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ARK Valuation of Bitcoin Series 1: Understanding Fundamentals from Underlying Data

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Can the data on the chain improve to help people see the intrinsic value of Bitcoin?

Original title: "On-Chain Data: A New Framework to Evaluate Bitcoin"

Original source: ARK Invest

Original compilation: 0x88

ARK Invest, as an investment company focusing on investing in innovative cutting-edge assets, has opened many ETFs. During the period, a net increase of 783,300 GBTC shares was valued at more than 35 million US dollars. It is not difficult to see that ARK Invest is full of confidence in the future growth of Bitcoin, but behind the full confidence is the powerful analytical ability to gain insight into the nature of assets. "Debunking Common Bitcoin Myths" has been translated, and the article explains in detail people's common misunderstandings about Bitcoin. On January 11 this year, ARK Invest released a report titled "On-Chain Data: A New Framework to Evaluate Bitcoin", which elaborated in detail the systematic logic of using on-chain data to evaluate Bitcoin. The following is Rhythm BlockBeats Original translation of:

This article was contributed by David Puell (@kenoshaking) in collaboration with Yassine Elmandjra. David is a full-time cryptocurrency on-chain analyst and market researcher. David is known for pioneering the field of on-chain analytics and has come up with several Bitcoin valuation metrics including MVRV ratio, Puell Multiplier and Token average dormancy period.

The inability to classify Bitcoin as a traditional asset class makes it difficult for institutional investors to accept Bitcoin as an asset . ARK believes that investors who doubt Bitcoin will only believe that Bitcoin, blockchain, and cryptocurrency cannot be analyzed, and will not think about the various characteristics of Bitcoin.

We believe that if Bitcoin is viewed from a new perspective and framework, it will be easier for investors to understand Bitcoin investment value. Although traditional analytical frameworks are not suitable for analyzing Bitcoin, Bitcoin provides another set of tools that allow investors to conduct a thorough analysis of its fundamentals.

Just like the national population and economic data released by government statistics agencies, the growth rate and earnings quarterly financial reports disclosed by listed companies , Bitcoin provides a real-time global ledger record, which records all activities and economic data within the network. In the absence of central control, Bitcoin's blockchain provides open source data, and the transparency of its network determines the true integrity of the data.

Investors can analyze Bitcoin fundamentals through open source data

As we will discuss in the next three blogs, market participants can analyze Bitcoin in a more in-depth manner than traditional assets through access to on-chain data. ARK classifies the depth of analysis according to the three-layer pyramid structure, in which the lower layer is the cornerstone of the higher-level analysis, as shown in the figure below.

Before we delve into more details, we can see that the bottom layer of the pyramid provides data that evaluates the overall health of the network: network security, monetary integrity, transparency, and usage. Anyone can access any blockchain "search engine" (block browser) , to obtain the underlying raw data without any complicated operations. For market watchers, the data provide a basic picture of the network. In this blog, we will explore this data layer in detail after summarizing the other two layers.

The middle layer provides more in-depth data: through the wallet address, the positions and positions of all currency holders can be provided cost. In the long run, the raw data reflecting the operation of the network in the layer will have an impact on the price of Bitcoin, but in the short and medium term, the behavior of buyers and sellers is more helpful to the pricing of Bitcoin, a non-productive asset.

Finally, the data on the top layer combines the data on the first layer and the second layer, giving a proof of short-term to medium-term Bitcoin Relative valuation metrics for price failure. Top-level data is extremely valuable to active traders, providing a EV/EBITDA such relative Valuation multiplier, from which you can judge the buying and selling signals in the encrypted market.

In ARK and Glassnode In this series of blogs, we will explain how on-chain data can provide emerging monetary assets such as Bitcoin) provides a new valuation framework. As institutional investors come into contact with Bitcoin, we believe that the "three-tier network data structure analysis" can enhance their fundamental understanding and confidence in Bitcoin. Throughout the series, we It aims to unleash the power of on-chain data and enable investors to transform these on-chain raw data into executable investment strategies.

While we could extend this analytical framework to all cryptocurrencies that run on open source software, this series focuses on Bitcoin and the Bitcoin network. In our opinion, no other network is comparable to Bitcoin's Transparency is comparable, making Bitcoin the most analyzable and fundamentally sound network.

Why Bitcoin?

