STATE OF CRYPTO - It's time for Plan B. Our insights on Bitcoin, the emerging store of value - CoinDesk
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21Shares AG, Dammstrasse 19, 6300 Zug, Switzerland
ISSUE 3 AUGUST 2020
STATE OF CRYPTO
It’s time for Plan B. Our insights on Bitcoin,
the emerging store of value.
The World’s First
Digital Asset ETP Issuer
Digital asset investments for everyone, with simple access to your
trades through your broker. Easy, safe and fully regulated.
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BX
Swiss
State of Crypto
Table of Contents
Foreword 2
Market Updates 6
Key Quotes 11
Crypto Jargon 12
Bitcoin Primer 13
Executive Summary 14
How Bitcoin Works 15
The State of Bitcoin 16
The Future of Bitcoin 17
Valuing Bitcoin 18
Risks 19
Valuing Bitcoin 21
Market Sizing 25
NVT Ratio 29
NVRV Ratio 32
NVHR Ratio 34
Active Addresses 36
Intrinsic Valuation 38
References 43
Contacts 44
Disclaimer 44
AUGUST 2020 STATE OF CRYPTO 1State of Crypto
Foreword
This report provides an in-depth overview of the state of the
cryptoasset industry over the last few months — offering 21Shares’
own view on the industry, a recap of the most important news
items, and an overview of our current products. In addition,
we have included two of our research reports: our primer on
Bitcoin and our Bitcoin valuation report.
The last few months have shaken the global economy
in an unprecedented way and also had a large impact
on our industry. We hope that our writing and
research can guide you over the next few months
by helping you understand the cryptoasset
market better.
2 STATE OF CRYPTO AUGUST 2020We have been consistent with our reactivated currency swap lines, which were previously
thinking from the beginning. Bitcoin used by central banks such as the Bank of Japan and the
has been the best performing European Central Bank during the Great Financial Crisis
asset of the last decade. of 2008, demonstrating the increasing fragility of many
The ongoing effects from global currencies. Overall, this crisis has amplified the
the COVID-19 pandemic US dollar hegemony as the world’s dominant currency,
have only provided further challenged the US global political power, and broadly
proof that crypto will continue weakened other fiat currencies while simultaneously
to be an incredibly resilient Plan B creating a unique growth opportunity for Bitcoin.
for the global economy and a valuable
addition to many more traditional portfolios. Over extended periods of time during this current crisis,
Bitcoin has demonstrated its ability to provide strong
Global economic data shows a cycle-defining shift returns. Even with the current crisis, Bitcoin has been
following the emergence of the virus. In the United one of the best performing assets of the year, returning
States, the unemployment rate rose from 3.5% in 25.72% from the start of the year to July 15. Compare
February to 13.3% in May, with an estimated 18.1 this to the S&P500’s performance of -0.26% and EURO
million Americans receiving unemployment benefits STOXX 50’s performance of-10.47% over the same period.
as of June 27. The European Commission is expecting In comparison, US treasury bonds have returned 8.25%,
EU GDP to contract 7.5% this year and unemployment Gold has returned 16.78%, and Oil has returned -72.22%1.
to rise to 9.6% from a 12-year low of 6.4% in 2019.
At the start of the COVID-19 market correction,
Equity markets have buckled, volatility and asset Bitcoin experienced a significant sell off (March 12)
correlation have spiked, while bond yields continue to which was exacerbated by a flight-to-cash liquidity
bottom, akin to the 1929 stock market crash. The S&P crisis in its market structure. Its strong returns of
500 plummeted 34% from February 19 to March 23. 25.72% since the start of the year demonstrates
Additionally, the crisis has driven many global investors that investors are able to generate significant alpha
to panic and withdraw more than $80 billion from from Bitcoin following risk events from Bitcoin.
emerging markets.
The crisis has led to a fundamental change in
To ease dollar funding shortages, the US Federal people’s financial behavior. Job losses and economic
Reserve has had to act in its time-honored role of uncertainty have put a strain on consumer spending and
lender of last resort by supplying needed liquidity for understandably led to an increase in household saving
offshore US-dollar borrowing, notably via FX swaps. rates — for example, household bank deposits increased
The US dollar liabilities of non-US financial institutions in the UK by a record £25.6B in May to £1.5T. This
have grown by 194% over the last 20 years reaching phenomenon has coincided with increasing concerns
$10.3 trillion in 2019. Amid this growth in foreign-held about the potential for viral transmission from physical
USD-denominated liabilities, the Federal Reserve has cash.
AUGUST 2020 STATE OF CRYPTO 3Figure 1: Bitcoin vs. Traditional Assets
S&P500 (-0.26%) EURO STOXX 50 (-10.47%) U.S. Treasury Bonds (8.25%)
Gold (16.78%) Oil (-72.22%) BTC (25.72%)
50%
Cumulative Returns
0%
-50%
-100%
Feb '20 Mar '20 Apr '20 May '20 Jun '20 Jul '20
An increased acceptance of digital finance, and This report offers an overview of the last few months
a pronounced shift from spending to saving and within the cryptoasset market and helps explain why
investing, help explain Bitcoin’s strong performance Bitcoin is simply too good an opportunity to miss. We also
this year. According to a survey from Fidelity, 6 out of 10 share our views on methods for valuing the asset. We
institutional investors believe that cryptoassets such as believe that Bitcoin and other cryptoassets will continue
Bitcoin have a place in their portfolios, while 91% of the to offer a way for investors to generate risk-adjusted
surveyed institutional investors plan to make allocations returns even during this period of extended volatility.
to Bitcoin within the next five years. There are strong
signs pointing towards the continued growth of Bitcoin. To us, it is clearer now than it has ever been. It’s time for
Plan B.
Not surprisingly, these are some of the reasons that we
offer Bitcoin and a wide range of other cryptoassets as Kind Regards,
exchange-traded products (ETPs) on Deutsche Börse’s Hany Rashwan, CEO of 21Shares
Xetra, SIX Swiss Exchange, Börse Stuttgart, and BX Ophelia Snyder, President of 21Shares
Swiss. There has never been a better time for institutional Lanre Ige, Research Associate at 21Shares
investors to get exposure to Bitcoin given the state of the Eliézer Ndinga, Research Associate at 21Shares
global economy and the continuing institutionalization of
the cryptoasset market. We believe Bitcoin, as one of the
most important financial innovations of recent memory,
offers a viable alternative for traditional investors looking
to grow their wealth.
