Here are some of the metrics that prominent bitcoiners use for valuation (there are lots more).
- Cost to Mine - Vinny Lingham
- Transactions on the network - Dan Morehead
- User growth rate- Jeremy Liew
- 200 Day Moving Average - Trace Mayer
- POW equivalent days -Tuur Demester
- Dilution Adjusted Price. Willy Woo
Both Vinny and Dan have recently indicated that the fair value of bitcoin has departed from what their respective metrics indicate to them. Vinny calculated that the cost to mine, which he sees as a huge indicator of what the value of bitcoin is, stands at around $800. For Dan Morehead, a fair value was $986 in March 2017.
Growth
Bitcoin has grown 5-6x in value over the last 2 years. In that time user growth seems to be somewhere between 2x and 4x, though it is hard to tell. Vinny has mentioned that people need to understand the economics to estimate a fair value for bitcoin.
Tuur DeMeester recently mentioned Peter Wuille’s metric ‘POW equivalent days’ as an important signal of how secure the network is. Its worth listening to his full interview with Adam Meister. This measure is not widely known though and so is unlikely to be a primary reason for recent enthusiasm.
Now you might say that compared to the early adopters and the whales, new entrants don’t hold anywhere near what the bigger players have. But the smart money historically won’t sell much of their long term holdings, unless the price goes parabolic (doubling within a month). Supply is constrained, so new entrants bid up the remaining limited number of coins.
Excitement Masks Problems
In the last boom, we know that MtGox stayed solvent for longer because the price was rising. When it crashed, Willybot was exposed. The price eventually settled on a value that long term holders were not willing to sell below.
It was only after the 2008 property crash that the wider public realised the extent to which subprime loans had been mixed with more secure loans to create a leveraged disaster. Cryptocurrency is much more volatile and much less regulated than the US property market. What are the chances that there is nothing unusual going on behind the scenes in bitcoin today?
Conclusion
In a bull market, these metrics are not accurate indicators of what the current price will be tomorrow. They may be useful for estimating where bitcoin lands when the current euphoria passes. These will of course change over time.
Like Mike Casey, I don’t think a peak can be predicted. Certainly a doubling within a month has been a bad sign, but we are not there yet. In the long term none of this should matter, but it’s no harm to be able to see the ground every now and then, in case you are forced to land.
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