The fundamentals of Bitcoin: is it time to buy crypto
By Andrey Mastykin on ALTCOIN MAGAZINE
The bear market in BTC/USD has been going on for over a year now. Since December 2017 bitcoin has become practically 6 times cheaper, many investors have lost their faith in the idea of a decentralized monetary system. On the other hand, the statistics show us a steady increase in the spreading of bitcoins all over the world that is one of the signs of the coming growth.
Cryptocurrency is a specific asset class, where the standard model of fair value evaluation does not work because of the decentralized nature. At the same time, to buy Bitcoins, you need more information, than can give you technical indicators and support lines.
Naturally, in the case of crypto, we cannot take into account the popular approaches of classical fundamental analysis when we classify stocks by income, cash flow, earnings per share, and so on. On the forex, we can determine the fair exchange rate by assessing trade balance, the monetary policy of a Central Bank and the general conditions in the economy.
When we begin to discuss crypto, all these approaches become inoperative. In a sense, we have a clean market, where we have just a few tips to guess the true value. Some “classic” investors and economists argue that fundamental analysis is absolutely useless in the field of crypto. The good news is that we can use other criteria that can complement new assessment models.
Some cryptanalysts offer evaluation models based on the power of the network. Such approaches are better for bitcoins since they take into account its decentralized network nature. Let’s look at them.
Metcalf’s law determines the value of a network by the number of unique users in a square. In theory, the more users load a cryptocurrency wallet, the more unique links are created on its network and the higher its practical value. Thus, the growth of cryptography capitalization in 2017 is justified, since the number of installed wallets has also increased dramatically. We are witnessing a steady exponential growth in the number of installations of wallets, which means that the power of the bitcoin network is only growing.
(all charts: https://www.blockchain.com)
The network value-to-transaction. This model claims when more and more people use crypto transfers and make purchases with their wallets, the real value of cryptocurrency also increasing. You can track the number of transactions using special blockchain-scanners. According to Bitcoin blockchain statistics, the peak in the number of transactions coincided with the peak of the price in December 2017.
Now we see the opposite situation, the network activity and the number of wallets are increasing despite the sharp drop in prices. This is a classic divergence that can predict a turning point in price.
Bitcoin is like the gold of the digital era. We often hear from crypto enthusiasts that bitcoin is the gold of a new era. They are right in a sense. Over the past two years, Bitcoin has dramatically increased its popularity as an alternative to traditional instruments. In fact, there is much in common between physical and digital gold.
Bitcoin, like physical gold, also needs to be mined, its offer is also limited. Like monetary gold, which is mainly traded in the form of derivatives, people accept the value of bitcoin, despite its intangibility.
If we accept the concept of digital gold, we can borrow some gold valuation approaches and copy them into crypto. The problem is the inaccessibility of bitcoin for a wide financial market. Conservative investors cannot freely use a cryptocurrency as a safe haven or directly as a value store due to lack of the financial infrastructure. Thus, all traditional correlations for gold do not work directly for bitcoins.
On the other hand, the situation is changing rapidly. I believe that very soon we will meet with the first regulated ETF, cryptocurrency options and other derivatives, which will increase the size of the cryptocurrency market radically. When we will buy crypto from any investment terminal as free as EUR/USD we can discover new correlations, rules and steady fundamentals.
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