4 STATE OF CRYPTO AUGUST 2020State of Crypto
About 21Shares
21Shares is a technology company that creates financial
on-ramps to invest, trade, and secure digital assets. Private
investors and institutions can use our products to get exposure
to digital assets in a simple, safe, and easy way using your
conventional broker and bank.
21Shares AG is based in Zug, Switzerland. With its traditions of international
neutrality, national sovereignty, and regulatory stability, we believe this is the
best jurisdiction in the financial world. You can count on Switzerland’s privacy,
neutrality, and stability when making your crypto investments.
21Shares Single Trackers 21Shares Indexes
ABCH ABBA
21Shares Bitcoin Cash ETP 21Shares Bitcoin Suisse ETP
CH0475552201 CH0496484640
ABNB HODL
21Shares Binance BNB ETP 21Shares Crypto Basket Index ETP
CH0496454155 CH0445689208
ABTC KEYS
21Shares Bitcoin ETP 21Shares Bitwise Select 10 ETP
CH0454664001 CH0475986318
AETH MOON
21Shares Ethereum ETP Sygnum Platform Winners Index ETP
CH0454664027 CH0508793459
AXRP
21Shares Ripple XRP ETP
21Shares Shorts
CH0454664043
AXTZ SBTC
21Shares Tezos ETP 21Shares Short Bitcoin ETP
CH0491507486 CH0514065058
AUGUST 2020 STATE OF CRYPTO 5State of Crypto
Market Updates
Business
On May 11 2020, the Bitcoin Halving took place. This Crypto exchange Coinbase has reportedly begun
annual halving, the third in the network’s history, saw preparing to go public according to Reuters. It was
Bitcoin’s mining reward reduced from 12.5 BTC to 6.25 reported that, citing people familiar with the matter, said
BTC. The Halving was a landmark in the history of Coinbase’s listing could come as early as this year. There
Bitcoin and the most anticipated event of the year in the are rumours that the firm is considering a direct listing
cryptoasset industry. — in a similar fashion to Spotify and Slack — as opposed
to an IPO.
During an interview with CNBC, hedge fund pioneer Paul
Tudor Jones praised the asset’s potential, saying he holds According to a report by The Block, leading crypto
1%-2% of assets in Bitcoin. lender BlockFi is looking to snap up a veteran corporate
financial professional to spearhead a possible public
Reddit is expanding a trial program designed to market debut in 2021. BlockFi CEO Zac Prince told The
let users reward each other for their contributions, Block that the firm could go public as early as the second
using the Ethereum blockchain. The program, called half of 2021. This development follows news from BlockFi
“Community Points,” was detailed in a slide presentation that their monthly revenue is up 100% after the Bitcoin
in which Reddit revealed its plans to utilize the Ethereum Halving.
network to incentivize the creation of “quality posts and
comments.” In Mid-July, major Twitter accounts including those of
Barack Obama, Bill Gates, and Elon Musk were hacked
The commodities investment firm, Hehmeyer Trading in a scheme which attempted to fool people to transfer
+ Investments, is pivoting to crypto full-time. The firm funds to a number of Bitcoin addresses.
will now focus on being a market maker and algorithmic
trader in the space. A Libra executive — Facebook’s digital currency initiative
— has confirmed the project has not lost sight of its
Three Arrows Capital, a crypto fund management firm original ambition to launch a multi-currency stablecoin
based in Singapore, has acquired a significant stake following resistance from government officials.
(6.26%) in the Grayscale Bitcoin Trust (GBTC), according
to a new filing with the U.S. Securities and Exchange
Commission (SEC).
6 STATE OF CRYPTO AUGUST 2020Investments
Andreessen Horowitz (a16z) announced it had raised a Toronto-listed Bitcoin miner Hut 8 has closed an equity
total of $515M for a second fund called “Crypto Fund II,” round at $8.3M from selling a 6% equity stake to
dedicated to cryptocurrency and blockchain projects. investors.
Blockchain startups ConsenSys, Polychain, Tron, and San Francisco-based startup River Financial has closed a
CipherTrace were reported to have obtained $30M+ in $5.7M seed round joined by Polychain Capital and others.
US ‘PPP’ bailout loans.
Crypto bank Avanti has raised $5M in an angel round
Crypto Trading Firm B2C2 is eyeing prime brokerage led by the University of Wyoming Foundation with
space with a $30M stake sale to SBI. Under the deal the participation from Morgan Creek Digital, Blockchain
two entities will launch a strategic partnership under Capital, and others.
which B2C2 will provide crypto liquidity for SBI.
Coinbase Ventures has invested in a $5M token sale for
Curv, a company that provides increased secrecy when it Ethereum data firm The Graph.
comes to holding cryptoassets, has closed a $23M Series
A funding round which included Coinbase Ventures and San Francisco-based startup Magic has raised $4M
Digital Currency Group. from Naval Ravikant, Placeholder, Lightspeed Venture
Partners, and others.
The NEAR Protocol announced that it had closed a
$21.6M token sale led by venture capital firm a16z. E-commerce startup Lolli, which gives shoppers bitcoin
rewards for online purchases at retailers like Sephora,
Accel, Coinbase Ventures, and Fenbushi Capital have has attracted $3M in investment from the YouTube
joined a $17M funding round for institutional crypto creator, Michelle Phan and Asthon Kutcher’s VC firm,
trading firm FalconX. Sound Ventures.
Cryptoasset intelligence firm Chainalysis has raised India’s largest cryptocurrency exchange, CoinDCX, has
$13 million in additional Series B financing from Ribbit secured a $2.5M strategic investment led by Polychain
Capital and Sound Ventures. Capital with support from Coinbase Ventures.
Avalanche blockchain developer AVA Labs has closed DeFi hedging startup Opyn has raised $2.16M in a seed
a $12M private sale of its AVAX token co-led by Galaxy round led by Dragonfly Capital.
Digital, Bitmain, Initialized Capital, and others.
The stablecoin cLabs and its corresponding nonprofit,
the Celo Foundation, has raised $10M through a token
sale to investors on the CoinList platform.
