A sudden COVID-19 epidemic has disrupted the work and life rhythm of most people. We seem to have suddenly entered the ice age from the fast lane. In fact, this kind of black swan incident has not appeared for the first time since 2020. From the crisis between Iraq and the United States to Brexit and then to the outbreak and spread of 2019-nCoV, the global economy is in the shadow of a huge uncertainty, such as. Taleb said in his Black Swan: our world is dominated by extreme, unknown and highly unlikely things, and our environment is more complex than we realize.
As a matter of fact, every Black Swan incident is an opportunity for the reconstruction of social order and the distribution of wealth. It is necessary for us to face squarely the impact brought by this black swan incident, in which there are both “dangers” and “opportunities”, and the opportunities lie in those emerging things that are vital and anti-fragile. Since its birth, BTC has been declared dead by the media 363 times, and every time the price falls, there will be news of BTC’s death. However. In a way, BTC may have a very good anti-vulnerability ability to deal with uncertainty. As we enter a new decade in 2020, it may be helpful to analyze the fundamentals of BTC, an alternative emerging asset.
“History and society are not crawling slowly, but leaping step by step. They jump from one fault to another with few twists and turns. “
- BTC and crisis.
BTC was born in 2008. As we all know, in 2008, the Black Swan incident of the subprime mortgage crisis occurred in the United States, and then triggered a global financial crisis, the global financial market fell into a panic, the stock market crashed, and the established investment bank Lehman declared bankruptcy. In October 2008, Satoshi Nakamoto published the famous BTC white paper “Bitcoin,A Peer-to-Peer Electronic Payment System”. On January 3, 2009, after the actual operation of the BTC theoretical system proposed by Nakamoto, that is, the so-called “mining” process, the first BTC block was born, including 50 BTC.
The timing coincidence between the world financial crisis and the birth of BTC does not mean that there is a direct correlation between the two. However, behind the two isolated events, the world financial crisis and the birth of BTC, there is a strong historical logic relationship. BTC is not the product of the subprime crisis. Satoshi Nakamoto actually began to design the BTC code in 2007, and finally officially launched this social experiment of a free currency with a geek spirit in 2008, when the subprime crisis broke out.
We can see that under the crisis, the basic means for governments to deal with the financial crisis is generally the quantitative easing policy of money supply, expanding government investment and strengthening their influence on the economy. the result is to promote a new round of inflation around the world. It is precisely that BTC provides a new idea and choice to overcome the inherent defects of legal currency. The digital, unlicensed, scarce and decentralized characteristics of BTC have attracted more and more people as they get older, not only the number of BTC users or BTC active trading addresses are showing a steady growth trend.
BTC wallet users (continued growth).
Number of active trading addresses for BTC (steady growth).
Below, we can focus on the seven related indicators of BTC to analyze its fundamentals.
- Sharpe Ratio.
After ten years of development, BTC has developed from an obscure geek game to an asset with a market capitalization of nearly 200 billion US dollars. It has already entered the vision of mainstream institutions and become an alternative asset allocation category that can not be ignored. The Sharpe ratio is one of the most commonly used measures of portfolio management when measuring assets, also known as the ratio of returns to volatility.
Sharpe ratio = (expected rate of return-risk-free rate) / portfolio standard deviation.
If we compare and analyze the returns on related assets since 2012, we can see that BTC’s Sharpe ratio is all the way ahead of other assets, surpassing not only the US stock market, which has grown for a decade, but also real estate, gold, oil, bonds and emerging market currencies. At present, the Sharpe ratio of BTC reaches 2.82, which is a relatively healthy level.
As we all know, BTC has always been regarded as “digital gold”, and the value of BTC as digital gold has increased significantly in the past 10 years. Gold and BTC are safe havens to avoid the devaluation of legal tender, while BTC has the advantage of digital technology and has become a means of value storage that can compete with gold in the digital age.
A study by analyst PlanB (@ 100trillionUSD) on January 25 this year showed that BTC also surpassed the Internet giant FAANG in terms of yield-to-risk ratio.
Since 2020, we have been in a volatile world, and we all want to find an asset with low valuation, asymmetric risk and return, and BTC as a hedge against real risk or a good choice. Fidelity Fidelity, an American asset management giant, pointed out in May last year that 22% of institutional investors had entered the market, while nearly half of the investors had considered increasing their investment in BTC.
- S2F Model.
Scarcity (Scarcity) is an attribute to measure the value of assets. Under the economic mechanism of supply and demand, generally speaking, the scarcity of goods, the higher the price. BTC is the first scarce digital commodity in the world. At the same time, it can be transmitted through the Internet, radio, short messages and even satellites. S2F model is a good quantitative analysis model.
