Bitcoin recovers, returns to ranging, and analysts grasp for new direction
Crypto analysts are confused – so what else is new? To be specific, the long-term consensus narrative remains intact. There are a multitude of fundamental drivers, as in Bakkt, Fidelity, TD Ameritrade, and VanEck when you look to institutional involvement, and then halving and increased public awareness that could drive a healthy perspective of what could transpire over 2020 and beyond for Bitcoin and other altcoins, but the confusion rests with the near term.
No one seems to be able to come to terms with the current incessantly drawn out period of ranging behavior that infects Bitcoin, even if the boundaries are a descending triangle or whatever converging pattern you wish to choose that points to an inevitable resolution somewhere down the road. Such patterns form when the market is in doubt, even if doubt may be too strong a term. Bitcoin enthusiasts have gotten so accustomed to meteoric rallies that, when one does not present itself, a form of mild depression sets in.
Analysts with a long-term view tend to step forward at times like these to put forward their various valuation models, each a bit of a stretch, since placing a value on the Bitcoin network is extremely difficult. There are two models that have surfaced recently, neither of which has a major following to speak of, but the “technical persuasiveness” of each “numbers game” can make one doubt what tomorrow might bring. One such model is known as an application of Metcalfe’s Law to Bitcoin, which attempts to determine a “Fair Value” of a network, based on active nodes. Here is a recent chart prepared by the folks ad QuantPedia, an analytical website:
As an intro, accept for the moment that Bitcoin has no revenue stream to discount, no predictable stream of dividends either. It does not generate cash flow, nor does it have a balance sheet of assets with hidden value that needs to be marked to market. In other words, standard valuation techniques do not apply to Bitcoin. It is unique, but analysts choose to look for any other model that could be used to arrive at a reasonable “Fair Value”. Just believing that Bitcoin is a mystery to behold is not good enough.
Metcalfe’s Law is an attempt to bridge the gap by assigning value to a measure of connectivity, which gets complicated very quickly, but the parabolic plot of dashed red lines in the above chart defines the calculated results relative to Bitcoin. A logarithmic scale on the left side of the chart designates “Fair Value”. The three bumps are when the market “manipulated prices” and charged a “premium” above fair value for investor participation.
Everything may sound logical and well thought out. The track of Metcalfe’s Law for Facebook actually accurately forecasted how the market would eventually assign a value to that particular network, such that there is more than just anecdotal support for this theory. As your eye looks to the present value “guesstimate” and attempts to make senses of the logarithmic scale, let me make it easy on your eyes – the chart contends that fair value today should be roughly $5,000. Gulp! Bitcoin is hovering at $10,400 – should we sell or short BTC in a nanosecond? The short answer is “No”. There are too many supporting factors in play today to suggest that 50% haircut is in the offing. “Fair Value” is only theoretical.
There is also another valuation method making the rounds today, one prepared by Bytetree, a crypto analytics firm. They, too, have a simple equation, based on network dynamics that goes something like this: “Fair Value = Network Value to Transaction Ratio (historical average) x Transaction value (12-week) divided by the adjusted supply of BTC.” Their “Fair Value” is roughly $7,500, more acceptable than Metcalfe, but a haircut just the same.
Should Bulls be worried by the models prepared by these two “number crunching” organizations? As we said above, the answer is “No”, for many substantive reasons that continue to buoy Bitcoin’s fortunes in this turbulent marketplace. We did not mention the “safe haven” nature of BTC, as well. As long as central banks in major developed countries keep expanding their respective money supplies, hoping that inflation will rise, Bitcoin will forever perform its original intended use a hedge against the dilution of fiat currencies. Fair Value today ignores this fact and is obviously overly conservative.