AUGUST 2020 STATE OF CRYPTO 7Regulation
Telegram has agreed to pay a $18.5M penalty in a U.S. will pay back its 9,500 investors in a settlement with the
Securities and Exchange Commission (SEC) settlement U.S. Securities and Exchange Commission (SEC).
over their failed TON offering. In addition, they will notify
the SEC if they plan to issue any sort of digital currency A class-action lawsuit has been filed against the Maker
in the next three years. Foundation on behalf of investors — which may be up to
3,000 investors — who lost funds following a protocol
The Financial Action Task Force (FATF), whose advice is failure on March 12, or Black Thursday.
heeded by more than 200 countries, will meet in October
to discuss ways to create a stronger global framework Bitfinex and Tether are seeking subpoenas across the US
for the regulation of cryptocurrencies. in a hunt for a missing $800M seized by legal authorities
in four different countries after its payment processor’s
Hester Peirce (dubbed “Crypto Mom”), one of five bank accounts were frozen.
commissioners with the U.S. Securities and Exchange
Commission (SEC), has been tapped for a second term at Kraken-owned Crypto Facilities (also known as Kraken
the regulatory agency. Futures) has won a UK license for a multilateral trading
facility (MTF) to offer derivatives trading as granted by
The European Union is preparing a new cryptocurrency the UK’s Financial Conduct Authority (FCA).
regime that could include stricter requirements for
“global stablecoin” projects such as Libra, according to Iranian Vice President Eshaq Jahangiri announced that
the EU’s lead economics minister. the country’s cryptocurrency miners will soon have to
register their rigs with the government.
The Proof of Stake Alliance (POSA), an industry
advocacy group led by Polychain Capital and Coinbase, In early 6 July, the Brazilian Securities and Exchange
is publishing a series of recommended standards for Commission (CVM) ordered cryptocurrency exchange
companies participating in a proof-of-stake consensus Binance to immediately cease offering derivatives
protocol in an effort to reduce regulatory clampdowns on trading services in the country.
different networks.
The U.S. Department of Justice (DOJ) indicted the
BitMEX, a leading crypto derivatives exchange, has founder of AML Bitcoin on money laundering and
begun restricting access to Japanese residents due to wire fraud charges. The U.S. Securities and Exchange
amendments made to the Japan Financial Instruments Commission (SEC) also filed charges.
and Exchange Act and Japan Payment Services Act
effective as of May 1 2020. Russia’s Ministry of Justice opposed a draft bill
prohibiitng crypto operations in the country. The bill
BitClave, a California startup whose Ethereum-based is likely brainchild of Russia’s central bank which has
search engine raised $25.5 million in a 2017 token sale, generally taken a negative stance on the industry.
8 STATE OF CRYPTO AUGUST 2020Technology
Blockchain predictions market platform Augur is As reported by CoinDesk, Ethereum’s scheduled
planning to launch a new version of its protocol during network upgrade (dubbed “ETH 2.0”) will benefit from
the summer. Users will have to manually migrate to the privacy technology improvements based on research of
new platform and token, dubbed “REP”. the Electric Coin Company, the firm behind the leading
privacy coin Zcash.
Decentralized finance (DeFi) liquidity provider Balancer
admitted it had fallen victim to a sophisticated hack Coinbase, the San Francisco-based exchange, rolled
that exploited a loophole. The protocol was tricked into out a new open-source tchnical framework for asset
releasing $500,000 worth of tokens. listings with the aim of making it easier for developers
to understand the technical information the exchange
Mutual fund giant Vanguard has completed a blockchain needs. In addition, it was reported that the firm is
pilot that aims to change the risk profile of foreign currently providing its blockchain analytics software to
exchange (FX) transactions. the U.S. Secret Service. The agency awarded the contract
to Coinbase in May and it ends in 2024.
Prominent Bitcoin developer James Prestwich reported
that Liquid — a network developed and overseen by Blockchain researchers at ZenGo, a wallet startup, have
Blockstream and meant to move bitcoins around more a found a vulnerability that affected at least three major
quickly than the Bitcoin blockchain — was found to have Bitcoin wallets — Ledger Live, Edge, and Breadwallet —
sent $8M in Bitcoin unsafely. and potentially more. This would have potentially allowed
a hacker to “double-spend” a user’s funds or lock them
According to Russian news agency TASS, a hacker out of their own wallet.
attempted to disrupt a blockchain voting system currently
being used to help decide constitutional changes in the Ethereum miners set a record for revenue from
Russian Federation. transactions in June according to research from The
Block. Ethereum miners generate their revenues form
Decentralized cloud computing startup Dfinity has block rewards (paid in ETH) and transaction fees; in June
announced its “Internet Computer” is now open to third- transaction fees represented 17% of their total revenue
party developers. Projects already being built atop compared to 10% in May.
of Dfinity include a decentralized TikTok rival and a
decentralized payment app. Stablecoin issuers CENTRE (behind USDC) and Tether
(behind USDT) were reported to have blacklisted a number
Filecoin, the decentralized storage network provider of Ethereum addresses holding their stablecoins. Firstly
that raised more than $257 million from investors in it was reported that CENTRE had blacklisted for the first
2017, is expected to go live during August. The project time an address holding 100,000 USDC. Following this
had previously said that it expected to launch its main news, an independent researcher discovered that Tether
network between July 20 and August 21. had blacklisted 39 addresses on Ethereum.
AUGUST 2020 STATE OF CRYPTO 9Europe’s third-largest exchange, the Deutsche Boerse, has listed the 21Shares Bitcoin
ETP (ISIN: CH0454664001 - BBG: ABTC SW) on its electronic trading venue, Xetra. More
than 90% of all trading in shares at German exchanges and about 30% of trading
in ETFs in Europe is traded through Xetra. This move will drastically improve the
access of Bitcoin and other cryptoassets to retail and institutional investors across
Europe. ABTC has a management fee of 1.49% and has a track record of over one
and a half years. In addition, Coinbase Custody will serve as custodian for the
underlying assets of 21Shares Bitcoin ETP.
21Shares AG, the leading issuer of crypto ETPs, officially listed its
21Shares Bitcoin ETP (ISIN: CH0454664001-BBG: ABTC SW), 21Shares
Ethereum (ISIN: CH0454664027 - BBG: AETH SW) and 21Shares’s
signature crypto basket index HODL (ISIN: CH0445689208 - BBG
HODL SW) in GBP on the Swiss SIX Exchange in June 2020.
According to senior management, “reducing FX conversion
costs by listing in key European currencies is an additional
item of its strategy to widen market participation”.
In June 2020, it was announced that 21Shares had
selected ETF and index data provider Ultumus to be
its portfolio composition file (PCF) solution provider.
21Shares is required to send PCFs daily to market
makers to ensure they accurately price to ETPs
and provide liquidity to investors. Ophelia
Snyder, co-founder, president, and head
of product at 21Shares, commented:
“Ultumus has shown equal drive to
transform the market for ETF and
index data by using innovative
technology to transform what is
possible.”
10 STATE OF CRYPTO AUGUST 2020State of Crypto
Key Quotes
“ [I have] just over 1% of my assets in Bitcoin.