Not all blockchains are created equal. The more open and transparent the blockchain, the easier it is for market participants to analyze its Fundamentals. A good public chain will provide easily accessible tools for anyone to audit the network. Today, anyone can easily Download the Bitcoin client, install a node and extract valuable data from the network. We believe that the auditability, openness and transparency of Bitcoin come from three characteristics of the network:

1. Bitcoin's accounting system is very simple: it is different from the traditional account system Compared, Bitcoin's UTXO-based bookkeeping system makes it very simple to track supply and audit monetary policy.

2. Bitcoin code has been verified: Bitcoin protocol code is audited more than any other open source software code.

3. Bitcoin nodes are very efficient: Bitcoin mining nodes and validators are more efficient than all other crypto networks.

Layer 1: Assessing the Health of the Bitcoin Network

Investors can extract open-source raw data from Bitcoin nodes to monitor the operation of the Bitcoin network in real time. In the table below, ARK provides three metrics for assessing network health.

1. The authenticity and integrity of the currency

As shown in the figure below, the Bitcoin protocol enables analysts and investors to track Bitcoin total circulation< /a> and daily Issue volume to ensure the authenticity and integrity of its currency. Amount in circulation is a function of historical monetary policy and current monetary policy. From the beginning, Bitcoin's monetary policy has been predetermined and written into the code of the Bitcoin protocol, making it completely predictable and verifiable. Backed by a strong system of checks and balances, Bitcoin follows its monetary policy underscoring the true integrity of its currency.

2. Security

The security of the Bitcoin network is guaranteed by miners, who ensure that transactions are irreversible after verification of. Hash Rate (shown below) measures the amount of computing power miners expend to protect the network from attacks. All things being equal, an ever-increasing hash rate increases the security of the network.

As the chart above shows, over the past six years, the hash rate has increased by nearly an order of magnitude every two years, which is three times higher than the price increase of Bitcoin over the past five years. Underpinning the rapid increase in hash rate is the advancement of hardware equipment and the willingness of miners to invest based on the expectation of rising Bitcoin prices. Interestingly, Bitcoin’s price surpassed its 2017 high in the past few months, during which time its hash rate increased by 950%.

miner revenue (the sum of newly minted bitcoins and transaction fees earned) is a measure of how much a miner invests in securing the network index. As you can see below, miners have produced over 18.5 million bitcoins since mining began, which is about $600 billion at current prices.

3. Using

Investors can track active The number of addresses (an indicator of user acceptance), and transaction volume (an indicator of economic activity) are used to observe Bitcoin network activity and usage.

Active address

Due to the transparency of the Bitcoin network, market participants can carefully observe the entire network to each level of address. The number of active addresses is not an indicator to measure the number of users, it measures the total number of unique accounts active in the network every day. A single address can represent an individual, or an institution such as an exchange or a mining farm. The number of daily active Bitcoin addresses has exceeded 1 million, [1] Its growth is positively correlated with Bitcoin price.

If we subdivide the effective addresses in more detail, we can capture the bitcoin in all addressesdistribution situation. As follows As shown, addresses holding more than 10,000 bitcoins have continued to decline over time, while addresses holding less than 10 bitcoins have been increasing. In other words, the distribution of wealth in the Bitcoin network is very dispersed

Trade Volume

Since its creation, the Bitcoin network has settled approximately $10 trillion in transactions, underscoring its value as a global settlement system. As shown below, via transaction volume divided by the total circulation, we can get Bitcoin's annual circulation rate. In the past eight years, the circulation rate of Bitcoin has dropped to a level not seen since 2011. This may be due to the following reasons: investors may continue to hoard coins or have lost their wallets, some transactions are on the chain carried out below.

Transactions Volume is a good indicator of economic activity but does not correlate highly with price volatility in the short run. The Bitcoin network has completed more than 600 million transactions in its 12-year history, and its activity has continued despite wild price fluctuations. For example, during the bear market in 2018, the price of Bitcoin fell by 73%, but the transaction volume increased by about 35%, which also shows the healthy activity of the Bitcoin network.

In this blog, we have detailed the operation of the Bitcoin network. In the second blog of this series, we will analyze the second data layer of the pyramid, which is the inflow of Bitcoin and Outflows, holder behavior, and cost benchmarks for various groups.