Well known Venture Capitalist Chris Burniske posted an article on why Bitcoin and Ethereum prices are well below the fundamentals.
The Cryptocurrency market has taken a hit in 2018 with most of the tokens losing over 90% in value. The dominant Cryptocurrency Bitcoin and the prominent smart contract platform Ethereum are down 83% and 94% from the peak value respectively.
Chris explains the fundamental analysis of both the networks and concludes that the current prices are significantly lower than the fundamental price estimation.
Here are the metrics he considers on both the supply and demand side of the Crypto network.
Bitcoin Demand-Side: Number of Daily Transactions (#), Estimated Daily Transaction Value (USD), Daily Unique Addresses Used (#).
Ethereum Demand-Side: Number of Daily Transactions (#), Total Daily Gas Used
Bitcoin & Ethereum Supply-Side: Hash Rate.
Chris refers to the Metcalfe’s law which measures the value of the network by the square of the network activity. By this metric Bitcoin and Ethereum still, on an average have 250,000 and 500,000 thousand transactions every day which is only down 41% and 52%, respectively from the peak value.
According to this metric, a 65% drawdown in Bitcoin and 77% drawdown in Ethereum network value is justified.
In this next metric, Chris considers the network functionality which is value moved across the network in the case of Bitcoin and processing of smart contracts in the case of Ethereum.
Excluding the exchange volumes, Bitcoin easily moves over a Billion Dollar worth of value every day. Smart contract computations in Ethereum have also been on the rise since the peak.
According to this metric, 26% of the network activity remains since the peak, which means a 93% drawdown in network value is justified. In the case of Ethereum 93% of the network activity remains since the peak, which means a 7% drawdown in network value is justified. Ether is massively undervalued according to this metric.
Even though Bitcoin hashrate decreased by over 10% recently, it is still higher than the current price value.
In the case of Ethreuem, developer activity is a core component of the supply side which is also outperforming the market according to Placeholder’s internal analysis.
Chris concludes by saying:
Placing these points in the context of the idea that “theory follows price, price follows theory,” it’s clear to me that Mr. (Crypto) Market has only a vague idea of what he’s doing right now.
The Crypto markets more often than not act in an irrational manner and do not follow the fundamentals, there are quick bull runs and extended bear markets. There are no market standards and established ways to assess the fundamental value of Bitcoin or other Cryptocurrencies.
The current bear market may extend for a longer period than expected by fundamental analysis and the next bull market could be faster than the fundamentals indicate.
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