Bitcoin Fundamental Analysis — 3 Indicators & 4 Ratios
Fundamental analysis is as important as technical analysis when predicting the bitcoin price. In the forex market, we can make trading decisions based on the CFTC report, the economic outlook of a country and more.
When comes to Bitcoin, what should we focus on? Here are 3 indicators and 4 ratios.
3 Indicators:
· Number of Active Unique Addresses
Unique addresses in the Bitcoin ecosystem are payment addresses that have a non-zero balance. This metric is one way of understanding the daily use of the Bitcoin network. However, according to a study, only 37% of the unique addresses are “economically relevant”.
So, we concentrate on the number of active addresses. From the graph below, it is not difficult for us to notice that along with the bitcoin price rising (in January 2018 and June 2019), the number of active addresses is increasing.
· Transaction Value
Transaction value (Tx) is the on-chain transaction value measured in BTC or USD, indicating the value of economic exchange between 2 parties over the bitcoin network. If the transaction value is increasing, the price of BTC will be rising; On the contrary, if the transaction is decreasing, BTC price will be falling.
· Mining Cost
As the mining machines in the bitcoin network increases, hash rate increases as well. And since more mining machines compete with each other, efficiency gains, but the mining costs rise. As such, in order to maintain healthy profit margins for miners, a rising bitcoin price is typically needed to correspond with a rising mining cost. Otherwise, the mining machines would shut down and stop working.
4 Ratios:
· Network Value to Transactions (NVT) Ratio
The ratio divides the network value, what would be considered the market cap in the equites space, by the network transactions. We want to see the relationship between the value of the overall network and how it relates to the network’s activity. And its purpose is to detect whether bitcoin is overvalued or undervalued.
If BTC has a very high network value (i.e. market cap) and low network activity, then it’s going to have a high NVT ratio. If BTC has a relatively low network value and high network activity, then it’s going to have a low NVT ratio.
When NVT is lower than 55, the BTC market is bullish; when NVT is higher than 75, it is bearish.
· Market Value to Realized Value (MVRV) Ratio
Realized Cap is an alternative approach to Market Cap as a measure of network valuation. Rather than using the last traded price and multiplying by the BTC in circulation as seen in Market Cap, Realized Cap approximates the value paid for all BTC in existence by summing the market value of BTC at the time they last transacted on the blockchain.
MVRC = Market Cap / Realized Cap It’s useful for getting a sense of when the exchange traded price is below “fair value” and is also quite useful for spotting market tops and bottoms.
If the MVRC is above 3.7, it denotes overvaluation; and 1.2 denotes undervaluation.
· Mayer Multiple Ratio
Mayer Multiple is simply the ratio of current Bitcoin price by its 200-day moving average. It is a statistical estimator which shows how common a price level is in relation to its historical trading patterns using the 200-day moving average.
Mayer Multiple = Price / 200 DMA (200-day moving average)
If the MM < 1.0, it’s Bullish and if the MM > 2.4, it’s Bearish.
· Price to Mining Cost Breakeven (P/BE) Ratio
The ratio compares the price of BTC relative to the cost to mine.
P/BE = Price/Breakeven price
If the cost of mining is higher than the price, then some miners will quit mining because it’s not profitable. If the price is way higher that the cost of mining, then it will start to bring in new miners who see the high profitability potential. Those new miners, will force the algorithm to increase complexity making it harder and more expensive to mine.
If the ratio is < 1.2 then the ratio is bullish and if the ratio is > 3.2 then the ratio is bearish.
Using the above indicators, we will find it easier to identify the bottoms and tops of bitcoin market. In addition, tracking the 5 fundamentals here along with the 7 indicators and ratios, we may be able to establish better trading strategies.
