Bitcoin is very different to “mainstream” investments such as stocks. With stocks there’s a lot of metrics we can look in to understand whether they are under or overvalued. But with Bitcoins it’s different. You should look at it more like a commodity, closer to gold or silver.
So, we’re going to have to look at other metrics. Because contrary to popular belief, crypto has underlying value. It’s not just pure speculation like some would have you believe. Here are some of the main key metrics you should look into before investing in Bitcoin.
Like any other investment, even stocks you first have to analyze fundamentals and the macro environment. So, in short, fundamental analysis means we are looking at measurable data to see if something is under or overvalued. The macro analysis on the other hand looks at the economic environment from a bird’s eye view so we can better understand where it’s headed.
An essential metric, it tells us how much people are transacting on the Bitcoin network.
Showing us how many people are using this technology to buy and sell rather than just blindly speculate, trying to make a quick buck.
Over time we obviously want to see an increase in transaction volume. That means more people will be sending and receiving Bitcoin or even putting it to work on special platforms like Blockfi, where you can earn a yearly yield on your crypto asset.
If you look at Bitcoin transactional volume on a free site like blockchain.com, you’ll notice that it has had an insane increase in value since its creation in 2009, even though very volatile, as the currency itself.
Every time you buy Bitcoin from an exchange such as Coinbase you are transferring it to your hot or even better cold wallet.
When the number of bitcoin addresses increases, it indicates new buyers. In the case of Bitcoin the number of addresses has skyrocketed. So, of today it stands at 64 million and it doesn’t look like slowing down. The bigger the number gets, the more network effect it will have. More people are going to be talking about it, and as consequence, buying it. Some will even start using it to buy and sell. This is where the real power of Bitcoin lays, not the fundamentals, not the narrative, not the price but its network. Without it, Bitcoin is nothing.
In short, the hash rate measures the computing power of the Bitcoin network. It helps us answer the most important question often asked by so many critics, how much of Bitcoin’s price is inflated and how much is real?
Above all else, what increases the hash rate is an increase in the number of miners. The miners are putting their finances on the line to confirm and secure transactions. Getting paid, of course in Bitcoin.
The more Bitcoin increases in value the stronger a mining business become while the hash rate goes up, making Bitcoin even more secure, reliable and valuable.
As we all know, Bitcoin has a fixed supply. So, it’s been programmed to only been mined until it reaches 21 million coins. This proves once and for all that the network is growing on real calculated value, not just a speculative bubble. People would not be so engaged in it, if it was.
In order to understand where Bitcoin is headed, we have to take a step and look at the situation from a broader perspective, analyzing the whole economic ecosystem.
Diffusion of innovations
or technology adoption curve in a nutshell shows us the speed with which new technology is adopted. It never increases linearly, it starts off low and picks up speed growing exponentially. This is slowly happening with Bitcoin. It’s going mainstream, as more and more individual and institutional investors join.
It’s been happening all through history. The automobile took 80 years to be fully adopted in western society, the telephone 50, the refrigerator 25 and the internet 20.
But Bitcoin will be adopted much faster. Nowadays it has just become so easy to spread information via social media, YouTube or the internet in general.
Even if it usually takes years, all new ideas go through the 5 phases of the adoption curve. The innovator, early adopter, early majority, late majority and the laggards.
We are now in at the end of the early adopter phase, right before the inflection point. And we are about to enter the early majority phase.
Bitcoin needs triggers to grow. The trigger that has brought it to the current point was of course, central banks crazy money printing. People are scared of hyperinflation. Bitcoin is starting to be perceived as a store of value, a sort of digital gold. And it is, folks, rough times are ahead, you should prepare for it.
A big potential catalyst that could raise the price of Bitcoin to new, almost unimaginable highs are new Bitcoin ETFs becoming popular. Maybe one day they will be included in everybody’s pension fund.
A big step towards the right direction is the increasing ease of regulation surrounding Bitcoin. Just recently the SEC has announced that Bitcoins can be stored in banks. Unfortunately, things could even go south, with regulators and the banking system seeing Bitcoin as a threat and regulating it, stopping the growth. I’m afraid this is much more likely, but that’s a topic for a different time.
Maybe the best, biggest trigger would be the endorsement of an S&P 500 company, willing to convert the company’s cash flow to Bitcoin (like in case of Microstrategy). A visionary is needed. Such as Elon Musk, who has hinted to it in the past. If that happens it’s only up from there, it will be a huge boost.
Disclaimer: The Content is an opinion and is for information purposes only. It is not intended to be investment or financial advice nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or any other assets. Seek a duly licensed professional for investment or financial advice.