Bitcoin Investor Behavior Breakdown: The Priming Changes Of BTC History’s Research Valuation


During some of our talks with crypto-investor enthusiasts, the most common questions asked is ‘what is the best model for truly valuing Bitcoin?' And it's completely understandable as investors all want to know what it is that drives major changes behind bitcoin and what can influence its value over time?

There are some measures that can be used in order to help provide the most informed judgments on investing in Bitcoin or any kind of cryptocurrency for that matter. Rather than this being some kind of brand new form of measurement, this model is actually rooted in work spanning all the way back to the rudimentary structures of 2011, and a practical application of the Blockchain behind BTC in order to extract vital information from the market that wouldn't normally be available for other commodities.

Bitcoin Investor Behavior Breakdown

Here are some of the alternative methods of measuring changes in bitcoin and altering saving behavior.

  • The Relative Unrealized profit/loss ratios
  • Buying and Selling positions (HODLer changes in position)

Along with these two kinds of metrics, it is also worthwhile making use of a measure for Bitcoin ‘Liveliness.' Which refers to the extent to which this cryptocurrency is being put to use by its holders and savers.

Bitcoin Valuation – A History Of Its Research

Here is more of an overview of the kinds of different approaches taken on by investors involved in Bitcoin that was used through time in order to help them decide on its fair value:

Over the course of 2010, Investors in Bitcoin attempted to conduct calculations of bitcoin. How this was done was through calculating the total cost in electricity in attempting to mine it. While this was an effective initial strategy, it was quickly dismissed as a means of valuation on account of the continually fluctuating cost of electricity, which depends on geographic location, as well as the cost of mining rising due to the increasing complexity due to the proof of work consensus.

In 2011, this system was replaced with the calculation of singular value through the use of Bitcoin's existing market capitalization by early-stage investors. Along with the concept referred to as ‘Bitcoin Days Destroyed,' this was once referred to as an ‘index of the market's health and participation,' and became known as one of the first metrics for valuation that was considered to be an age of addresses.It is during this time that the ‘Price over Difficulty' ratio was deliberated as a means of categorizing the value of Bitcoin, and whether it was more beneficial to participate in mining of Bitcoin as opposed to buying and selling.

With 2012, it was suggested by Trace Mayer that the 200 Daily Moving Average of the market cap for the likes of Bitcoin could be used as a form of indicator for its value. This is due to the fact that it works to filter out longer-term uptrends.

There were a number of authors that examined the notion of Bitcoin's value behaving in a more long-term uptrend back in 2013,  and this norm-based deviation from the trend line is an indicator of its chronic over or under-valuation.

Over the course of 2014, it was proposed by the online gbianchi that the ‘Network Value' as the underlying ratio when it comes to the growth in the number of addresses as well relating to its market capitalization.

Along with gbianchi, the developer, Jon Ratcliff stated within his publication of analysis on blockchain which demonstrated that the distribution of Bitcoin depended on its age when it was last used, further adding that “This graph shows how many Bitcoin are actively moving at any one time over a set period of time.”

Over September 2017, Chris Burniske along with Willy Woo jointly published research based on the NVT ratio, which had since been referred to as a ‘PE Ratio for Bitcoin' due to the fact that it focused on providing a comparative tool for measuring the overall on-chain volume of Bitcoin along with its market cap.

March 2018 saw Dmitry Kalichkin suggest an alternative system to NVT, which he went on to refer to as a 90 day NVT ratio. Two months afterward, Kalichkin went on to introduce the Network Value to Metcalfe ratio (NVM), which was initially built on the metric of Daily Active Addresses.

During April of the same year, Dhruv Bansal provided a subsequent update to Ratcliff's age distribution concept on UTXO, as well as suggesting that there is a ‘waves' structure to HODL trends from investors.He went on to comment that “It is not possible to make charts such as the one above for traditional asset classes. It’s only Bitcoin and other public blockchains that meticulously track these data throughout their whole histories. This enables post-hoc analyses of large-scale market behavior.”

Over the course of 2018, Nic Carter as well as Antoine Le Calvez, having been inspired by Pierre Rochard, they created what is being referred to as the Bitcoin ‘realized' cap, which refers to the aggregate value attached to UTXOs which would be priced by their underlying value from when they last . moved. Shortly thereafter, a Bitcoin ‘thermocap' was suggested. This is also referred to as the ‘accumulated security spend'. These refer to the aggregated miner revenues over the entire life of Bitcoin going forward.

Within the same month, work was published on the concept of a Market Value to Realized Value (MVRV) by Murad Mahmudov and David Puell.

Lastly, over the course of December 2018, the notion of Bitcoin ‘Liveliness' was introduced to investors by Tamaás Blummer. Which refers to the number of times that BTC is used for meaningful transactions.

Find A Meaningful Measure For Changes In Behavior In Saving

Considering the fact that we view Bitcoin as a powerful tool, being a censorship-resistant store for value, often being referred to as a new digital gold, with its underlying functions being ideal as a payment solutions system as a secondary purpose.

