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Buyer And Seller Behavior: Analyzing Bitcoin's Fundamentals


  • The value of a monetary asset like bitcoin is a function of demand relative to supply.
  • Bitcoin's on-chain data details the behavior of participants with a simple and transparent accounting system: the unspent transaction output, or UTXO for short.
  • We believe the on-chain behavior of buyers and sellers can help investors identify bitcoin price inefficiencies.

By Yassine Elmandjra, Blockchain/Cryptoasset Analyst

In this series, we introduce a framework to analyze bitcoin's fundamentals in more depth than we believe is usually possible for any traditional asset. We characterize the depth with a three-layered pyramid, the lower layers serving as building blocks for the higher layers, as shown below.

Note: The Market Value to Realized Value (MVRV) ratio is a long-term metric used to assess bitcoin's market cycles over the long term. HODL is a term derived from a misspelling of "hold" that refers to buy-and-hold strategies in the context of bitcoin and other cryptocurrencies.

Source: ARK Investment Management LLC, 2020

In Part 1, we detailed the data in the bottom layer of the pyramid, which assesses the health of Bitcoin's (BTC-USD) network. In Part 2, we will focus on the data in the middle layer, assessing bitcoin holders' positions and cost bases at any point in time.

The value of a monetary asset like bitcoin is a function of demand relative to supply. While the supply of bitcoin is mathematically metered, its demand is a function of the monetary characteristics enabling it to play the unique role of a global digital money. Since its inception more than 12 years ago, the demand for bitcoin has trended upwards[1] but, over shorter time periods, it has fluctuated dramatically. Based on on-chain data, investors can assess the variability of demand, and its likely impact on price, by analyzing the behavior of bitcoin buyers and sellers at any point in time.

On-Chain Analysis: A Look into Bitcoin's Inner Economics

Investors can leverage Bitcoin's on-chain data to assess the economic behavior - including inflows, outflows, holding patterns, and cost bases - of all market participants. It tracks each participant on-chain using simple address-based heuristics. Here we define these participants and their roles in the Bitcoin "economy" and then depict them in the graph

This article was written by

ARK Invest holds a precision lens on thematic investing. We focus on disruptive innovation and identify themes that will enhance productivity and create wealth. ARK seeks to research and invest in technologically enabled innovation that cuts across economic sectors and changes the way our world works. Our current themes include: Industrial Innovation, Web x.0, and the Genomic Revolution. Innovation is inevitable, and ultimately wins out in an equity market. Our research is made available on our website and we invite everyone to participate in our discussions around thematic investing in innovation. For more information please visit: http://ark-invest.com

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Comments (3)

This helps the situation we find ourselves in ? The world has been forced forward with change unimaginable in the time of one year ; now you are saying it's not Bitcoin time for continuing the upheaval to help stabilize the volatility in the world .

Let's think how unprepared we were before this change occurred and now we want to go back to pre-pandemic times ?

Go Backward and go-broke or Go Forward and fix-it now with Bit coin .
Jethroe1 profile picture
One of the important aspects of this update from ARK, in my mind, is that Bitcoin is very unique, both in it's transparency, and it's mathematical underpinnings. These two attributes, more than anything else, allow for modelling that is visually compelling, repetitive or provable, and surprisingly accurate for so little time history.

If you are new to the Bitcoinosphere (proprietary word first coined here on 11Apr21), then I strongly urge you to do view some recent logarithmic charts available, with the most accurate being Plan B's S2Fx model.
grendelbane profile picture
"Bitcoinosphere (proprietary word first coined here on 11Apr21)"

OK, I was going to suggest BTCVerse, but Bitcoinosphere will also work.
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