The reciprocal of the annual supply growth rate of S2F Model:Stock to Flow (= 1 / inflation rate) is derived from the index used by commodity markets to measure asset scarcity, or there is a “hardness” (hardness) indicator. Economist Saifedean Ammous, in his book The Bitcoin Standard, applies S2F, which was originally used for commodity market analysis, to BTC. S2F provides a simple quantitative framework for analyzing BTC price trends: it is a highly explanatory indicator that makes BTC comparable to gold and its close relatives.
Figure: S2F index of several precious metals.
The S2F of the latest BTC is about 27 (= 18200000, 1800,365), halving to about 56 in May 2020, almost close to the hardness of gold. After halving 2024, the hardness (inflation rate) of BTC will reach 110, surpassing gold in an all-round way to become the hardest and scarcest asset.
Analyst PlanB (@ 100trillionUSD) extends this in his “Modeling Bitcoin’s Value with Scarcity” article, where he finds a strong correlation between BTC market capitalization and S2F, and predicts future BTC prices. BTC is a “super hard” asset. In his model, there is a complex power-law relationship between BTC price and S2F value, a power-law function, monthly data from October 2009 to February 2019, BTC price=0.4* S2F ^ 3, if using annual data, BTC price=0.18* S2F ^ 3.3.
According to the monthly formula, based on the value of 55 of S2F after halving, the price after halving should be about 66550, and according to the annual formula, the price after halving is even higher, which can reach 99648. However, as shown in the previous chart, there is always a deviation between the actual price and the theoretical value, but these deviations are basically within an acceptable range.
- NVT Ratio.
In the traditional stock market, PE P / E ratio is a good indicator to measure a company’s performance and valuation. PE= share price / earnings per share EPS, high P / E ratio generally means that the valuation is too high or has high performance growth potential.
However, in the encryption world, each project usually does not bring real benefits or profits. PE indicators can not adapt to the valuation of encryption projects., Willy Woo put forward the concept of NVT (Network Value to Transactions), and the funds flowing through the network (transaction funds) reflect the value of the network as a substitute index.
NVT= market capitalization Market Cap/ daily transaction amount.
Generally speaking, the interpretation of NVT has the following aspects.
High NVT ratio can indicate high speculative value. We see that in the early days of BTC, 2009-2011, the NVTs were all above 100, indicating that the success rate of investment was very high at this time.
Use the NVT ratio to detect bubbles. But it is difficult to predict bubbles before they happen, because skyrocketing prices do not necessarily mean that assets are in a bubble. We can only confirm this after the market reassesses the peak of the new valuation, and let’s see if prices consolidate or collapse. For example, when we saw that in December 2017, the BTC price also reached US $10, 000 ATH2, and the NVT target reached 105. Then, the market began to adjust, the bubble burst, and the NVT index began to fall sharply. By 2018, the NVT index in the big bear market has been revised to a low of 22.
For example, on June 26, 2019, when the price of BTC approached an annual high of $12713, the NVT index reached 113, indicating that the market has entered a stage of excessive valuation growth. Since then, the market has undergone a process of repair, and the price and NVT have gradually dropped to the lowest point 57.
As of today, the NVT index shows 104, which is also a recent stage high, the market appears a kind of “overbought” state, a little overheated, later may be a pullback.
- MVRV Ratio.
Nic Carter, of, Castle Island Ventures in 2018, who is also the founder of Coinmetrics, worked with Blockchain.info ‘s Antoine Le Calvez to come up with the MVRV indicator:
Market value the value of the price of the (Market Value), exchange and the quantity of coin in circulation, that is, the market value of circulation.
Realized value (Realized Value), calculates the total value of coin in circulation based on the market price at which the last UTXO transaction was aggregated and moved.
When the MVRV=MV/RV, value is low, it generally indicates that the market participants make little or no profit, while the high MVRV value generally indicates that the asset holders make a good profit. On June 26, 2019, the MVRV value of BTC reached 2.57, and then entered a downward channel until December 17, 2019, when the MVRV value dropped to 1.18, and then began to recover slowly.
Generally speaking, a MVRV value of less than 1.5 for BTC means a lower valuation, and a value greater than 3.5 means a higher valuation. Historically, the MVRV value of BTC has been lower than 1 three times, which also means the historical bottom, which is the end of 2011, the beginning of 2015, and the beginning of 2019. After these three historical bottoms, BTC has started an upward cycle.
At present, the MVRV value of BTC is at a median of 1.71. in the long run, there is still some room for growth in the future.
- Mayer Multilier.
Mayer Multiplier (Mayer multiple) was created by the famous investor and podcast host Trace Mayer, and Mayer multiple is defined as “the multiple of the current BTC price over the 200-day moving average”. It is equivalent to giving a ratio to time and past transaction prices.
Mayer multiple = BTC market price / 200-day market capitalization.
When using Mayer multiples, two key specific values are 1 and 2.4.
The meaning of a multiple of 1 is simple: any value above 1 means that the price of BTC has risen to its lowest level in 200 days, and anything below 1 means that the price has fallen to the lowest level.
