Bitcoin Value Indicator - August 2018
Summary
- Network fundamentals made modest gains in July.
- Future tech made progress by leaps and bounds, especially the Lightning Network.
- Based on historical trends, Bitcoin is still overbought.
- The impact of an ETF could be a game changer, heavy speculation has already begun.
- I'm launching a marketplace!
Network Fundamentals
If this is your first time reading a Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC) Value Indicator report, you may want to refer to the original article to get caught up. The long and short of it is that I suggest that we can know something about Bitcoin's market cap by looking at the network fundamentals since they have shown correlation in the past, but this relationship is not guaranteed to be as strong in the future due to changing market dynamics and new technology.
Number of Confirmed Transactions
The total number of confirmed transactions increased by 6,393,536 in July. This gives us a daily average of 206,243.
Data Source: blockchain.com
What's interesting about this to me, is that it represents the fourth straight month of growth in monthly transactions. Look at the chart below, and note that March of 2018 shows the low point of transactions. This growth is modest, but I consider it an important sign of life.
Data Source: blockchain.com
Number of Unique Addresses in Use
The average number of unique addresses in use for the month of July was 438,867. This is a modest gain from June, but still slightly below May.
Data Source: blockchain.com
Network Hash Rate
The average hash rate of the Bitcoin network rose from 37,377,891 TH/s in June to 39,735,959 TH/s in July. The network hash rate predicted a market cap (average) of $97 billion for Bitcoin, compared to $121 billion that we actually saw in July.
This was the closest predictor of the three. I expect this figure to grow more slowly in the coming months, as mining profits have been squeezed by the combination of low fees (due to lower traffic and increased SegWit usage), increased hash power, and lower bitcoin price.
Signal Breakdown
| Indicator Name | Unique Addresses | Hash Power | Total Transactions |
| Predicted Market Cap | $21,582,080,261.53 | $97,404,671,998.39 | $59,199,570,117.14 |
| Actual / Predicted | 5.63x | 1.25x | 2.05x |
| Metric Signal | Overbought | Overbought | Overbought |
Data Source: Blockchain.info
August 2018 Signal
Overbought.
The all-important chart
Combining all three signals into a single chart gives us this.
Data Source: blockchain.com
Because this chart is now covering eight years, I thought it would be nice to present one that shows just the last two years so it's a bit easier to see where we are now. Have a look.
Data Source: blockchain.com
As you can see, the Bitcoin market cap has been over all three predictors since June of 2017. This signal that the market was overheated (the fact the the actual market cap is higher than all three models predicts) came a full six months before the absolute peak in market cap.
Future Tech - Segwit and Lightning Network
As I've said in the past, upgrades to the Bitcoin network are a necessary prerequisite for the next wave of growth. Since the two biggest updates happening now are SegWit (still not fully implemented by the community) and the Lightning network (still in very early stages), that is where we turn our attention now.
| Lightning Network | # of Channels | Total BTC |
| June High | 8.9k | 28.996 |
| July High | 10.99k | 118.949 |
Data Source: Grafana - Lightning Network
Wow, incredible growth in the lightning network over the last 30 days!
Image Source: Grafana
| Segregated Witness | Percent of Transactions Using SegWit |
| June High | 39.6% |
| July High | 40.3% |
Data Source: Grafana - SegWit
Segwit peak usage was up a fraction as well, but I had higher hopes for this figure.
Image Source: Grafana
The impact of a Bitcoin ETF
I've seen a lot of news articles making the rounds, speculating about the approval of a Bitcoin ETF. The one that seemed to kick it off was this one from Zerohedge. Since then, we had the (COIN) ETF denied, but there are many others still in play.
I don't know if the suspicions are true, but I have a feeling that with so much money on the line, approval of the ETF will most likely leak out before it happens. Here's how I see the impact playing out.
- The price will surge prior to the ETF approval announcement, then fall back somewhat, followed by even more gains in the months following the actual launch.
- After the launch of the Bitcoin ETF, other coins will attempt to follow suit and we could see a situation similar, but on a larger scale to what happens now when a new coin gets listed on Coinbase (the price shoots up in anticipation, and becomes shifted north moving forward).
- The Bitcoin value indicator will be temporarily shifted out of position by a one-time massive inflow of capital. This will cause Bitcoin to appear more overvalued than what we would otherwise expect because of new factors in play, namely the ability to buy Bitcoin on the (United States) stock market. Market makers will need to provide initial liquidity for this, and as many have pointed out, there could be a similar situation to what happened with the launch of the gold ETF.
Investors should be aware that an ETF could also make it easier for market manipulators to cash in on their futures contracts manipulation, as a combination of direct ownership of Bitcoin coupled with ETF ownership could allow for new attack vectors.
I'm Launching a Marketplace!
I'm very proud to announce that after months of preparation, I have founded a private investment company focused exclusively on cryptocurrencies. I've gotten the green light from SA to create a marketplace where you can join me on our journey. I'll be writing exclusive content for the marketplace, in which I will disclose which cryptocurrencies we're investing in, how we allocate our portfolio, when we rebalance, and much more.
I hope you'll check out "Crypto Blue Chips," launching on September 1st. Thanks again for all the supportive comments. It's been great to be able to share what I've learned, and also to learn from the community as well. With Crypto Blue Chips I hope we can take this to the next level together.
Conclusion
Network activity was mostly positive, as the number of transactions increased for the fourth straight month, and mining hash rate reached new all time highs. Unique addresses gained modestly, but seems to be lagging the other indicators.
Based on the data from last month, the Bitcoin Value Indicator is suggesting that Bitcoin is still overbought. Segwit usage ticked up a fraction, but the Lightning Network increased in channels and value by a massive amount.
