Adamant Capital, a cryptocurrency fund recently released a paper that shows how to measure the value of bitcoin. According to the private company, there are two ways, and these are the investor sentiment and insider buying/selling. The company added that the duo could be used to determine when bitcoin is undervalued, overvalued, or has a fair price.
Institutional Investor’s interest in Determining Bitcoin’s Value
Adamant Capital’s report on medium reveals that institutional investors are usually curious to know how they determine bitcoin’s value. Is the virtual asset undervalued, overvalued, or has a fair share?. The same was reported of these people’s curiosity to know the fundamentals that influence bitcoin’s price trends.
In the same vein, the platform noted that in the past, investors had used several models to try and determine bitcoin’s fair value. Some instances of these include the estimation of the value of 1 bitcoin based on the electrical cost of mining it. Adamant notes that soon, people realized that as the market price of the asset went up, so did the mining cost and as such, it could not be used as an accurate measure.
Other measures include the use of bitcoin’s market cap and the number of active addresses. However, they are not accurate because blockchain has the limitation of not covering the entire data such as lost bitcoins. There is also its inability to determine if a transaction carried out by a user is sent to another person or an address still controlled by them.
Two Major Models Used to Determine Bitcoin’s Value
That being the case, the fund has outlined two major models that are used to determine the value of the digital currency. These are Relative Unrealized Profit/Loss Ratio (investor sentiment) and HODLer Position Change (insider buying/selling).
In the case of Relative Unrealized Profit/Loss Ratio, the company stated that each time a user sends bitcoin over the blockchain, then it shows that they recognize its value. This is irrespective of whether it was sent to themselves or another person. Therefore, a realized capitalization is calculated by amassing the value of bitcoin each time it moved on the blockchain.
Determining the Relative Unrealized Profit/Loss Ratio
Likewise, subtracting the realized capitalization from bitcoin’s market capitalization leads to the Relative Unrealized Profit/Loss Ratio. In the aspect of HODLer Net Position Change, the company outlined that it is the monthly position change for bitcoin savers.
According to Adamant:
We see that significant quantities were cashed out during bull markets of Bitcoin, and net new positions were accumulated by HODLers in bear phases.
One more measure which Adamant takes into consideration is liveliness. In their opinion, investors interest are usually sparked when they know that old coins are moving on the blockchain. This is usually translated as whales moving their virtual assets. Therefore, liveness gives users an insight into the behaviour pattern of bitcoin savers. “The higher the amount of meaningful transaction settlement a blockchain accommodates, the higher its Liveliness.”