In part, because it’s the most secure blockchain with the most dominant brand, but also because of network effects. BTC is the most widely available trading pair on just about every exchange, and that means that a large number of cryptoasset trades trade through Bitcoin. As such, it will be difficult for any other cryptoasset to compete with Bitcoin’s trading volume and liquidity — and remember, liquidity attracts investors.

CoinMarketCap BTC Dominance Chart

In other words, if a whole lot of other cryptoassets do well, they will have a gravitational pull on the price of Bitcoin as investors rush to buy them and drive volume up on both trading pairs.

Remember that the November crash had nothing to do with the actual value of any of these assets. We were already trending down as part of the normal market cycle, and the hash war triggered an unjustified panic in the ecosystem, which gave the bears an excuse to accelerate the path to the bottom.

But every cryptoasset that demonstrated any real traction escaped the bears. It started with Waves when they launched a new wallet with an enhanced built-in DEX, followed quickly by enhanced smart contract capabilities and smart contract demo apps at the end of December. The result? A more than full recovery of the pre-November crash value:

WAVES Recovery

Theta partnered with Tencent Games, Sliver.tv and others and got mainstream gamers using Theta. Then launched mainnet and completed a successful token swap and TFuel airdrop. Result? Full recovery:

Theta Recovery

Augur attracted other projects to build on top of their prediction markets:

Augur Recovery

The Brave browser challenging Chrome on privacy and ad-blocking technology and a built-in crypto wallet rolled out BAT wallets, conducted airdrops, and announced over 5 million active users:

BAT Recovery

Maker DAO, the organization behind the DAI Ethereum stable coin has attracted over $700 million market cap. Over 1.5% of all Ethereum in existence is currently locked up as collateral in DAI loans (CDPs).

Maker Recovery

Cardano is preparing to launch long-anticipated smart contract capabilities on mainnet. The much anticipated Haskell-based Plutus smart contract language promises to make smart contracts less error-prone, more trustworthy, and easier to write, with helpful tools for developers. In the meantime, Cardano’s mainnet has been operational since 2017, and currently challenges all but Bitcoin in transaction volume.

Cardano Recovery

iExec has attracted big-name partners to allow users to earn money by leasing CPU time for scientific computing, 3D rendering, and other compute-expensive tasks.

iExec Recovery

Litecoin promised to work on adding privacy features and then renewed development efforts to back it up:

Litecoin Recovery

And of course, Binance is the leading cryptoasset exchange, where all of these other assets are traded. Increased trading activity has led to increased revenues, and enhanced BNB token value:

Binance Recovery

EOS and Tron have both recovered:

EOS (left), Tron (right)

Layer 2 scaling solutions have begun to launch on Ethereum, and Ethereum DApp developer activity is picking up again.

Ethereum Recovery

The combined effect of all this is increased investor interest in the space, and Bitcoin is the gateway crypto. With all this supporting data, I’m making a prediction: BTC to $6,500 USD soon. I would not be surprised to see another big jump like we saw on April 1st. It could arrive at any moment, or it could be a couple months away, but I’m pretty confident it’s coming soon.

BTC Coming Soon: Full Pre-Crash Recovery

Disclosure: I hold many of the cryptoassets discussed in this article. All charts used in this article are based on publicly verifiable data.

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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