We may be on the verge of another Bitcoin market bull run according to a new report by Grayscale. The report dubbed “Valuing Bitcoin” tries to assess the leading cryptocurrency’s real value while pitying it against other traditional financial instruments like cash, financial assets, and gold. It also looks at the number of people holding the digital asset for the long term compared to speculators. It concludes that there is a similarity to the current market state to that of 2016 before the historic bull run, which took place a year later.
Bitcoin has had a decent year so far more than doubling since dropping below $5,000 in March. The coin has spent the best part of the past month around the $11,000 range, and if the analysis by Grayscale is to be believed, then we could be in for an exciting final quarter.
Even though Bitcoin is designed to be scarce with only 21 million coins expected ever to exist, gauging its real value is quite difficult since its not a cash-generating asset, which individuals can use a standard cash flow analysis to assess. The closest way to get its actual value is through relative valuation and supply/demand analysis.
Bitcoin’s Market Cap Should Be Way Higher
Based on relative valuation, Paul Tudor, a famous investor, uses purchasing power, portability, liquidity, and trust to measure Bitcoin’s standing against other stores of value like gold, cash, and financial assets. Even though Bitcoin scores the lowest among the others as a store of value, Tudor’s surprise is how low its current market cap is compared to its potential value.
“Bitcoin had an overall score nearly 60% of that of financial assets but has a market cap that is 1/1200th of that. It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value. Something appears wrong here and my guess is it is the price of Bitcoin.”
The problem right now is the vast challenge Bitcoin faces if it’s to reach the level of trust, adoption, and regulatory clarity that the other assets it competes against are afforded.
An analysis of supply and demand reveals a supply shortage due to a growing demand for BTC. It looks at the number of active coins categorizing them into two; speculator and holder coins. Speculator coins have moved in the past three months, and holder coins represent those that haven’t moved over the past three years. The rise in holder accounts signifies accumulation, which is a bullish sign, whereas the growth of speculator accounts tells of distribution, which is a bearish indicator. According to the chart, there is a growing number of holders and fewer speculators currently, something reminiscent of the market structure in 2016.
This growing appetite for BTC is evident among exchanges as more people seek to get a hold of the asset. There is an increasing preference for P2P markets like Bitcoin Global since they offer users absolute control over their coins. The platform gives users the liberty to set prices they would like to purchase and sell coins through advertisements and complex price equations.
Negotiations on the deal are done peer to peer when one initiates a buy or sell action. The seller states the kind of payment they prefer with multiple payment methods supported, and the coins are held on escrow until the payment is made. Once the payment is made, the seller can proceed to release the BTC to the buyer. In case of a dispute, the issue is resolved by the customer support who has to listen to both sides of the story and offer a verdict. Such P2P platforms work on a reputation-based rating where users rate each other. People love them for their simplicity as even individuals with limited knowledge of cryptocurrencies can easily buy BTC. Also, they offer a fast and easy way to convert fiat to crypto and vice versa.
Inflation Fears Are Driving Demand For BTC
The report also notes Bitcoin is likely to experience more demand as inflation accelerates since there is a growing need for a scarce financial commodity. Inflation had shot up since the 1970s when the US government abandoned the gold standard due to loose monetary policies that encouraged the market to take debt to purchase assets.
And when things got worse like in 2008, quantitative easing (QE) was enforced to stop the debt spiraling and support the economy, but this led to the worsening of the problem.
Due to the dependence on QE, which involves money printing to help the economy stay afloat, the S&P dropped by 20% in three months when the federal reserve tried to reverse its policies in 2018. What began as a 1 trillion bailout in 2008, surpassed 4 trillion by 2014 with the fed printing more and faster than ever.
Even though the USD remains strong compared to other fiat currencies, excessive printing of money is causing worry among investors who are afraid of monetary inflation; thereby, they seek alternatives like Bitcoin to store their wealth. And it s this demand for BTC that is fueling the next bull run.