The underlying goal in demonstrating the components needed for an effective metric for Bitcoin valuation, as well as uncover data that can specifically identify changes in behavior towards spending.

The Current Challenges With The Current Methods Of Valuation

One of the added positives of Bitcoin, especially when it comes to its underlying blockchain is that it records a remarkable volume of data. But the downside is that it is certainly not ALL data, and it is demonstrably unable to track the number of Bitcoin that are subsequently lost throughout its lifespan.

A part of this is because it, as a blockchain, cannot ascertain whether a transaction is a transition from one user to another, or if it is just the same owner moving coins from one address to another or wallet.

Along with this, it does not monitor off-chain transactions that take place. An example of this is . that it will not show transfers that take place between various Bitfinex users, or Lightning Network transactions.

Along with these limitations when it comes to information recorded on blockchain, the commodity style nature of cryptocurrencies mean that there are some implicit complexities that arise in constructing a methodology around their valuation.

When it comes to cryptocurrencies, information regarding the overall supply that is in circulation can be somewhat opaque. With requirements associated with getting a particular currency listed on an exchange can be rather loose, while dilution schemes can often be abused by users.Assigning a particular kind of market cap to a crypto (Mined coins multiplied by underlying token price) does not provide an effective comparative tool for valuation.

One of the challenges associated with the number of addresses linked to a particular cryptocurrency, or associated transaction volumes (NVT / NVM) is the fact that sources such as these do not allow for the separation of particular behaviors that would otherwise be oriented around longer-term behavior in contrast with short term oriented ones.These systems of measurement also do not actively differentiate speculators from their contrary value-based investors and, as a result, can be gamed or unnaturally inflated simply by moving a large quantity of coins in and out of an ecosystem, or simply by creating a large volume of smaller transactions on-chain.

So, What's The Solution?

When it comes to a meaningful solution, the best one is to accrue data that allows for the placement of all Bitcoin in circulation within a collected historical context to allow for the most accurate type of valuation.

This would place it in the direct tradition of works such as Realized Capitalization, HODL Wave trends, as well as MVRV. There needs to be a focus on data that is provided by BTC and its underlying blockchain. This is because it provides the most reliable, secure and ultimate layer for the settlement layer for any and all crucial transactions that take place.

If we take the quantities of output when it comes to each block, while also combining it with the times recorded within these individual blocks, there is a lot more that we can learn with regards to the behavior of these savers on Bitcoin.

The Matter Of Investor Sentiment (Relative Unrealized P&L)

Whenever there is a movement of Bitcoin, no matter what the quantity within the blockchain, its market value is acted upon. This is something that the owner is often very well aware of, and acts specifically with regards to this value, and affirms their control over it. Whether or not the transaction does represent the owner sending this coin to someone else (another trader or as a gift) or as a form of self-dealing to some capacity.

The notion of ‘Realized Capitalization' comes from the notion of valuing every coin during the time that it is moved, regardless of if it was moved as a sale or simply to move address. From there, we can then subtract this realized cap from the underlying market capitalization to end up at the Unrealized Profit/Loss margin.

This measure of Unrealized Profit can also include the statistics of Lost Coins within a blockchain. It is a matter of inevitability that coins are lost as they were associated with an unspendable output script. But with the majority of these coins, it can only be estimated at through the imposition of a threshold for inactivity. It is only through this threshold that coins can be construed as being ‘Lost.'

What the measure of Unrealized Profit and Loss speculates is the overall amount of dollar profits and losses within Bitcoin. It should be mentioned that it does not directly act as a filter for relative changes within the market that may otherwise coincide with it.

Through dividing up Unrealized profit and losses by the underlying market cap, we can finally construe what we previously referred to as the Relative Unrealized profit and loss.

If Bitcoin's market cap comes to consist of an inordinate percentage of unrealized profits, it can be regarded as an indicator that investors are behaving in an avarice based manner. The overall ratio will steadily decrease in tandem with prices, resulting in an ever more cautious investor base. When these unrealized gains translate into unrealized losses, we then start to move into the field of capitulation and apathy.

So what is the reason for Relative Unrealized Profit and Loss' increases within a Bull market? This is because it demonstrates that investors, by and large, are realizing the profits they have at a slower rate during this point in time, especially when compared to the overall growth demonstrated in the market cap.

Over this period of time, 20 percent of the underlying market cap for bitcoin consists of coin holdings that would otherwise generate a loss for their holders were they to be sold at today's current valuations. These  are what we refer to as ‘underwater holdings' on account of the valuation at which they were bought.

We will be spending this point examining in more detail the Liveliness metric for measuring the value of Bitcoin before going on to the new suggested tool for Bitcoin valuation which is called the ‘HODLer Net Position Change'.

