Bitcoin fundamentals

Bitcoin Fundamentals: What’s up with This?

Share this!

The progress of Bitcoin, a new form of digital money, is currently being watched with lots of interest and critics. This is nothing new in the world of blockchain enthusiasts and cryptocurrency followers. The blockchain technology is very young and real-world solutions haven’t been found yet. The price of bitcoin will always be something to talk about because bitcoin and other cryptocurrencies are very famous for their massive price volatility.

Bitcoin price volatility

After hitting new highs at the end of 2017 with a price of almost 20000$, in 2018, massive sell-offs have been taken place in this crypto market. Currently, the entire crypto space is recovering from the longest bear market(entire2018) ever and a lot of bitcoin skeptics are predicting ‘the dead of bitcoin’. For me being around in this market for almost 6 years now, it’s a big ‘deja-vu’ experience. So the discussion of the price and the speculations will always be there, but common bitcoin fundamentals: what’s up with this?

Daily bitcoin transactions

Currently, the total crypto market is in a state of depression and anger when talking about price actions. However, an argument can be made that Bitcoin fundamentals are much stronger than in late 2017. The most important reason for this is daily transactions.

Bitcoin fundamentals & daily transactions

These transactions have most recently reached levels not seen since November 2017 when its price went parabolic. Most users of bitcoin don’t even know what the real purpose of this new digital coin is. Bitcoin is being introduced as a new form of money but it can also be used as a store of value and being transferred over the web. This confusing property of the coin doesn’t reduce the popularity of the digital currency. Not at all, if you measure the amount of transactions on the network or the ever rising amount of online wallets.

Peak of transactions

The last peak of transactions was reached at the end of 2017 with about 300,000 transactions per day. After that a period of decline followed, mainly because the bitcoin network was on peak capacity and transaction fees were soaring. Over a year later, daily transactions have finally reached over 300,000 yet again, returning to levels not seen since December 2017, according to blockchain data from BitcoinVisuals.

Daily bitcoin transactions
Daily bitcoin transactions

Transaction fees

In the past when the number of transactions started to rise, this immediately caused a rise in transaction fees also. However, the current rise in transactions over 300,000 a day again, didn’t cause a rise in transaction fees. The most important reason for this, in my opinion, is the implementation of the SegWit second-layer protocol upgrade. With transaction fees staying low a big step forward is made in the adaption of the bitcoin blockchain as a payment network.

Bitcoin fundamentals & Lightning network

Another important innovation of the network will be the implementation of The Lightning Network. Currently developers are collaborating to make this happen. This network is also a second layer protocol which will help the scaling issue of the bitcoin payment network. You can say on a daily transaction level a lot of developments are taking place which is very positive sign.

Bitcoin transaction fees
Bitcoin transaction fees

Measurement of Bitcoin fundamentals

Because of its unique property the blockchain has, analysts have a very hard time to measure the Bitcoin fundamentals. Normally investors can do fundamental analysis on assets or equities in the financial markets. To do the same kind of analysis on cryptocurrency is very hard and requires more digging when doing research.

For instance, investors can evaluate a company’s stock by looking at certain items on its balance sheet, but bitcoin does not produce revenue or earnings numbers. Jacob Eliosoff, a cryptocurrency fund manager is also doing research based on fundamental analysis. He says in an interview with Coindesk:

It’s hard to derive an even remotely precise valuation for bitcoin from future cash flows, the way you can do for other assets such as General Motors stock.

Jacob Eliosoff

Fundamental analysis

That doesn’t mean fundamental analysis which is done the traditional way doesn’t count for bitcoin. Cryptocurrency uses the same laws of economics compared to fiat currencies. Using supply and demand as a basic rule of your analysis will help you when doing research. In a tweet I recently posted, I also mentioned the limited supply property of Bitcoin:

Current use of Bitcoin and demand

Several variables affect bitcoin demand, including user adoption, transaction activity, and trading. User adoption is very crucial for bitcoin if it wants to compete with other payment networks out there. This means that bitcoin is being used as a form of digital money all over the web. To do so, bitcoin is being used as a store of value, a medium of exchange and a unit of account. Currently, Bitcoin has managed to gain significant traction as a medium of exchange. Hundreds of companies – including eBay and PayPal – have agreed to accept the digital currency since its introduction in 2009.

