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Legendary value investor Warren Buffett has been candid about his distaste for Bitcoin. When telling investors nearly a decade ago that he didn’t believe it was a store of value or a reliable medium of exchange, he made it clear that he wasn’t even answering not to the definition of a currency. This year, he called it a gaming token unworthy of serious fundamental investors.
Yet time has proven the value of these digital currencies. Although very volatile, Bitcoin and Ethereum have maintained threshold value levels while continuing to act as a medium of exchange. At this point, it’s fair to say that Buffett may not be entirely right about these instruments.
While I agree with Buffett that Bitcoin and digital currencies in general cannot be examined through a traditional value lens, I think it’s obvious at this point that they have a certain fundamental value level if we want to think of them as currencies.
I will note that it is important for us to specifically consider cryptocurrencies as currencies. It’s definitely not like owning stocks; Owning cryptocurrencies does not represent a fractional claim on a company’s cash flow like owning stocks does.
Rather, cryptocurrencies should be assessed on the basis of their value as currencies: the extent to which they provide and are used to exchange value. Since we have readily available metrics for this, we can work towards establishing a fundamental valuation methodology for cryptocurrencies.
This article will outline these metrics and compare Bitcoin and Ethereum based on them.
Currency Fundamentals for Cryptocurrencies
A currency value is established from all the transactions it supports. In macroeconomics, there is an established theoretical corpus on this subject. The greater the demand (total transactions) for a currency, the higher its value. At constant levels of currency supply, more trading volume implies higher value for a given currency. A second-order demand effect would be for countries to hold certain currencies in reserve so that they can transact in those currencies in the future.
The value of Fiat currencies is then derived from both the size of a country’s economy and the volume of international transactions for its respective currency. The total volume of domestic and international transactions forms the total demand for a given currency. A good example of this in the real world would be the large global levels of dollar-denominated debt as well as dollar-denominated energy trading; these are well understood to represent the fundamental underpinnings of the dollar’s exceptionally high value.
That being said, we can establish a fundamental measure of supply and demand, as well as relative valuation, for Bitcoin and Ethereum.
The demand here is the level of transactions occurring on-chain, as in the direct use of the blockchain network for a like-for-like exchange. This metric does not take into account the secondary market demand for these two cryptocurrencies, namely crypto-to-fiat conversions. While these secondary market forces are undoubtedly an important price driver, it is beyond the scope of functioning as a currency per se and will not play into our fundamental analysis this time around.
The supply here is of course the actual amount of cryptocurrency in circulation.
Date
BTC volume
ETH volume
04/11/23
.385M
1.085M
04/12/23
.338M
1.022M
04/13/23
.332M
1.095 million
04/14/23
.316M
1.166 million
04/15/23
.276M
1.056 million
04/16/23
.232M
.854M
04/17/23
.316M
1.012 million
04/18/23
.313M
1.070M
04/19/23
.302M
1.085M
04/20/23
.297M
1.074 million
04/21/23
.352M
1.010M
04/22/23
.355M
.862M
04/23/23
.433M
.868M
04/24/23
.360M
.941M
04/25/23
.370M
.976M
04/26/23
.436M
.978M
04/27/23
.419M
.939M
04/28/23
.484M
.988M
04/29/23
.486M
.887M
04/30/23
.569M
.975M
05/01/23
.682M
1.102 million
05/02/23
.458M
1.128 million
05/03/23
.490M
1.117 million
05/04/23
.491M
1.110M
05/05/23
.411M
1.209 million
05/06/23
.601M
1.146 million
05/07/23
.608M
1.101M
08/05/23
.575M
1.146 million
05/09/23
.598M
1.127M
05/10/23
.672M
1.086 million
05/11/23
.547M
1.100M
Click to enlarge
Source: Excel, Y charts
BTC price
$26,808
ETH price
$1,808.39
BTC average daily volume (30 days)
.450M
Average daily BTC volume in $
$12.07 billion
ETH average daily volume (30 days)
1.077 million
Average Daily ETH Volume in $
$1.95 billion
Click to enlarge
Source: Excel, Y charts
We can see that in the past 30 days, the Bitcoin network has processed 6.2 times the number of transactions that the Ethereum network has on a dollar basis.
BTC Circulating Power
19.370M
ETH Circulating Power
121.340M
Click to enlarge
Source: Excel, Y charts
We can now divide the average transaction volume (in dollars) by the total supply to arrive at a total transaction value per unit of measure:
Transaction value per BTC supply unit
$622.91
Transaction value per ETH supply unit
$16.05
Click to enlarge
Source: Excel, Y charts
This paints a bleak picture. Based on pure supply and demand for the past month, Bitcoin is currently 38.8 times more valuable than Ethereum, even though its price is only 14.82 times that of Ethereum.
However, we need to contextualize this further. It should be noted that there has been a very significant increase in Bitcoin network volume over the past month; it is currently well beyond historical standards. It looks like this push is going backwards, but it’s unclear which direction it will go. Additionally, average network activity for Bitcoin appears to have stabilized at a level below historical norms through 2022 and the first 2 months of 2023. This longer-term structural trend may well continue when the rise to short term will recede.
Y-Charts
As for Ethereum, the recent trendline also saw volatility but was delayed by 3 months. The structural trend here appears to be the reverse of Bitcoin; Ethereum usage has fluctuated at a higher level than before.
Y-Charts
While the data is clear on a 30-day basis, an examination of the longer-term technical picture here indicates that Bitcoin’s network usage trend is too short-term and high-variance to constitute a signal. reliable purchase.
The other thing to consider is the significant multiples at which each of these cryptocurrencies trades against the daily trading volume they support.
However, for a monthly usage level, prices seem more anchored compared to market prices:
Monthly trading volume per BTC supply unit $18,687.41 Monthly trading volume per ETH supply unit $481.61 Click to enlarge
As such, I’ll bet it’s the best-used metric now and in the future.
On this measure, BTC also seems to be relatively cheap:
BTC price / Monthly trading volume per unit 1.435 ETH price / Monthly trading volume per unit 3.755 Click to enlarge Conclusion
Although we have established a sensible way to relatively value these two cryptocurrencies, the current fluctuations in Bitcoin’s network usage are too variable to make the numbers reliable for an investment decision. If the massive increase in Bitcoin usage proves consistent for another 3 months, I would feel comfortable calling it a buy on a relative basis.
Alternatively, if the BTC trend normalizes and the Ethereum structural trend continues to accelerate towards higher usage, I would call Ethereum a buy.
Right now, I would be cautious and estimate that Bitcoin is on hold as network usage levels out to something more in line with historical norms.
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Sources 2/ https://seekingalpha.com/article/4604487-why-buffett-never-bought-bitcoin-fundamental-value-for-cryptocurrency The mention sources can contact us to remove/changing this article |
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