$6000 BTC/USD was indelibly etched in the trading price of Bitcoin for most of 2018. Of course, it ended up falling another ~50% in the closing months of last year. Since then, it has steadily climbed back upwards, grasping towards that very psychologically significant boundary of $6000, which is likely to be the contemporary inflection point between bear and bull.
Bears vs. bulls
I found the recent Trading Bitcoin debate, Has Bitcoin Bottomed?, rather interesting. As the debate is over 5 hours long, this article is broadly a TL;DR of many of the most important (in my mind at least) points talked about throughout.
To summarize the debate, the bears—Tone Vays, Tyler Jenks, and Venzen Khaosan—argued for the recent low of $3100 not being the ultimate bottom of the current market cycle, while the bulls—Willy Woo, Murad Mahmudov, David Paul, and Tuur Deeeester—argued in favour of it being so.
Although there were a few interesting ideas presented by the bears, it’s important to point out (as Willy Woo did) that their arguments were mostly based on secondary technical analysis of data provided by third-party exchange/trading platforms; whereas, the bulk of the bulls’ arguments were based on primary fundamental analysis of blockchain metrics data.
Owing to the openness of its blockchain, various fundamental Bitcoin network metrics are of course directly auditable by anyone. In all other traditional markets, this fundamental data has only been directly available to the market gate-keepers themselves. No doubt, access to the underlying market data bestows great power upon those who possess it.
This is one of the advantages of the blockchain: open access to its underlying network data. Of course, this openness also comes with disadvantages: namely, a lack of privacy.
Anecdotes vs. first principles
Personally, I find the bulls’ argument much more compelling than the bears; simply, because it is based on analysis of principle blockchain metrics, new metrics derived from these fundamentals, and how they relate to BTC price. No longer must traders and investors rely on whatever shreds of information that the powers-that-be deign to release from on high, anecdotal evidence, random number generators, the cycles of the moon, and/or readers of the casting of chicken bones, etc.
Ok, perhaps I’m being overly critical of the bears and their ‘technical analysis’ (TA). I actually rather enjoy watching Tone Vays and his cohorts’ as much as the next guy. Let’s just say, I believe their various methods of TA are perhaps better suited to short term prediction. Conversely, the fundamental metrics we’ll discuss below are geared towards forecasting the largest scale market trends and cycles.
And, good prediction of key moments in the long-term trends and cycles is the key to timing market tops and bottoms when it matters most—so you can buy your bitcoins cheap, bury them in the ground, and dig them back up when they’re overpriced.
Although he also relies on much anecdotal evidence to support his argument, Tyler Jenks does raise a good point when he urges caution when extrapolating from the limited amount (less than a decade) of blockchain data. Yet, as Willy Woo counters, we must keep in mind that these new metrics are of a fundamentally different quality than any other “in the history of finance,” and with every additional day of data their power grows.
So, what exactly are these new metrics and what can we learn from analyzing them? I’ve explained a few already—including Network Value to Transactions Signal (NVTS) and Market Value to Relative Value (MVRV)—in Chaff from the wheat: towards improved cryptocurrency valuation metrics. Below, I cover a couple more: namely, Network Momentum, Bitcoin velocity, and Deltacap.
New blockchain analysis metrics
Derivation 1. Network momentum = estimated daily blockchain transaction value
Network momentum is actually just a fancy term for the estimated daily BTC value transacted on the blockchain (Drv. 1), but with a particular focus on its relationship to price cycles. Philip Swift championed the idea of network momentum being a leading indicator of Bitcoin market cycles. The notion is basically that sufficient levels of on-chain transaction values must be reached before bull markets reverse out of bear markets (Fig. 1).
Figure 1. Network momentum market cycles
A look at Figure 1 shows that on-chain transaction throughput has recently been strongly pulling upwards out of the recent multi-year. Notably, it did very much the same thing proximal to the 2015 market low, prior to that market cycle transitioning from bear to bull.
Willy Woo noticed that the 2016 bull run needed higher momentum to kick off than did that of the 2013 (Fig. 1): likely owing to the inflation in BTC supply. Similarly, the next bull run will perhaps also need more momentum than in 2016 to kick off. Though, owing to the continued halving of mining rewards, this effect will decrease overtime.
