The Supply and Demand Metrics, as mentioned in Grayscale Investments recent 20-page report, “Valuing Bitcoin” by Phil Bonello will be covered in detail in this blog post.
The reports are intended to be read by Accredited investors. This category of investors does not have the knowledge or skills required to:
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Yet, they desire access to the top performing assets of the previous decade and 2020. They may even be interested in the next decade.
My previous post Valuing Bitcoin For Accredited Investors covered
- What is an Accredited Investment?
- Grayscale Investments has been buying Bitcoin faster that miners.
- Grayscale Bitcoin Trust – GBTC
- Valuing Bitcoin
- Bitcoin: Why is it important?
- Which is the best way to view Bitcoin’s true value?
- The relative valuation of any other store value.
We only touched upon the Supply and Demand Measures. These metrics were only bulleted as this post began to get long.
These Supply and Demand Metrics are something I’d seen mentioned, but wasn’t aware of their importance or how to use. As promised in the comments, I was going to do more research on them.
Here’s a recap of Valuing Bitcoin As Accredited Investors
A Accredited Investment Investor will allow you to make investments in Grayscale Bitcoin Trust.
A natural person is an accredited investor if they have either made more income than $200,000, or $300,000 in a joint partnership, over the previous two years. OR have a net worth of at least $1 million (exclusive of the primary residence).
Continue reading in the Institutional Money Series
Bitcoin’s supply limit is 21M Bitcoin.
Bitcoin’s public blockchain allows us to analyse supply and demand shifts in order to accurately estimate the price.
Supply Based Measures
It is possible to identify coins by their age, and it can help us understand the global Bitcoin market structure.
It is considered a Holder if coins aren’t moved in the last one to three year.
It is believed that any coins moved over the last 90 day are belonging to a Specialist.
An increase in Holder Coins is indicative of accumulation. However, an increase in Speculator Coins signals distribution. Below is the chart that shows how there has been a rise in Holders relative it a decrease of Speculators. It was similar to what we saw in 2016, but the opposite happened during 2018.
Bitcoin Blockchain shows that Bitcoin has been owned at a greater level for more than a year.
This measure indicates the strength of Bitcoin’s investor base. It is a supply-side measure, however, this metric also shows that there is demand for Bitcoin’s potential use as a storage of value instead of trading.
2. Bitcoin Days Declined (BDD).
This measures the cumulative age of all coins moved during a single day.
BDD can be used for identifying large supply shifts of old coins.
The BDD score is high to indicate that the HODLers for long-term are either bullish, or bearish.
BDD is a historically high indicator of market exhaustion. Investors sell long-term positions and BDD rises near these tops. Market bottoms are when investors give up as the sign that supply exhaustion has passed.
3. Realized Capitalization
This is an indicator of how much Bitcoin has cost to move. Realized Capitalization is the cost of each Bitcoin as it was at the time that it last moved on-chain.
This method allows coins that are lost to be discounted. This measure is more precise in describing Bitcoin’s market capitalization, as it incorporates the price at which all the coins were traded and not only the recent trades.
Historically, Realized Capitalization served as a support for Bitcoin’s capitalization.
MVRV refers to the ratio between market capitalization (realized capitalization), and historically signals buying opportunities when it’s near 1.11.
4. Model of Stock-to Flow
This is done by multiplying the supply of a commodity with its annual production growth. Investors use this metric to gauge the supply and demand for commodities.
Stock-to-flow high commodities such as Bitcoin and gold have traditionally been used to store value. It is evident that the historical Bitcoin price has been closely related to the stock-to -flow ratio. It is useful in estimating the price of future Bitcoins.
5. Bitcoin is held by exchanges
The amount of Bitcoin that is held by investors on exchanges can be used to calculate how many Bitcoins are available to liquidate. The presence of large amounts of Bitcoin in exchange might indicate bearishness, while low Bitcoin supplies could signal bullishness.
Demand Based Metatrics
Bitcoin blockchain can be used to track the demand growth for investors.
1. Daily Active Addresses
Daily active addresses, or DAA (daily active address), is the measure of total addresses who participate in Bitcoin transactions.
Even though the daily active users metric does not include all users it provides investors an overview of Bitcoin’s growth. Investors are generally looking for increased activity that correlates with price rises.
2. Whale Index
The Whale index counts all Bitcoin addresses that are unique and have balances of more than 1,000 Bitcoin.
The trend of accumulation is indicated by an increase in the number of Bitcoin-rich addresses.
3. The Production Value of Bitcoins
It is possible to use the Bitcoin network’s electricity consumption for the calculation of Bitcoin’s production cost.
Bitcoin mining could be defined as the act of turning electricity into Bitcoin.
We need to know the price-production cost relationship because this gives us insight into miner profitability. It’s a crucial input for Bitcoin value analysis. In turn, miners will use more energy as the Bitcoin price goes up. The inefficient miners who lose profitability are forced to sell their Bitcoins or close their mines. These miners are more likely to have more Bitcoin because they anticipate price rises. Instead of selling all production.
You can use the ratio between Bitcoin’s price and its manufacturing cost to identify price floors within the Bitcoin market cycle.
The Reports Summary
It is worth exploring how Bitcoin might fit in a portfolio that’s resilient to the economic conditions. But many investors have difficulty finding reliable methods to determine Bitcoin’s true value. The report describes how investors can calculate fair value by using blockchain metrics, relative valuation, and supply-demand data. However, as Bitcoin transactions occur off-chain, this report may be less accurate.
Bitcoin is likely to be well-positioned in this environment of monetary inflation as the demand grows for valuable assets. A number of blockchain metrics are covered in the report. They show that Bitcoin’s current market structure recalls early 2016, before the historic bull run. Bitcoin has continued to attract global investor attention. However, there’s not enough supply available to meet the growing demand. The infrastructure can now be built to address that need. This report outlines the best methods for investors to evaluate Bitcoin’s potential growth and value.
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