Maybe it’s almost 2%. That seems like the right
number right now. ”
Paul Tudor Jones
FOUNDER AND CIO, TUDOR INVESTMENT CORPORATION
“Boomers and Gen X’rs will move to own massive “Everybody should have 1% of their assets in Bitcoin
amounts of Bitcoin and control exponentially more of specifically. I think it is just a fantastic hedge ... [with
the asset than millennials when it should be the other Bitcoin] an average individual citizen of any country in
way around.” the world has an uncorrelated hedge. ”
Jason Williams Chamath Palihapitiya
CO-FOUNDER, MORGAN CREEK DIGITAL CEO, SOCIAL CAPITAL AND FORMER EXECUTIVE, FACEBOOK
“I definitely think that there’s a role for blockchains “This year will confirm Bitcoin’s transition from a risk-
to play in being this kind of neutral global player role on speculative asset to the crypto market’s version of
[for] these systems, currencies, and applications to gold.”
interact ... anything created and maintained by nation-
states can’t play that role.”
Vitalik Buterin Mike McGlone
CO-FOUNDER, ETHEREUM SENIOR COMMODITY STRATEGIST, BLOOMBERG INTELLIGENCE
AUGUST 2020 STATE OF CRYPTO 11State of Crypto
Crypto Jargon
A Blockchain is an append-only, decentralized ledger Stablecoins are cryptoassets which aim to have similar
that can be used to store data (such as transaction volatility to widely-used fiat currencies like the US dollar.
history) in a censorship-resistant way.
Zero-Knowledge Proofs (ZKPs) enable an individual
Cryptoassets are digital assets whose global transaction to provide proof to a verifier that a certain asset or
history is stored on a blockchain. information exists without revealing details about the
asset or information itself.
A Crypto Exchange is a platform that enables the
exchange of cryptoassets for other cryptoassets or fiat Binance Coin (BNB) is a cryptoasset issued by the crypto
currencies. exchange Binance and is used to pay service fees on the
exchange.
A Digital Wallet is software that interacts with
blockchains to facilitate the storage of cryptoassets. Bitcoin (BTC) was created in 2009 and is the first and
most popular cryptoasset.
A Halving Event is when the number of new coins
awarded to miners per block is cut in half. Bitcoin Cash (BCH) is a fork of Bitcoin and aims to be a
medium for payments.
The Hash Rate is the number of computations (hashes)
performed by miners within a network per second. Ether (ETH) is the native cryptoasset of the Ethereum
blockchain and is used to pay for transaction and smart
A Token Sale, also known as an initial coin offering (ICO), contracts fees on the network.
is a fundraising mechanism for blockchain projects
where tokens are generated and sold to investors. EOS (EOS) is the EOS.IO network token used to build and
run decentralized applications on the network.
Mining is a mechanism where individuals within a network
solve computationally difficult proofs of work in order to Litecoin (LTC) is a fork of Bitcoin with a focus on offering
confirm transactions and add new blocks to a blockchain. faster and cheaper transactions.
Proof of Stake (PoS) is a mechanism that selects Ripple (XRP) is a token issued on the Ripple network that
block creators based on a participant’s stake, such as focuses on facilitating the transfer of currencies.
the number of tokens they hold or how long they have
participated on the network. Tether (USDT) is a stablecoin pegged to the US dollar
created by iFinex Ltd.
A Proof of Work (PoW) is a piece of data which is difficult
to produce but easy for others to verify and which Tezos (XTZ) is a token issued by the Tezos network and is
satisfies certain requirements. They are often used in the used to vote on Tezos governance decisions and pay for
consensus mechanisms of cryptoasset networks. transaction and smart contract fees.
A Smart Contract is digital code typically programmed Zcash (ZEC) is a fork of Bitcoin with an increased focus
onto a blockchain that enforces a previously-agreed- on privacy through the use of zero-knowledge proofs.
upon transaction based on preset conditions.
12 STATE OF CRYPTO AUGUST 2020Research Primer
Bitcoin — Digital Gold
This research primer is a guide to understanding Bitcoin.
It explains why Bitcoin is important, how the technology
for Bitcoin is likely to change over the next decade, how
we can value Bitcoin, and what the main risks associated
with investing in Bitcoin are. We believe Bitcoin presents
the investment opportunity of the decade, and that this
research primer will help guide your investment decisions.
DATA AS OF JULY 15, 2020
AUGUST 2020 STATE OF CRYPTO 13Bitcoin Research Primer
Executive Summary
This research primer acts as a guide for investors to understand how Bitcoin works, the current state of Bitcoin, the
future of the cryptoasset, valuation and portfolio optimization for the asset, and its various investment risks. Bitcoin is
the world’s first “digital gold” and offers an extremely viable alternative for gold as a Store of Value and a hedge against
global economic instability. As we show in this research primer, the potential value of Bitcoin is vastly greater than its
current value, meaning that an investment in Bitcoin is arguably one of the best investment opportunities currently
available.
Over the last three years Bitcoin has posted returns of
over 360%, making it one of best-performing assets Bitcoin Key Metrics As of July 15, 2020
over the decade. Currently, Bitcoin’s total market
Ticker BTC
capitalization sits at around $170 billion. Despite Bitcoin’s
strong performance over the last decade, the rest of this Price (USD) $9,196.73
report will show that there is still a massive amount of
upside for the cryptoasset going forward. The table Circulating Supply (BTC) 18,433,773 BTC
(right) shows some of the current key metrics for Bitcoin,
Market Capitalization (USD) $169,530,356,543
including its market capitalization and block reward. The
2020 halving event saw the Bitcoin’s block reward reduce
Block Reward (BTC) 6.25 BTC
from 12.5 BTC to 6.25 BTC..
Figure 1: BTC Key Metrics (Source: Coin Metrics)
Figure 2: BTC 1-Year Performance (Source: Coin Metrics)
2020
28.26%
YTD Returns
33.18%
YTD Transaction Volume Percentage Increase
$39.49B
YTD Market Capitalization Increase
14 STATE OF CRYPTO AUGUST 2020Bitcoin Research Primer
How Bitcoin Works
So you may be wondering: how exactly does Bitcoin Proof of Work Mining
work? The key innovation of Bitcoin is that it allows for
Proof of Work mining is the process which allows new
peer-to-peer, decentralized financial transactions on the
transactions and blocks to be added to the Bitcoin
internet. This is facilitated by two inventions: blockchains
blockchain. It is also the method through which new
and Proof Of Work mining.