ETF approval will be a game changer, and I expect this info to leak out before any official announcement. This will create temporary shifts in valuation models and other cryptocurrencies will try to follow suit.
Check out my marketplace, Crypto Blue Chips launching on September 1st!
Cheers,
Hans
Analyst’s Disclosure: I am/we are long BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (34)
Unfortunately I do not participate in ICOs anymore. There are simply too many to keep track of, and the failure rate is very high. Sorry I can't be of more help here. Thanks for reading.
$400M loss on the Hong Kong BTC exchange this AM resulting in forced sale, they were professional traders so able to cover
The cost of mining is tricky, because it depends on the number of participants and each has a different cost structure. Furthermore, even though the majority of miners are running the same equipment, there is some variety of mining machines being used, so that makes it even more complicated.If you look at what it cost to run a single machine right now, the break-even is $0.13 for power at this difficulty and price level. See below.www.coinwarz.com/...If the price goes down, the margins gets squeezed. New new equipment comes out that's more energy efficient, then the price to mine a Bitcoin would drop etc.What's happening now, is that miners with higher cost structures are either mining at a loss, or just selling off their equipment to people with lower cost of operations (primarily power).However, if the network hash rate dropped, it wouldn't be the end for Bitcoin, because difficulty of mining just drops as the hash rate drops. The thing that would happen, is that Bitcoin would become easier to attack. However, since Bitcoin is the largest computing network in the world, it would take a long time of declining hash rate for it to become practical to attack the Bitcoin network.Fees are just a function of traffic related to block size. So, if there's room for 10 transactions in this block, and 11 people want to transact right now, then the person paying the lowest fee has to wait for the next block and the other 10 get in. So, people bid against each other for block space.The idea is that eventually the miners could be supported by fees in the year 2140 when all the Bitcoin are mined. "what happens if miners decide to stop mining?"Well, the thing is as long as people are using Bitcoin then there will be mining. This is because the network activity keeps the price from being zero, and the block size keeps the fees from being zero, so there's always money to be made. Even if the margins are low, some miner somewhere will be mining, even if it's off power they're stealing from the grid using equipment that's already paid off (they have no operational costs).I wrote an article about how to know if Bitcoin is actually dead. It goes over some of this stuff. You might find it interesting.seekingalpha.com/...
We think the eventual replacement of paper money with a digital crypto could involve municipalities issuing what might be described as a put warrant. This is a security that gives the holder the right (but not the obligation) to sell a given quantity of an underlying asset for an agreed upon price on or before a specified date. A typical put warrant issued via blockchain methodology by a municipality would allow the holder to use specific cryptos to satisfy obligations to the government at a specified exchange rate, which is the strike price.An example of such a transaction might be one in which a municipality issues a crypto put warrant with a market price of $1000 and a strike price of the warrant at $100. This gives the holder of the warrant the right to put to the government one unit of cryptocurrency and be credited with $100 as payment for taxes. This theoretical warrant is far out of the money and would likely never be exercised. The worst case for the municipality is that the crypto's value falls to zero sometime in the future. This would cost the municipality $100 at some future date as the warrant reduces the holder's tax burden by using one unit of cryptocurrency to satisfy all or part of its obligation to the municipal government. However, the municipality had initially received more than $100 in return for issuing the warrant so it will always benefit or at worst break even. The cryptocurrency that first aligns itself with a municipal government will likely be a winner during the period that the transition to a digital currency gradually occurs. That particular crypto would enjoy a first mover advantage in a new world monetary order.We agree with GS that Bitcoin is not a fraud. To some extent cryptocurrencies comprise an asset class different from any that has ever existed before. GS and their clients appear to be applying Modern Portfolio Theory and the Capital Asset Pricing Model, which says that the most efficient portfolio is one that includes all possible invest-able assets. Current portfolio theory textbooks, now indicate that all invest-able assets should include collectibles, art, real estate, bullion etc. A consensus among those in the financial theory community that cryptocurrencies are an asset class that makes a portfolio more efficient, could provide a boost to cryptocurrencies. A thing to keep an eye on is whether other major financial market participants follow GS with regard to the cryptocurrencies.Despite claims by some, we have not seen any methodology which can be used to arrive at an intrinsic value for a cryptocurrency. This is certainly an impediment to cryptocurrency achieving the status of an asset class that would routinely be included in well diversified portfolios. The next major event in the cryptocurrency space will likely be the integration with cryptocurrencies by state and local governments. This will involve quasi-legal tender status being obtained by some cryptocurrencies, in that under some circumstances, cryptocurrencies could be used to satisfy obligations to state and local governments. It is not clear if this will provide a boost for the entire cryptocurrency space or result in distinct winners and losers among the cryptocurrencies. In order to integrate with the public finance issuers, cryptocurrencies will have to provide financial incentives to the cash-hungry state and local governments. The winners and losers among the cryptocurrencies may, in a large part, depend on which particular have the ability, willingness or political connections to be among the earliest to achieve quasi-legal tender status via integration with state and local governments..."
seekingalpha.com/...
Thanks for reading and for your supportive comment. In regards to the ETF, you may be correct. The ETF does go against the Bitcoin ethos, and I think it's not necessary at all for Bitcoin to be a success. If it happens, then there will be a one-time shift; but I can see why the regulators are hesitant. Just look at the insane manipulation that's going on right now, specifically with BTC/Whatever trading pairs on exchanges.medium.com/...Regardless of this, I consider Bitcoin to be the most interesting experiment that I've ever been a part of because it somehow gets at the intersection of trust, money, cryptography, computing, networking, and most importantly the impact of technology on society.Cheers,
Hans