Bitcoin Liveliness – What It Means

This notion of older coins moving within their dedicated blockchains has always resonated well with the more experienced investors for currencies like Bitcoin. Statements such as ‘What exactly are Bitcoin's Whales doing?', or ‘What do we think Satoshi is up to?' come to mind.

Overall, the analytical framework that was previously referred to in our overview offers investors some insight into how bitcoin savers behave within the market when it comes to their own coins at any particular time.

One of the limitations that we have when it comes to metrics such as HODL waves is the fact they don't exactly provide us with a fully understandable signal for what is going on in the marketplace. Consequently, we have to put forward some kind of singular metric that can allow for more of a focus to be placed on the coins active within the ecosystem as opposed to ones that are more static for longer periods of time.

What Does Liveliness Refer To Exactly?

What Liveliness is, is a new metric that provides more in the way of insight into the shifts that take place in saving behaviors. The higher the volume of meaningful transaction settlements that are accommodated.

This metric of Liveliness can also be defined as the underlying ratio for the sum of all Bitcoin Days Ever Created.

For the sake of fully comprehending this metric, here are a few examples:

Over the course of its  lifespan, a blockchain that has not yet conducted transaction other than rudimentary issuance, has a Liveliness metric of 0 percent. Conversely, any blockchain in which has its recent balance continually moved back and forth would result in a very low liveliness metric. This measure is otherwise quite unforgiving for blockchains that are otherwise replete on the subject of transactions. Bitcoin, for example, has a high degree of Liveliness if it manages to conduct a large number of transfers which include quantities of older coins on a frequent basis.

For any blockchain that has a large number, or all of its coins move within a single block would result in a Liveliness index of 100 percent. Another example would be a blockchain with an age of two years that otherwise offers no kinds of block rewards, as well as, where one year ago, all coins were moved from a single block, and no further transactions since then,  there would be a liveliness of 50 percent.

With the total circulating supply also impacts on the Liveliness: if, for example, in the previous metaphors had 20 percent more new coins created within the same year that all of these coins were shifted, then the Liveliness would be depreciated to 40 percent as opposed to being 50 percent. Thus demonstrating how we should be wary of blockchains with high dilution and inflation rates.

The index of Liveliness can also be put to used in order to weigh the overall market cap in the process of comparing cryptocurrencies directly. This is because it will be as close to zero as possible for other currencies that have an otherwise inflated market cap due to either a bank of pre-mined coins, or was trading taking place within units.

Apart from this, this Liveliness metric can also be used as a foundation-based tool from which we can derive other insightful metrics. One of these being the possible aggregation of HODLed Bitcoin as well as Lost coins, and can subsequently used to alert traders to moves of larger and older coin stashes.

Position Changes For HODLers (Insider Buying And Selling)

So, now that it is more common knowledge that the approximated total number of coins that are being held as part of a longer investment strategy, or are otherwise lost, we can move on to deduce, or give an approximation on the monthly change in position that takes place within Bitcoin savers.

This is what we refer to as HODLer Net Position Change. Mainly because it simply measures the actual movements of coins.

What we see is that there is a far more significant quantity that were previously cashed out during more bullish trends within Bitcoin's market throughout its lifespan thus far, and with newer net positions being taken on by HODLers during bearish trends within the market. The process of net buying appears to fluctuate between net selling once the initial top was reached.

One thing that is important to bear in mind is that a significant volume of coins are otherwise held on various cryptocurrency exchanges, and which are merely placed there for administrative purposes on their own or other investors behalf, and this can have a remarkable impact on measures such as the HODLer Net Position Change.

On the other hand, there is serious effort has been made in order to de-anonymize the associated exchange addresses. As a result, future analysis should be able to accommodate for what we would almost refer to as an ‘exchange bias'.

One kind of noted negative change that happened with positions includes the net move of roughly 278,000 Bitcoin, which took place on August 2017. This position movement is something that can be attributed to the subsequent hard fork from Bitcoin Cash during the same month. This meant that every private key linked to Bitcoin provided access to an equal amount of Bitcoin Cash as with Bitcoin within the wallet.

With BCH undergoing a rally during this period of time, it had managed to reach over 20 percent that of a BTC, this provided HODLers of both to split the two through a range of on-chain transactions, allowing them to either sell off BTC or buy more BCH. And considering just how strong the narrative was when pertaining to BCH being ‘the real Bitcoin' by a number of its die-hard supporters, it is understandable that there were a number of old bitcoin that was subsequently sold.

Bitcoin Investor Behavior Breakdown Conclusion

Through creating a wealth of tools that can measure some of the changes that take place in saving behavior within the settlement layer of Bitcoin, we can contribute to the discourse of valuation. The likes of Relative Unrealized Profit and Loss within Bitcoin, it can tell us about the market's emotional state. The likes of HODLer Net Position Change can provide us with more information about the kind of movements that Bitcoin Whales are participating in, while Liveliness provides us with a powerful metric that can allow us to compare long-term activity from investors, as well as platforms for building new measures for valuation within this space.

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