Bitcoin enters into the money supply. Proof of Work is
similar in abstract to the process for gold mining, users
Blockchains (called “miners”) make use of computer equipment to
A blockchain is a data structure — in the same way an process an algorithm which creates a piece of data called
excel sheet is a data structure — which holds a growing list a proof of work. A proof of work is, by definition, difficult
of records, called blocks, which are linked to each other to solve and requires extensive computing power, capital
through the use of cryptography. Within a blockchain investment, and energy to find. Once the solution is found
each block is ordered in a sequence and each contains it is very easy for others in the Bitcoin network to verify.
encoded information about its predecessor (a hash), the The Bitcoin network is designed so that miners only solve
date and time at which it was created, and data about a proof of work on average every ten minutes and they
the transactions included in it. Every transaction which are rewarded for their efforts through newly-inflated
has settled on the Bitcoin network is contained within a Bitcoin, currently at an amount of 6.25 BTC per block.
certain block in its blockchain. The use of mining makes it extremely hard for Bitcoin’s
transactions to be manipulated, as a malicious actor
Blockchains are useful for storing sensitive data which would have to expend a large sum of capital and energy
one needs strong assurances over, such as security, to do so. The diagram below (Fig. 3) shows an illustration
safety, and integrity. Typically, blockchains are stored on of a blockchain where the black blocks represent the
a network of users across the internet who each store path of the blockchain that all miners and nodes in the
a version of the Bitcoin blockchain. Once data has been Bitcoin network agree on. If miners or nodes do not agree
recorded onto a blockchain, the block cannot be altered on a certain blockchain, it is discarded — as demonstrated
retroactively without changing all subsequent blocks: by the yellow blocks.
this is only possible if the majority of the network agrees.
Figure 3: A simplified
illustration of a blockchain
AUGUST 2020 STATE OF CRYPTO 15Bitcoin Research Primer
The State of Bitcoin
Since its launch on January 3 2009, Bitcoin has grown Over the next year Bitcoin will continue to grow as
into an asset with a market capitalization of around $170 more institutional projects are built for it, such as prime
billion and created an entire asset class, cryptoassets, brokerages, custodians, derivatives, and exchange-
with a cumulative market capitalization of over $265 traded products like those issued by 21Shares. These will
billion. We believe that Bitcoin represents a paradigm make it easier to trade and invest in Bitcoin whilst also
shift in finance by being a peer-to-peer, decentralized helping to reduce regulatory and security risks which
asset class and history’s first digital gold. This claim is have helped prevent mainstream interest up until now.
justified given that Bitcoin has a fixed maximum supply
of 21 million — meaning it will end up an incredibly scarce Aside from the adoption side, Bitcoin also has a thriving
asset. Needless to say, Bitcoin in recent years has been technological and developer community who will
able to mature as an investment product and become continue to expand the technical tools which can interact
increasingly institutionalized. The chart below shows how with the Bitcoin network — making it easier, for example,
Bitcoin’s supply follows a totally predictable schedule as to self-custody one’s assets, transact at a low cost, or
it reaches the 21 million supply limit. understand Bitcoin’s blockchain data.
Figure 4: Bitcoin’s project circulating supply over time
Bitcoin Projected Total Supply and Monetary Inflation
Source: BitcoinVisuals
Total Supply Annualized Inflation Rate
20000000 2000%
16000000 1600%
Total Supply
Monetary Inflation
12000000 1200%
8000000 800%
4000000 400%
0 0%
2010 2015 2020 2025 2030 2035 2040
16 STATE OF CRYPTO AUGUST 2020Bitcoin Research Primer
The Future of Bitcoin
Part of the appeal of Bitcoin is its yet unrealized potential; whether it be technical developments that enable a deeper
range of types of transactions and ways to improve transaction speeds, or improvements in the infrastructure running
Bitcoin’s market microstructure. Several interesting product developments within Bitcoin include: the Lightning Network
— a “Layer 2” protocol that exists on top of Bitcoin as a potential way to improve scalability; Liquid — a “Layer 2” settlement
network built on Bitcoin allowing more complex transactions; and Bakkt — a futures and custody warehouse which,
amongst other things, will allow users to trade and exchange Bitcoin and other digital rewards points.
In addition, Bitcoin has played a key role in the formation of a range of other cryptoassets — known as “forks” — which
either have been inspired by Bitcoin’s technical infrastructure (see Fig. 5) or which have borrowed heavily from the
software which makes Bitcoin work. This allows for innovation from Bitcoin to spread to the rest of the industry and is a
key factor behind the cryptoasset industry’s high level of innovation.
Figure 5: Map of Bitcoin Forks (Source: Bitcoin Magazine)
AUGUST 2020 STATE OF CRYPTO 17Bitcoin Research Primer
Valuing Bitcoin
Market Sizing
Bitcoin’s primary valuation proposition comes from its percentage of Bitcoin in their portfolio, Bitcoin would
ability to act as a Store of Value. Therefore, the most make significant progress as a Store of Value.
accurate way to understand Bitcoin’s potential value
Figure 6: Bitcoin Market Sizing
in the long term is by doing a market sizing analysis of
Bitcoin compared to other assets which have historically Bitcoin
served as reliable Stores of Value — Gold, Art, Stocks,
Gold
and Bonds. Bitcoin currently represents less than 1% of
its immediate addressable market (Gold) and an even Art
smaller proportion of other Store of Value markets that
it could capture (see Fig. 6) — this presents a massive Global Stocks
growth opportunity. If investors include even a small
Global Bonds
$0T $20T $40T $60T $80T $100T
Total Value ($ Trillion)
Portfolio Allocation
Our analysis (Fig. 7) suggests that Bitcoin can act as an of Bitcoin and its uncorrelated nature when compared to
excellent way to improve an investor’s portfolio through other assets. For example, over the aforementioned time
diversification which therefore increases risk-adjusted period Bitcoin’s returns have a 0.29 correlation with Gold,
returns. The chart shows several portfolios1 — Stocks a -0.15 correlation with bonds, and a 0.51 correlation with
(60%) and Bonds (40%); Stocks (57%), Bonds (38%), and stocks.