Bitcoin velocity is very similar to network momentum but aims to correct for this coin inflation introduced by the mining of BTC over time. It does so by dividing the estimated cumulative 90-day BTC transaction value by the 90-day moving average (MA) of BTC money supply (Drv. 2).
Derivation 2. Bitcoin velocity = 90-day cumulative Network Momentum / 90-day MA of total bitcoins
Figure 2. Bitcoin velocity
It’s important to note that Network momentum and bitcoin velocity are base on estimates of real transaction values rather than actual transaction volumes. Such estimates are presumably based upon applying various filters to transactions in an attempt to subtract out likely sources of ‘background noise,’ e.g. change outputs, blockchain spamming, etc. Admittedly, having to rely on such black-box metrics is a less than ideal situation to be in; more on this at the end.
It’s also of great importance to remember that Network momentum and Bitcoin velocity, by definition, do not account for off-chain volumes. As we will cover in the Off-chain expansion followup section, on-exchange volumes are likely to now outpace on-chain volume.
TODO: explanation, derivation
Deltacap uses: “catches all the [bear market] bottoms“
TODO: brief MVRV ratio explanation, link
MVRV low and climbing
But there’s always a fly in the ointment: NVTS is rather high at the moment.
TODO: brief NVTS explanation, link
Many of these new metrics have only recently been proposed over the past few months, while others have been around for a few years. They have only begun to be tested, and all are as yet unproven. Only future market cycles, and time, will tell how well they might predict those aspects of the network they are meant to shed light upon.
Yet, despite being unproven beyond a couple major market cycles, it would also be unwise to underestimate their power of prediction. These metrics are conceived of from truly fundamental network data, which has never before, in the history of finance, been available to the likes of us lowly traders, speculators, and aspiring investors.
Personally, my BTC is running with the bulls! Based on the current trends of most of these new metrics, I forecast BTC poised to smash through that daunting $6000 barrier in the coming weeks. Yet, even if it does take another few runs at it, once we do break through that formidable barrier, a stampede is likely to follow!
A word on off-chain expansion
Another factor of great importance to the interpretation of the above metrics (particularly network momentum and bitcoin velocity) is the fact that there is ever-increasing volumes off-chain transactions that cannot be tracked with them.
Figure 6. Adjusted transaction volume vs. exchange volume
Off-chain growth is partly owing to the adoption of side-chains such as Liquid and Lightning. However currently, the unchained elephant in the room is the ‘apparent’ immense growth of on-exchange volumes, relative to on-chain volumes, since the last all-time-high (ATH, Fig. 6).
I say ‘apparent’ because unfortunately, despite a number of inquiries on my behalf, coinmetrics.io (“the industry standard” publisher of blockchain metrics, at least according to Willy Woo) has not been forthcoming with the source of their exchange volume metric data. Nonetheless, there are many other exchange volume estimates that suggest the same growth of on-exchange volumes.
If the volumes are to be believed: during the last ATH, on-exchange volume has not only caught up to on-chain volume but now greatly surpasses it. Additionally, on-exchange volumes are already as high as their prior ATH levels during the BTC price ATH. Litecoin’s on-exchange volumes are larger than Bitcoin’s on-chain volumes, for christ’ sake.
What implications could the burgeoning of on-exchange volumes have going forward? Likely increased BTC price volatility, along with even more volumes of stolen bitcoins than we’ve historically seen. Unfortunately, despite these likely outcomes, the popularity of centralized exchanges will probably continue growing, as they currently offer superior user experience (UX) and interface (UI) to that of Bitcoin—owing to their centralized structure.
Lest we forget
In closing: let us never forget that the corruption inherent in all human organizations where power is centralized at the top, is precisely what Bitcoin and other decentralized technologies are fighting against. Not your keys; not your Bitcoin!
Unfortunately, there is currently no open source alternatives published for most of the above metrics (that I’m aware of), so we must trust in certain publishers such as coinmetrics.io, and blockchain.com at least for now. In the future, I’d like to remedy this undesirable situation by weaning my open source Bitcoin Analytics project off of other people’s data. If anyone wishes to collaborate on such a project, hit me up on GitHub.