Grayscale Report Offers Method For Valuing Bitcoin, States That Market Is Reminiscent Of 2016 Bull Run

Bitcoin’s market structure is parallel to what it was before its historic bull run in 2016, a recent report from Grayscale found.

Bitcoin’s value is more difficult to determine than traditional assets because of the currency’s relative youth and unique properties. Grayscale analysts set out in a recent report to outline key metrics which can help investors to value Bitcoin. These metrics were broken down into two categories: supply metrics and demand metrics. Supply metrics included active coins, bitcoin days destroyed, realized capitalization, and Bitcoin held on exchanges. Demand metrics included daily active addresses, whale index, and Bitcoin’s production value.

After analyzing these metrics, Glassnode analysts stated that Bitcoin’s current market is similar to what it was before 2016’s bull run. The two outstanding metrics which seemed to be repeating a pattern from 2016 were Bitcoin active coins and daily active addresses.

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PC: Holder v.s. Speculator Chart via Grayscale

Bitcoin’s active coins chart showed the resurgence of a pattern similar to before 2016’s bull run with holders increasing and speculators — those holding coins that have moved within 90 days — on the decline. The combination of increased HODL behavior with fewer people trading on exchanges would take a bite out of circulating supply which could lead to prices pushing upwards. Daily active addresses, a demand based metric, is also seeing heights which haven’t been reached since 2017, signaling increased Bitcoin adoption.

“The plethora of blockchain metrics covered in this report indicate that the current market structure is reminiscent of early 2016, the period that preceded Bitcoin’s historic bull run,” the report read.

While these metrics are useful for now, they may soon be outdated. As the Bitcoin environment continues to evolve more and more transactions are occurring off chain, which will make these metrics less effective in evaluating the marketplace.

Valuing Bitcoin relative to other value store assets could serve as an alternative. The Grayscale report cited a research note published by successful investor Paul Tudor Jones who scored Bitcoin relative to other assets including cash and gold. Bitcoin scored the lowest among listed assets, however Jones noted that its score relative to other assets implied it deserved a higher market capitalization.

“It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value,” Jones wrote. “Something appears wrong here and my guess is it is the price of Bitcoin.”

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PC: Relative Value of Bitcoin Chart via Grayscale

One of Bitcoin’s primary allures as an investment is its 21 million hard supply cap, a metric that leads members of the crypto community to believe that a price increase for the asset is inevitable.

Investors have a harder time valuing Bitcoin because typical models centered around cash flows don’t work. Traditional assets, like shares in a company, are cash generating. When the company earns revenue by selling a product or creating a new innovation, shareholders get a piece of that revenue because the company’s value increases. Bitcoin, like gold, is not a cash generating asset. This distinction means that for valuing Bitcoin investors instead have to turn to relative valuation and supply/demand analysis. The problem with valuing Bitcoin this way is that these metrics rely on historical data, which is not always an accurate way to assess current market conditions.

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Despite not generating cash, Grayscale and the wider crypto community has enormous faith in Bitcoin’s value potential. In the report, authors pointed to the Federal Reserve’s practice of quantitative easing — buying securities to funnel money back into the market — as a source of instability in the U.S. economy and the dollar’s strength. The Federal Reserve began practicing quantitative easing during the 2008 recession, expanding its balance sheet from $1 trillion to $4 trillion over the course of six years, but when the central bank tried to reverse the practice in 2018 the S&P 500 dropped by 20% in 3 months, according to Grayscale’s report.

“It would appear that QE cannot be reversed without cratering the financial markets it is intended to support,” authors wrote.

As the Federal Reserve continues to print dollars, especially amid the COVID-19 pandemic, some investors have raised red flags citing inflation concerns. Grayscale believes that demand for a finite asset like Bitcoin will increase as global inflation rises.

By Emily Mason​

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