Gold (5%); and Stocks (57%), Bonds (38%), and Bitcoin Figure 7: Comparison of Portfolios
10%
(5%) to demonstrate how good Bitcoin is as an addition
to a portfolio. Even a small addition of as little as 5%
Cumulative Returns
0%
can lead to a significant improvement in an investor’s
portfolio. The portfolio with 5% Bitcoin has returned
-10%
5.97% since the start of the year, compared to the
portfolio with 5% Gold which returned 4.88%, and the
-20%
portfolio split between stocks and bonds which returned
Jan '20 Mar '20 May '20 Jul '20
4.19%. It is clear that the addition of Bitcoin to a portfolio
Stocks (60%) and Bonds (40%)
is an excellent strategy for investors who want to improve Stocks (57%) Bonds (38%) and Bitcoin (5%)
Stocks (57%) Bonds (38%) and Gold (5%)
their risk profile. This is due to the strong performance
18 STATE OF CRYPTO AUGUST 2020Bitcoin Research Primer
Risks
Block Reward Halving
One of the biggest risks to Bitcoin’s long-term success incentives for miners such as an increased probability of
is the economic effect of its finite supply and reducing attempts to reverse transactions through “51% attacks”2;
block reward. Miners within the Bitcoin network are both scenarios could harm Bitcoin’s economic security.
rewarded for mining and ensuring the economic security However, solutions have been suggested to mitigate the
of Bitcoin by transaction fees and newly-inflated potential negative effects of the block reward halving —
Bitcoin. However, as this block reward decreases over for example, introducing a minimal amount of inflation
time, miners will be compensated only by transactions or finding ways to ensure (per block) the demand for
fees. There is some research showing potential issues transactions is always greater than supply. In conclusion,
with a regime in which block rewards for miners are Bitcoin’s block reward halving is a long-term issue which
continually halved. For example, the amount miners is yet to be resolved but there are several viable ways to
receive in transaction fees alone may not be enough, solve the problem going forward.
or variability in transaction fees could lead to perverse
Environmental Impact of Proof of Work
Proof of Work mining is an extremely energy-intensive some research3 has argued that, on a conservative
process that can require miners to be willing to pay up estimate, renewable energy makes up 74.1% of the
to the current price of Bitcoin in marginal costs to mine energy of Bitcoin mining. This would, in fact, make mining
a single Bitcoin. The University of Cambridge Centre more renewables-driven than most other mainstream
for Alternative Finance estimates that Bitcoin currently industries in the world. While it is difficult to verify such
consumes 55.33 Tera-watt Hours of energy per year, and numbers, there is no doubt that a large amount of Bitcoin
suggests that the number will increase as the network mining is powered by renewable energy. Despite this fact,
continues to grow. We agree that the energy consumption the mainstream perception is that Bitcoin mining is an
of the Bitcoin network is likely to continue to increase unnecessarily energy-intensive process. There remains
as the mining industry continues to professionalize and the possibility that, as policy action around the climate
as the popularity of the Bitcoin network increases. It is crisis intensifies, there could be a regulatory crackdown
unknown exactly what the energy mix of Bitcoin mining is on Bitcoin predicated on a pro-climate agenda.
but we know that at least some amount of Bitcoin mining Researchers in the industry can mitigate the risks of such
is powered by non-renewable energy sources — meaning a scenario by making a concerted effort to prove that
that Bitcoin mining may contribute to exacerbating Bitcoin mining relies heavily on renewable energy and
current issues associated with the climate crisis. However, find further ways to reduce its reliance on fossil fuels. .
AUGUST 2020 STATE OF CRYPTO 1920 STATE OF CRYPTO AUGUST 2020
Research Report
Valuing Bitcoin
This research report will identify and analyze the different
methodologies for valuing Bitcoin. We will use each of these
methodologies to better understand the different trends in
relevant data points for the cryptoasset over time. Understanding
the different approaches to valuing Bitcoin is key to truly
comprehending its role as an emerging store of value. This report
touches on a number of the most important valuation techniques
for Bitcoin and establishes a lower bound for its value.
DATA AS OF JULY 15, 2020
AUGUST 2020 STATE OF CRYPTO 21Valuing Bitcoin
Summary
This report1 aims to value Bitcoin in a similar way to Assumptions
the valuation methodologies available for traditional
financial assets. It builds on the wealth of research For the NVT, NVHR, NVRV, Network-Value-to-Metcalfe’s-
already carried out on valuing Bitcoin and uses the Law (NVML), and Network-Value-to-Odlyzko-Law (NVOL)
most credible methodologies — such as Market Sizing, Ratios, the implied Bitcoin ranges have been calculated by
the Network-Value-to-Transactions (NVT) Ratio, and using the maximum and minimum values of the respective
Network-Value-to-Realized Value (NVRV) Ratio — to metric during the period July 15 2020 to July 15 2021, and
ascertain price ranges for Bitcoin as shown below (Fig. then calculating the implied Bitcoin price assuming that
1). Our key finding is that, based on the current valuation the fundamental metric within the denominator of each
methodologies at our disposal, Bitcoin’s current price ratio (transaction volume and realized value) was equal
seems to be trading within an acceptable threshold based to its value on July 15 2020. For market sizing, the implied
on its fundamentals. Given the nascent methodologies Bitcoin range was calculated by taking the minimum
and the cryptoasset’s volatility, the price ranges shown and maximum values of the predicted Bitcoin prices on
by some of these are slightly off the mark. Nevertheless, the date July 15 2021. Finally, the implied Bitcoin range
we believe that certain valuation methodologies such as under the Equation of Exchange method was calculated
Market Sizing, the NVT Ratio — though a lagging indicator using the maximum and minimum values for on-chain
— and the NVRV Ratio are useful in better understanding transaction volume in the twelve months prior to July 15
the relationship between the market’s current pricing of 2020. The charts throughout this report use data from
Bitcoin relative to its fundamentals. July 15 2013 onwards.
Methodology Implied Bitcoin Price
Current Price as of July 15, 2020: $9,196.73
Market Sizing $11,392.80 $16,299.55
NVT Ratio $8,015.92 $13,471.77
NVRV Ratio $5,132.37 $12,688.71
NVHR Ratio $4,706.66 $22,794.75
NVML Ratio $6,960.80 $18,372.36
NVOL Ratio $5,924.05 $14,707.39
Equation of Exchange $2,498.08 $25,368.31
Bitcoin Price $0.00 $5,000.00 $10,000.00 $15,000.00 $20,000.00 $25,000.00 $30,000.00
Figure 1: Valuation Price Ranges
22 STATE OF CRYPTO AUGUST 2020Valuing Bitcoin
Methodology Overview
Traditional valuation typically uses one of three However, it is important to note that the intricacies of the
approaches to value a business or asset. concept of mining difficulty in Bitcoin may impact the
effectiveness of the cost approach in valuing Bitcoin.
Cost Approach
Market Approach
Simply stated, the cost approach is a valuation method
that states the price of an asset should be equal to the The market approach values assets, also known as the
costs incurred to build, replace, or procure that asset. relative value approach, by comparing the asset to others
The cost approach is a popular method for valuing assets with similar characteristics or by using transactions of
like gold. Because many researchers believe that gold similar size in similar industries to derive its value. The
and Bitcoin share similar roles as a store of value or as a two most common market approaches to valuation are as
tool for hedging, the cost approach may provide a strong follows.
framework for valuing Bitcoin.
