The bitcoin market is extremely vibrant and offers numerous opportunities for all traders to earn money. In times of market turbulence, following widely known metrics as market capitalization and bitcoin price is hardly enough.
To predict market movements and place wise orders, most traders use crypto-specific metrics rooted in traditional finance market analysis but take into account the blockchain characteristics.
Four types of capitalization
Blockchain specific look on how to measure Bitcoin market value, using Average Cap, Inflow Cap and Realized Capitalization
The most common metric is market capitalization which is simply calculated by multiplying current price and current BTC total supply. Cryptocurrencies are often compared by market capitalization, which is in a sense identical to the market capitalization in the traditional markets, where the number of company’s shares is multiplied to the price of one share to evaluate the total market value.
To put market capitalization in perspective, Renato Shirakashi has introduced a methodology to calculate the true average of the bitcoins’ capitalization history. The average cap is calculated as the cumulative sum of daily capitalization values divided by the age of the market in days.
Another interesting way to assess cryptocurrency value is to calculate total capital inflows, which is realized in the inflow cap metric that sums the value of all coins at the price when they were mined.
Since the blockchain world differs from the world of equities, pure market capitalization does not account for volume deficiencies or lost and unspendable coins. The downside of the high security of the bitcoin usage is that when holders lose private keys, there is no way to retrieve their assets. Ask James Howells who is set to excavate a landfill site where he dumped 7500 bitcoins in 2013. According to Wall Street Journal research, around 20% of bitcoins are very unlikely to be again in circulation. That is why traders prefer bitcoin valuation metrics.
To take into account only actual bitcoins, Antoine Le Carves has proposed an automated methodology to calculate all bitcoins in circulation at the price they last moved in the metric he dubbed the realized capitalization that discounts inert and lost coins. The main issue with this metric is that there is no methodology to 100% differentiate lost and inert coins from deep hodlers’ funds. Yet it provides a fair estimation of what the market has paid for their bitcoins.
Bitcoin Days Destroyed and Pricing Models
How bitcoin price metrics help traders assess cryptocurrency velocity and market movements
The bitcoin price is determined by demand and supply or simply put by traders actions, at a particular moment on all cryptocurrency exchanges. The problem with using only the bitcoin price is that it can be easily manipulated and offers no clues on market movements.
While most bitcoin users put their attention to the bitcoin price, more experienced traders use additional metrics that help to assess market velocity and predict market behaviour.
To segregate hodlers from short-term traders, blockchain experts use the metric called Bitcoin Days Destroyed (BDD) that measures the bitcoin demand on the number of days it has been held. The BDD helps to assess bitcoin velocity over time.
To predict market turnarounds, experts derive the transferred price from the BDD, that can be seen as a moving average of the price spent. The transferred price is the result of multiplication of the BDD by the market price at the time of destruction and division by the coin age and circulation supply of bitcoins at the time.
The difference between the realized price and the transferred price is called the balanced price, that is especially useful in the bearish market, helping to indicate when the market can expect a turnaround.
If while calculating the transferred price, instead of using the circulation supply of bitcoins at a given time, we use the constant value of 6 million, we arrive at the Cumulative Value-Days Destroyed (CVDD). According to Willy Woo, “the CVDD has hit the historical bitcoin price bottoms with remarkable accuracy”. The CVDD is especially useful in the bearish cycles to evaluate how bitcoin will rise from the bottom.
Market turnaround indicators
How metrics help traders to identify when it best to buy and sell bitcoins
As has been already pointed out, the balanced price and the CVDD can help evaluate when and how bitcoin will rise from the bottom in the bearish market. Also, Puell’s indicator the delta cap predicts new bull runs. The delta cap is the difference between the realised cap and the average cap (the cumulative sum of daily capitalization values divided by the age of the market in days). The average cap multiplied by 35 gives the top cap that together with the CBDD provides a fair overview of historical ups and downs.
To watch out for times when Bitcoin price approaches bubble levels, traders use the metric roughly similar to the price-to-earnings ratio in the equity world called the NVT, Network value to transactions that is calculated as the market capitalization divided by the daily value transmitted on Bitcoin blockchain. The NVT helps to measure bitcoin’s monetary velocity.
To determine when exactly is best to buy bitcoins, the bitcoin difficulty ribbon is another useful metric that shows the rate of change in Bitcoin mining difficulty over time. When the ribbon is negative or compresses, it might be the best time to buy bitcoins, because while small miners are going out of business, strong miners remain on the top with less pressure, leaving more room for bullish actions.