Although opinions are still divided, the majority of the cryptocurrency community views bitcoin’s primary functions a store of value, hence, the parallel to gold. Although this mass adoption of the world’s biggest currency is closely connected to crypto payment industry, its utility as a payment function comes only secondary.
Adamant Capital, the Ukraine-based independent investment advisory company, has published a brief analysis of how bitcoin’s value is measured. Newconomy brings you a brief summary of the analysis paper below.
The team behind the research notes the difficulty in measuring the value as the blockchain “records a lot of data, but not all data”. For instance, a transaction is made and the addresses are visible. But what we don’t know whether it is a purchase/sale of an asset, or simply the same owner moving their digital assets from one place to another.
Still, the company proposes two new options to measure changes in bitcoin saving behavior: Relative Unrealized Profit/Loss Ratio and HODLer Position Change.
The first model – the Relative Unrealized Profit/Loss Ratio i.e. investor sentiment, is based on the market value of bitcoin. It doesn’t matter what kind of transaction that actually is (a sale or the same owner moving his assets around) as the mere fact that the owner is aware of the value.
“If we value every coin at the time it last moved and aggregate these values, we arrive at the “Realized Capitalization”. The next step is to deduce the Realized Cap from the Market Cap and thus, we arrive to “Unrealized Profit/Loss”.
Still, due to the lost coin, the relativity comes into play.
“The measure of Unrealized P&L estimates the total dollar amount of paper profits/losses in Bitcoin, but it does not clearly filter out the relative change that accompanies it. By dividing Unrealized P&L by the Market Cap, we arrive at the Relative Unrealized P&L, which can be interpreted as an indicator of investor sentiment.”
A conclusion from this model is – whenever there is a high percentage of Bitcoin’s market cap portion of unrealized profits, the investors are greedy. The percentage drops, along with the decline in prices are the risk that enters into play.
In case 20% of today’s holdings are sold at current prices, it would generate losses i.e. the so-called ‘underwater’ holdings.
The second model – the HODLer Position Change – is much simpler and closely related to insider buying and selling. The HODLer Net Position Change refers to the monthly position change among Bitcoin savers. When the market is in the bullish mode, investors accumulate short positions and vice versa.
These two models are also complimentary – the former points to the emotional state of the market, while the latter provides an indication about big players moving their assets around.