Bitcoin fundamentals and transaction volumes

Like I explained earlier in this article, the transactions on the blockchain are on its peak again. You can say this is a good indicator for user adoption, but it doesn’t say much about economic activity. The reason for this is the automatic traffic caused by bots on exchanges. Often this kind of traffic is being used to keep the volumes on a certain level. Most of the economic transactions are currently taking place between exchanges and users with crypto wallets. This means that the use of crypto is there, but in the form as a medium of exchange and a store of value.

Supply

When you have done some research in cryptocurrencies before, you already know that there is one very important property called limited supply. This is a very straight forwarded thing compared to the demand issue. Bitcoin, for example, has its limit at 21 million coins in circulation. When doing fundamental analysis this is THE main difference compared to the traditional monetary system.

Bitcoins in circulation
Circulating supply of Bitcoin and max supply according to Coinmarketcap

Bitcoin dominance

Another interesting point of measurement is Bitcoin dominance. Bitcoin dominance is the total market cap of the Bitcoin market compared with the other cryptocurrencies in the market. Bitcoin dominance is the outcome of a calculation whereby Bitcoin market cap / Total market cap. Currently, Bitcoin has a 51% market dominance and is number 1 ranked. In the early days of Bitcoin market cap was always around 90 %. Did changed during the last bull run when other Cryptos entered the market and gained market share also.

Bitcoin market dominance

The current rate of 51% dominance(March 2019) is quite low but has been on the rise again. At the beginning of 2018, when the total crypto market was in bullish sentiment the Bitcoin dominance dropped to a low of about 30%. Other crypto projects(like EOS and TRON) were being introduced to the market and were quite ‘hot’. This resulted in “dumb money” just pouring new money into the market, which caused a massive growth of new projects. A lot of these new projects didn’t quite understand the unique property of a cryptocurrency which is limited supply and decentralization. Like in the traditional world the printing press is being used to stimulate inflation. This was also the case for a lot of securities and tokens being introduced to the crypto market.

Bitcoin fundamentals & ICO market 2018

This trend of just throwing new money in by speculators changed rapidly after the total market turned bear. Right now we all know that a lot of ICO’s being introduced in 2018 ended up in the graveyard. Back then when an ICO was launched, the idea was to fund the new project with ETH or BTC. As a result of this exchange, the investors got a new token were they speculated it would grow in value. Like I mentioned earlier, the ICO market in 2018 ended not very well. This resulted in project leaders and investors to sell their tokens and convert it back to BTC.

Bitcoin & crypto market

In my opinion, a high Bitcoin dominance rate is healthy for the crypto market in total. The main reason for this is the relation many altcoins have to Bitcoin. You can say a lot of altcoin projects out there exist by the success of bitcoin. If Bitcoin would fail as a project, 85% of the total crypto market would be sent to the graveyard also.

Bitcoin Fundamentals & Bitcoin dominance chart
Bitcoin dominance chart since 2013

Bitcoin fundamental analysis by traders

To get a better indication of the real value of bitcoin, traders could do fundamental analysis. By doing research thoroughly and considering all relevant factors. By doing this, traders can get a better sense of whether it’s a good time to buy or sell. Of course when trading bitcoin, one has to deal with the market sentiment which doesn’t reflect the true value of the asset at a certain time.

To manage this risk, bitcoin traders can combine fundamental analysis with technical analysis. For example, a fundamental analyst might look at several indicators of demand, concluding that bitcoin is underbought. Combine this with technical analysis by reading charts to find the best entry point.

Bitcoin fundamentals conclusion

Alternatively, a trader might use technical analysis to determine that it’s a good time to sell. After that decision he could then leverage fundamental analysis to confirm this view by looking at key drivers of demand.

In my opinion, Bitcoin as a cryptocurrency is more alive than ever. A lot of innovative developments are being underway. A good example is the current developments and progress being made with The Lightning Network. Also, the total market is ranging and the bear market is coming to an end. A lot of veterans in the market are also turning positive as ArminvanBitcoin pointed in one of his tweets:

So do you agree with the current sentiment in the market or do you expect more bearish firework to come next?

Related : What is Blockchain? / What is the Lightning Network?

Disclosure: This post contains affiliate links. This means I may make a small commission if you make a purchase. This doesn’t cost you any more but it does help me to continue publishing cool and actual content about Bitcoin & Crypto – Thank you for your support!

Jelmer Steenhuis
Follow me

Jelmer Steenhuis

Online entrepreneur at uDigitize
Crypto believer and 'Hodler' of Bitcoin since the early days. Spreading the word about this exciting new technology..
Jelmer Steenhuis
Follow me

Latest posts by Jelmer Steenhuis

Leave a Reply

Your email address will not be published. Required fields are marked *