Public Comparables (“Comps”)
The asset is valued by comparing a set of its relevant financial ratios to those of a set of comparable
assets that are selected based on metrics like industries and geographies served and company size.
By comparing the asset to its peers, this approach can develop a price estimate or price range for
the asset based on the best, worst, mean, or modal metric values for the peer group. Selecting the
appropriate metrics and companies is of the utmost importance with this methodology, however, as
unrelated assets or industries will produce values that have little relevance to the asset being valued.
Precedent Transactions
The asset is valued by analyzing the price paid for similar companies in past M&A transactions.
For this reason, preceding transactions may also be referred to as M&A comps. This approach is
useful because it considers the market’s appetite for the asset and values the asset accordingly. One
drawback to the preceding transactions approach, is that an acquirer in a preceding transaction may
pay a premium for a particular asset that is not reflected in the asset being valued in this approach.
AUGUST 2020 STATE OF CRYPTO 23The discounted cash flow (DCF) approach, also known as the intrinsic value approach, posits that the value of an asset
is the present value of its expected future cash flows. These future cash flows are the projected year-end cash flows
for the asset after relevant costs and expenditures are subtracted from revenue. The DCF approach values the asset by
discounting these back to the present day using an appropriate discount rate.
The DCF approach is one of the most widely used valuation methodologies in both professional and academic contexts
thanks to its focus on the actual business environment a company or asset is operating in, which allows investors
to determine whether an asset is properly valued. One must use caution when using the DCF approach, however, as
unexpected economic changes and incorrect growth projections may produce valuations that diverge significantly from
an asset’s actual real-world value.
Traditional Valuation Methodology Bitcoin Valuation Methodology
24 STATE OF CRYPTO AUGUST 2020Valuing Bitcoin
Market Sizing
Overview
We can use the Market Sizing method to compare the value of the Bitcoin market to other comparable markets such
as global remittances (Fig. 2) and gold (Fig. 3). The price of an individual Bitcoin can then be calculated by dividing the
total market value by its fully-diluted circulating supply. The global remittances market has generally been seen as
an appropriate comparable for Bitcoin since the cryptoasset could theoretically help solve some of the pain points of
the industry — for example, high fees and the lack of efficiency. The gold market can also be seen as an appropriate
comparable for Bitcoin given their similar functions as stores of values and their equivalent properties — (quasi-) fungibility
and scarcity, for example.
Market Sizing Method — Chris Burniske & Arthur V. Laffer2 (2015)
Burniske and Laffer argued that the remittances market, “characterized by high fees and slow settlements”, could be the
market most ripe for disruption by Bitcoin. The World Bank3 estimated that money transferred to developing economies
totaled $436 billion in 2014. If the only function of Bitcoin were to serve the remittances market and the cryptoasset were
to take the various shares of the market as we have shown in Fig. 2, then the price of Bitcoin would be as shown. Using the
2014 World Bank numbers and Bitcoin’s circulating supply of just under 18.5 million. At 1% penetration the Bitcoin price
would be $237, at 10% penetration it would be $2,365, and at 100% penetration it would be $23,652. However, we believe
that this approach grossly underestimates the value of Bitcoin because Bitcoin’s value proposition is better suited for
markets other than the remittances market. Established firms like TransferWise already provide an excellent service for
remittances and it is unclear why Bitcoin’s other properties — censorship-resistance and decentralization — are valuable
when the cryptoasset is used as a facilitator of remittance payments. Our method for market sizing Bitcoin, instead, uses
the total value of all mined gold — around 197,576 tons according to the World Gold Council4 — of $11.28 trillion5.
Level of penetration * Value of target market
Implied Bitcoin Price =
Fully-diluted Circulating Supply
Value of Target Market — Market value of the market that Bitcoin has been predicted to capture.
Level of Penetration — The predicted proportion of the target market Bitcoin captures.
Fully-diluted Circulating Supply — The total number of units of Bitcoin that will ever exist.
AUGUST 2020 STATE OF CRYPTO 25Analysis
We believe that gold offers a much better Finally, to reach the 30% penetration target price of
$161,074 the average daily rate of return would need to be
comparable market than that of global
0.157%. We have chosen the year 2025 as it represents a
remittances given the similarities shared year far enough away for Bitcoin to have made significant
between gold and Bitcoin, like its (quasi-) strides forward on its fundamental value proposition
fungibility, censorship-resistance, and — in terms of improvements in its technological and
financial infrastructure — such that the cryptoasset
reliable monetary supply.
could have plausibly captured a significant proportion of
its target market. Unlike the majority of other valuation
methodologies for Bitcoin, the market sizing method has
an intuitive appeal for what Bitcoin’s value could be at
In Fig. 3 we have calculated the price of Bitcoin assuming full maturity.
different levels of penetration of the gold market. At
a 5% penetration of the gold market, Bitcoin’s price It is difficult to understand and predict the path the
would be $26,846 and at a 10% penetration of the gold cryptoasset will take to reach its indicated values at
market, its price would be $53,691. Moreover, at a 20% maturity. Cryptoasset returns could be argued to be
penetration its price would be $107,383, whilst finally, at stochastic over short time periods and the predictions
a 30% penetration its price would be $161,074. We can made for the price of Bitcoin fail to take that into account
see that our market sizing method leads to substantially — therefore limiting this method’s usefulness over
higher values of the estimated price of Bitcoin, which we shorter time frames.
view as more reasonable given the range the cryptoasset
has traded at over the last two years. While we believe that the gold market currently offers the
best comparable market given Bitcoin’s value proposition
In Fig. 4 we have calculated the possible paths required as a store of value, this could change due to microeconomic
for the Bitcoin price to reach different gold penetration factors, like changes in technology or the emergence of
levels from July 15, 2020 to July 15, 2025. To reach viable competitors within the cryptoasset space, or to
the 10% penetration target price of $53,691, Bitcoin’s macroeconomic factors, like unprecedented government
average daily rate of return would need to be 0.0966%; action against cryptoassets. In such cases, alternative
to reach the 20% penetration target price of $107,383 markets such as peer to peer payments or more complex
the average daily rate of return would need to be 0.135%. financial products may be better suited for comparison.
