Forget Technical Analysis, On-Chain Metrics Suggest Bitcoin Upside
Summary
- On-chain metrics taken from crypto blockchains provide adoption measurements and unique price signals related to discernible user motivations.
- Active address counts on the Ethereum platform, which has been correlated to positive price movement, show a significant recent uptick.
- Confirmed Bitcoin transactions and payments have recovered since the July lull induced by the China trading and mining crackdown.
- The current on-exchange BTC count is at the lowest point in the past twelve months and falling. This points to price strength and participants maintaining a HODL stance.
- Bitcoin's adjusted MVRV metric is sitting right at the border between an accumulate recommendation and a hold recommendation.
Olemedia/E+ via Getty Images
It is hard to value the Bitcoin (BTC-USD) network and other large-cap coins like Ethereum (ETH-USD) using any semblance of traditional analysis. Benjamin Graham's earnings and growth formula just doesn't apply in the crypto space. This may be one reason there is such a keen focus on using technical analysis in the various crypto communities. But more, this lack of traditional valuation measures helps drive the "bitcoin is worthless" sentiment, as was seen earlier this month from Jamie Dimon during an Institute of International Finance event.
However, using technical analysis generally only provides a probabilistic direction for asset moves. For example, the general thought this past week was there was a head and shoulders pattern set up in Bitcoin pricing and a significant move to the downside was probable. But price action Thursday and Friday belied this idea.
So to augment medium-term technical analysis, a wealth of information can be taken from the different crypto asset blockchains. This information mainly relates back to sentiment, which interestingly makes it somewhat akin to TA itself. As an example, on-chain metrics provide numerous adoption measurements. It also provides unique price signals related to discernible user motivations.
The article below considers only a few of these metrics and starts with active and unique address growth. Confirmed payment counts and total transaction value are covered. The lesser-known market value to realized value ratio (MVRV) is explained and there is a look at exchange flows of BTC. As a whole, these metrics will paint a bullish picture for crypto assets and Bitcoin specifically.
Active & Unique Addresses and Price Correlation
Address growth on the Ethereum platform is discussed below. However, similar patterns can be seen with Bitcoin addresses. If interested, most of this data for the Bitcoin network can be found at blockchain.com.
First are the Ethereum cumulative unique addresses, which are up about 44% over the last twelve months. Of special note in the YTD graph below is the flattening of the growth rate in July, which has only recently shown signs of accelerating.
This oft-seen summer '21 dip, or lull, in both growth rates and absolute numbers for the majority of the metrics presented here relates to the China crackdown on trading and mining. July generally represented the bottoming for most metrics and a directional change. The following graph illustrates this point by highlighting total global hash rate declines of both the Bitcoin and Ethereum platforms caused by the relocation or abandonment of mining by Chinese participants during the spring and summer.
This July China effect is on display again in the Ethereum new unique addresses per day data seen below. Of more importance, note the recent increase of the new addresses per day over the last month.
Active addresses show a similar recent uptick and also of interest is the close correlation between the Ethereum price and the number of daily active addresses. The late summer price run-up seen below in absence of increased daily activity is likely explained by the Ethereum community's excitement in August for the network's London hard fork and improvement proposal called EIP-1559. For details, consider my coverage and outline of the changes to the Ethereum protocol here. For the most part, there is a close correlation between active addresses, which are now rising, and the price.
Confirmed Payments and Total Transaction Value
Since the July lull, transactions per day on the Bitcoin network have risen. One also sees nice growth in payments, which may be a better indicator of network utility. The second graph down is from blockchain.com and plots the 30 day average of payments per day during the past three years. The already significant growth in payments per day appears to be accelerating this month. Follow the source link below the graph for the tool which allows the displayed period to be customized.
Source: Confirmed Payments Per Day, blockchain.com
Additionally, the total value of transactions per day is meaningfully up year over year, up during the latest bull run, but down from the spring highs. Note that from my perspective, the total value metric shown below is of slightly lesser use than other metrics presented because movements are primarily dependent on the change in the underlying price of the bitcoins transferred. In any case, this value measured in USD has become substantial.
Estimated Total Transaction Value Per Day (30-day average)
| October '20 | April '21 | September '21 | October '21 |
| $1.6 billion | $6.7 billon | $3.9 billion | $5.2 billion |
Source: Compiled from blockchain.com (link above).
Exchange Flows of BTC and MVRV Ratio
There are about 2.4 million bitcoins combined in the exchanges' wallets. Over the past year this number has fluctuated up and down approximately 4% or 100k BTC. A rise in the number of coins on the exchanges has been associated with price declines. The general idea is that there is a net inflow to the exchanges from cold storage when participants are looking to sell.
The current on-exchange BTC is at the lowest point in the past twelve months and falling. This points to price strength and participants maintaining a HODL stance. One can view exchange reserves at CryptoQuant.com and see the inverse relationship to price.
Beyond exchange flows, another metric that appears to capture user motivation or intention is the market value to realized value ratio. Bitcoin MVRV is calculated by dividing current market value or market cap of the network by the realized value. Realized value is defined as the total of all the prices for each coin the last time it was transacted, so basically the sum of the cost averages of holders. Movements in this metric have had a tendency to front run price movements. The idea being, as the MVRV ratio increases, downward pressure should follow as more holders increasingly feel the current market price represents a value for their coins.
The basic MVRV is currently 2.7; this is a medium high reading. However, there are a number of adjustments various analysts have made in their more complex models for such things as lost/inactive coins or volatility. My general takeaway is that the adjusted MVRV is sitting right at the border between an accumulate recommendation and a hold recommendation.
One other item to note on MVRV, Bitcoin's blockchain cannot capture the cost average of participants who buy through derivative products like the cash-settled futures-backed ProShares Bitcoin Strategy ETF (BITO). As these off-chain avenues increase, a high value reading of the basic MVRV metric may be less meaningful as an indicator of future selling.
Summary
On-chain metrics which are taken directly from the various crypto assets' blockchains provide investors with adoption measurements and unique price signals related to user motivation and intention. Looking at active address counts, which has been positively correlated to price movement, shows a significant recent increase. And Bitcoin transaction and payment counts have recovered since the July lull induced by the China trading and mining crackdown.
The current on-exchange count of bitcoins is at the lowest point in the past twelve months and falling. This points to price strength as participants maintain a HODL stance. Bitcoin's adjusted MVRV metric sits between an accumulate recommendation and a hold recommendation. Taken as a whole, on-chain metrics are bullish for Bitcoin and the crypto space.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTC-USD, ETH-USD, BLOK either through stock ownership, options, or other derivatives. 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.