Second, historically, any multiple above the threshold of 2.4 indicates the beginning of a speculative bubble: for example, when BTC reached an all-time high in December 2017, the Mayer multiple reached an abnormally high of 3.65, and at the end of June 2019, when BTC also reached an annual high, the Mayer multiple also reached 2.48. Through simulations based on historical data, Mayer infers that when the multiple of Mayer is less than 2.4, the best long-term return on investment can be obtained by hoarding BTC.
At present, the Mayer multiple is 1.12, which is still in a relatively healthy upward channel in the long run.
- BTC Difficulty Ribbon.
Bitcoin Difficulty Ribbon refers to the mining difficulty band index of the BTC network, which was first proposed by Vinny Lingham, who is also the founder of the Civic project. In April 2014, he published an article on “Finding Equilibrium: Searching for thetrue value of a Bitcoin” detailing this theory:
The difficulty band consists of a simple moving average of the difficulty of the BTC network, which shows the impact of miners’ selling pressure on the price trend of BTC. Generally speaking, as new coins are dug up, miners sell some of the tokens dug up to cover production costs such as electricity bills, which will put downward pressure on prices. The least powerful miners have to sell more tokens in order to keep the mining machine running. When selling out all tokens is still not enough to cover the mining cost, most miners are already in a state of shutdown, and the hashing capacity and network difficulty will be reduced (the difficulty band will be reduced). When the climbing slope of the difficulty zone of the whole network decreases and overlaps, only strong miners can continue with mining. These powerful miners only need to sell a small proportion of BTC to maintain operations, which will reduce the market BTC selling pressure and provide more room for price increases.
According to the index, the area where the mining difficulty zone shrinks or even overlaps will be the best time for BTC to build a warehouse, that is, when a mining accident occurs, most of the miners have already stopped, and the time has entered the end of the mine accident / the end of the bear market, and the currency price may hit bottom and rebound. During the period from 2019 to the present, the mining difficulty belt has been negative, or it means that hoarding and admission are more appropriate.
- Fear & Greed Index.
The BTC market is an emotional market. When the market rises, people tend to be greedy, which leads to FOMO (fear of missing it). At the same time, when the market fell sharply, people began to fear and continued to lead to selling. The fear-greed index ranges from 0 to 100. 0 means “extreme fear”, while 100 means “extreme greed”.
0-30, extreme fear-fear, may indicate that investors are too worried, but it may also be a better opportunity for investment.
70-100, when investors become too greedy, it means that investors have gone crazy in the FOMO, market, but this may enter the time for adjustment, and investors can consider leaving the market for a while. For example, on June 26, 2019, the index reached a phase high of 94. Then we saw that the market began to decline.
According to this index, we can not give an opinion on the price point of BTC, but it can help us to measure the basic market sentiment of BTC. At present, the index is 52, and the market has picked up, but it is not crazy yet.
- Halving Effect.
After reviewing these fundamental quantitative indicators, it is also necessary to uncover the biggest suspense of BTC in 2020-halving the third time every four years, and we can review the price trend of the first two halving times (halving effect).
The first halving occurred in November 2012, when BTC’s daily production decreased from about 7200 BTC per day to about 3600 BTC per day. BTC gained 341.9% before halving, 7976.44% after halving, and peaked at around $1000 in late November 2013.
The second halving occurred in July 2016, reducing BTC’s daily production from about 3600 BTC to about 1800 BTC per day today. BTC gained 111.9 per cent before halving, 2866.74 per cent after halving, and closed at an all-time high of nearly $20,000 in December 2017.
The third halving is expected to occur around May 7, 2020, and BTC production will be halved again to 900 units per day. As of today, BTC has achieved an increase of 80.63% from May 2019 before it was halved. How much more can BTC gain from now to the two and a half months before it is halved? How much increase can you get after halving it? We cannot accurately predict, but it is clear that, judging from the current trend, the halving effect of the first two times is still significantly reflected in this halving event.
We have noticed that after several rounds of bull-bear cycle, the trading applications and users of BTC are booming, and BTC, as a new alternative asset class, increasingly reflects its value attribute. This paper mainly selects 7 ratios or indicators in the core framework of BTC fundamental analysis. The first two ratios, Sharpe ratio and S2F index, are mainly used to evaluate the overall assets of BTC and tend to make decisions on the direction of longer-term value investment. The last five indicators (NVT, MVRV, Mayer multiple, Difficulty Ribbon, Fear&Greed index) focus more on dynamic and medium-and short-term investment direction decision-making. Finally, we also consider the price trend of BTC in each output halving and the possible prediction of the third reduction in the future.
As of the date of this article, BTC prices have risen strongly after several key resistance levels and have steadily crossed the round mark of $10, 000, indicating the end of a winter and the beginning of a new bull market cycle. In this continuous cycle, it is important to use the relevant indicators based on fundamental analysis as the most sensitive indicators to cycle time, which can help us to make more informed investment decisions.