26 STATE OF CRYPTO AUGUST 2020$40K Figure 2: Bitcoin vs. Global
Remittances
$30K
$23,652
$30 000
Bitcoin Price
$20K
$10K $9,197
$9 197
$2,365
$3 000
$420 $300
$237
$0
Aug 1, 2015 1% 10% July 15, 2020 100%
$200K Figure 3: Bitcoin vs. Gold
Market
$161.1K
$150K
$134.2K
Bitcoin Price
$107.4K
$100K
$80.5K
$53.7K
$50K
$26.8K
$9.2K
$9.5K
$0K
5%
%
%
%
%
%
20
10
15
20
25
30
20
5,
l1
Ju
AUGUST 2020 STATE OF CRYPTO 27The exceedingly large number for the potential price of
Bitcoin — using the several different estimates for the
amount of the gold market that Bitcoin is likely to capture
— helps demonstrate the expansive total addressable
market for the asset. There remains the possibility
that Bitcoin could, in fact, capture even more of the
gold market than just 30%. In either case, its current
valuation can easily be justified, and higher levels can
be supported on an intellectual level if only some of the
capital currently invested in gold transfers to Bitcoin.
Such an exercise is useful at explaining a long-term
investment view of Bitcoin, but its usefulness diminishes
over shorter time periods, especially due to Bitcoin’s high
level of volatility.
Figure 4: Bicoin Market Sizing, 2020–2025
$200K
$150K
Bitcoin Price
$100K
$50K
$0
2016 2018 2020 2022 2024
28 STATE OF CRYPTO AUGUST 2020Valuing Bitcoin
NVT Ratio
Overview
The Network-Value-to-Transactions (NVT) Ratio6,7,8 measures the dollar value of on-chain transaction activity of a given
cryptoasset network relative to its Network Value. In the following example, we make use of a 30-day moving average to
account for large variations in on-chain transaction activity.
Network Value
NVT =
Value of On-chain Transaction Activity
Network Value — The total dollar value of all the circulating units of the given cryptoasset. It is equivalent to the
market capitalization of a stock.
Value of On-chain Transaction Activity — The dollar value of the transactions settled on the cryptoasset’s
blockchain. In contrast, off-chain transactions are those such as when an exchange carries out a trade between
two counterparties without the trade itself being settled on a blockchain.
In simple terms, the ratio can be understood as the We show Bitcoin’s NVT over time with its peak (112.97),
dollar amount an investor can expect to invest in Bitcoin trough (26.02), and mean (61.74) indicated (Fig. 5). The
corresponding to one dollar of value being transmitted NVT ratio shares similarities with the Price-to-Earnings
on the Bitcoin blockchain. All things being equal, an NVT (PE) ratio used in equity markets (e.g. like the way the PE
higher than the historical mean suggests that the market ratio indicates the dollar amount an investor can expect
is placing a premium on Bitcoin’s ability as a transactional to invest in a company to receive one dollar of that
medium, which is ostensibly one of its primary functions. company’s earnings). In a similar manner to how earnings
Conversely, an NVT lower than the historical mean should be seen as the key performance indicator of a
suggests that the market is placing Bitcoin’s ability as a mature company, the amount of value transmitted on
transactional medium at a discount. In the long term we Bitcoin’s blockchain is the most important signal to
expect Bitcoin’s NVT to trend towards its historical mean, suggest it is in fact being used as a medium of exchange
therefore the ratio can be used as an indicator of Bitcoin and a store of value.
being undervalued or overvalued.
AUGUST 2020 STATE OF CRYPTO 29Figure 5: NVT, 2013–2020
125
113
100
NVT Ratio (30d MA)
75
62
50 Analysis
25
26 Graphing Bitcoin’s price and NVT during the Bitcoin
bubbles of 2014 and 2017 (Fig. 6) demonstrates that NVT
is a lagging indicator of both periods of overvaluation and
0
2014 2016 2018 2020 undervaluation.
Figure 6: NVT vs. Price, 2013–2020 The peak Bitcoin price during the 2013 bubble was
$1,334.93 on December 4, 2013 — though the 30-day
NVT (30d MA) Price
MA NVT did not peak until it hit 112.97 nine months later
200 $24K on August 3, 2014. The exact same pattern emerged
during the 2017 bubble, when the peak Bitcoin price was
150 $18K $19,451.70 on December 16, 2017. In this case, the NVT
peaked 10 months later at a value of 96.80 on October 7,
NVT (30d MA)
113
100 $12K 2018 (Fig. 7).
62
50 $6K
Conversely, the bottoming out of the NVT in the
26 aforementioned periods at 22.2 on March 7, 2014 and
26.02 on August 2, 2017 preceded both periods’ price lows
0 $0
2014 2016 2018 2020 by large timeframes. As of July 15, 2020, Bitcoin’s NVT of
100.77 is trending noticeably higher than historical mean,
Figure 7: NVT vs. Price, 2017–2020 suggesting that the market is currently pricing Bitcoin at
a premium to its NVT-based fair value (Fig. 5).
NVT (30d MA) Price
200 $24K
150 $18K
NVT (30d MA)
113
100 $12K
62
50 $6K
26
0 $0
2018 2020
30 STATE OF CRYPTO AUGUST 2020There are intuitive reasons why the NVT ratio is appealing 20.03%. This percentage difference arises because the
as a valuation indicator. It helps investors understand the metric tends to overestimate the Bitcoin price during
value trend of Bitcoin as a transaction medium, as well market highs, as shown in the Bitcoin bull market of 2017
as the price that the market assigns to this function. where the implied Bitcoin price reached $20,848 while
The chart (Fig. 8) calculates the implied Bitcoin price the actual Bitcoin price peak during the same period was
assuming that Bitcoin’s NVT was equal to its mean value $19,640.
of 61.74. The implied Bitcoin price has been a relatively
strong indicator of the actual Bitcoin price therefore Moreover, on a conceptual level the metric could be said to
showing that NVT does have some bearing on Bitcoin’s slightly undersell the value proposition of Bitcoin. Whilst
fundamentals. NVT measures Bitcoin’s utility as a payments medium,
it cannot properly account for Bitcoin’s usefulness as a
However, the NVT ratio does have limitations — including store of value. As such, a metric like NVRV could be better
the fact that it is a lagging indicator — and it cannot be suited for such a purpose, as it accounts for the lengths
used as the only way to value Bitcoin. For example, the of time over which Bitcoin has been held by investors — a
average percentage difference of the implied Bitcoin proxy for its store of value property.
valuation and the actual Bitcoin price was around
Figure 8: Price vs. NVT-implied Price, 2013–2020
Price Implied Price (30d MA)
$30K
$20K
$10K
$0
2014 2015 2016 2017 2018 2019 2020
AUGUST 2020 STATE OF CRYPTO 31You can also read
