On-chain data offers investors several options to analyze the behavior of the price of Bitcoin. Long-term investors are interested in metrics for the valuation of BTC to know when to buy or sell.
Many investors consider that Bitcoin does not fit the criteria of traditional assets, but on-chain data offers a broad framework to analyze it. The Ark Invest firm reached that conclusion in the report titled A framework for evaluating Bitcoin.
Ark Invest leading analyst Yassine Elmandjra and Bitcoin on-chain analyst David Puell were in charge of the study. They described metrics at three layers on the network, relevant for different investors.
Health Assessment of the Bitcoin Network
Investors can use raw data from a node on the network to track the health of Bitcoin in real-time. The protocol ensures currency integrity by allowing the monitoring of the total coins in circulation and the daily issuance of BTC.
Regarding network security, the study highlights the metrics of the Bitcoin hash rate and the income for miners. After the ban on Bitcoin mining in China in the second quarter of 2021, the hash rate has recovered by 166%.
In the case of miners, the sum of newly minted Bitcoin and transaction fees also reflect a measure of their income. From the beginning, they have generated revenue of more than 18.9 million BTC, equivalent to about USD 1 trillion.
Concerning Bitcoin use, investors can monitor the activity on the network with metrics such as active addresses and transaction volume. In mid-December 2021, there was a daily average of 1 million working addresses, which dropped to 920,000 by the end of the year.
Behavior Assessment of Bitcoin Buyers and Sellers
The relationship between demand and supply helps determine the value of a monetary asset like Bitcoin. Based on blockchain data, investors can assess demand variability and the price impact by analyzing buyer and seller dynamics.
If a trader sells two coins that have not changed hands in 7 days, that transaction generates 14 days of destroyed Bitcoin. Taking the sum of destroyed Bitcoin in the last 365 days as a variable, this is a year of destroyed Bitcoin.
The highs on the curve coincide with the all-time highs of the price of Bitcoin. However, the year values of Bitcoin destroyed in 2021 did not exceed the all-time high of early 2018. That could suggest a higher accumulation of BTC in the hands of holders than in 2018.
The HODL (“hold on for dear life) waves divide the Bitcoin in circulation into different bands of retention periods. For example, a one-week HODL band measures the percentage of BTC that has changed hands in the last week.
Valuation of the Pioneering Cryptocurrency
The top layer offers metrics similar to the valuation of a traditional company that compares market capitalization with gross operating income. The relationship between market value and realized value (MVRV) considers the price of BTC the last time it changed hands.
Another metric is the relationship between the market value of Bitcoin and the income of miners (MVTV). The study calls the value paid to miners thermo value. The metric shows that the price of BTC at USD 64,000 in April 2021 did not correspond to its intrinsic valuation.
David Puell created the investor capitalization metric in 2021, which consists of subtracting thermo capitalization from market capitalization. That metric can be an indicator of capitulations in bearish markets, as it allows assessing the fair value of Bitcoin in at least one market cycle.
By Alexander Salazar
