Grayscale’s report analyzes the macro and other factors for valuing bitcoin.

In an attempt to unravel the complexities of evaluating the dominant cryptocurrency, Grayscale Investments has assessed macroeconomic factors and indicators of demand and supply in a new report titled “Valuing Bitcoin.”

The report concludes that the current Bitcoin market structure parallels that of early 2016 before it began its historic bull run.

Grayscale: Macroeconomic considerations

• Bitcoin is a scarce monetary asset whose demand will grow with acceleration in global monetary inflation, says the Grayscale report.
• Loose monetary policies, particularly after the abandonment of the gold standard in 1971, has shoveled money into financial assets rather than the real economy.
• US debt to GDP ratio has nearly doubled since 2008 while the velocity of M2 monetary supply has declined.
• The relentless Quantitative Easing (QE) is now a tiger by the tail. The Fed cannot reverse it without cratering the financial markets it has so far pumped up.
• The ever-expanding monetary supply is a recipe for great monetary inflation.
• Bitcoin’s has “verifiable scarcity” and its supply cannot be controlled by a central authority. According to Grayscale, “it can [therefore] be leveraged as a store of value and as a way to escape this great monetary inflation.”

Supply and demand

• A growing number of investors are holding bitcoin for the longer term (compared to speculators, who have a short-term orientation). This phenomenon had appeared in early 2016, too.
• An analysis of the bitcoin blockchain reveals that there has never been a higher level of bitcoin owned for more than one year.
• This bolsters the argument that more and more investors see bitcoin as a store of value.
• Bitcoin’s MVRV, the ratio of its market capitalization versus realized capitalization (calculated by taking the price of each bitcoin at its last on-chain movement) has historically signaled a buying opportunity when it needs near 1. As of August 1, the MVRV ratio is about 2, according to Grayscale.
• Bitcoin adoption is steadily increasing. Visa (NYSE: V), Square (NYSE: SQ), and PayPal (NASDAQ: PYPL) and traditional businesses are now accepting it.
• Increasing adoption is also visible from the Daily Active Addresses (DAA) metric on the blockchain. This metric measures the total number of unique addresses that participate in bitcoin transactions on a day. As of August 1, the DAA is at its highest level since 2017.
• Bitcoin’s “whale index,” (the number of unique bitcoin addresses with balances over 1000 bitcoin) is sitting near all-time highs. This shows a rising accumulation of the cryptocurrency by investors.

• The ratio between bitcoin’s price and its production cost (of which electricity is a dominant component) also provides clues on the bitcoin market cycle. Periods during which mining results in low or negative profitability are generally indicative of market lows. These are a good buying opportunity. These periods flush out unstable and inefficient miners. Bitcoin has exhibited such a scenario from mid-2018 onwards.

Conclusion

This report will assist investors to measure bitcoin’s network growth and assess its value with more confidence.

“As demand for stores of value grows during this regime of monetary inflation, bitcoin may be well-positioned given that it is a scarce digital asset,” says Grayscale. “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.”

Related Story:  Bloomberg’s Bitcoin Analysis – $20K in 2020