Bitcoin’s Valuation Fundamentals. What is the Metric that determines the price of Cryptocurrencies?
Bitcoin’s Valuation Mechanism
With Bitcoin’s rapid growth over the last few years, investors are starting to agree that with Bitcoin, comes a new asset class. In mid-January this year, The Federal Reserve Bank of St. Louis in the USA stated that this may, in fact, be true. (You can read more about the bitcoin to Rand price discovery here).
Consequently, the creation of a new asset comes with the difficulties that arise in assessing their underlying fundamental values. The market uses earning reports to calculate fair evaluation of traditional stocks. There is no regulated central authority to perform this function for cryptocurrencies.
Multiple different theories regarding bitcoin’s valuation as well as other cryptocurrencies have surfaced over the past few years. However, those who make price predictions based on traditional valuation analysis are often incorrect. Let’s look into why people are flocking to bitcoin like Kalahari sheep during the summer thunderstorms.
The one theory that makes the most sense, is that long-term Bitcoin holders have the biggest impact on Bitcoin’s valuation. For this reason, the transactional demand is far less important. Hodlers are the floor of the bitcoin price. A paper published in early 2014 went into detail about the fact that bitcoin’s valuation is determined by the hodlers’ willingness to take bitcoins out of circulation.
The term “Hodlers” (Hold on for Dear Life) is a meme that came into existence following a drunken forum post in 2013 as the price of bitcoin took a dive amid the cryptocurrency regulation related concerns in China. The writer expressed his preference for holding onto his Bitcoin assets as opposed to day trading. This meme quickly became a war cry for investors that hold onto their Bitcoin assets for extended periods of time.
Bitcoin hodlers have their feet firmly planted in the rise of cryptocurrency. They are willing to hold all of their assets even when the price drops by 25% or even by over 50% over the course of a month. By the same token, some dedicated hodlers may even buy more assets during the price drops.
Are Hodlers the Floor on the Bitcoin Price?
Hodlers hold onto their Bitcoin assets for many different reasons. Some may be political, others truly believe that bitcoin has far more worth than any fiat currency. These hodlers see Bitcoin as digital gold, understanding the value of permissionless, electronic money in a period of transition into the technological age.
Many dedicated hodlers have no intention of selling their Bitcoin assets. As a result, they wait. The hodlers wait for the day after which can use Bitcoin worldwide and everyday transactions are made via Bitcoin. The lightning network is leading the race to be the solution for this, it allows for micro-transactions on the Bitcoin network.
Been following some of my favorite chartists in the down market… pic.twitter.com/66x0vV2u23
— Ran NeuNer (@cryptomanran) June 14, 2018
Bitcoin Hodlers have a strong impact on long-term Bitcoin’s valuation. However, when it’s time to measure the collective effect they have on bitcoin’s valuation, we are met with difficulties. This is mainly due to the fact that hodlers are hard to detect on the blockchain. It’s hard to determine if someone is a hodler unless they’ve had a price panic or 2.
Last year, LendEDU hosted a survey in which a large group of bitcoin investors stated that they would sell their assets once bitcoin was worth $200,000 per coin. However, many of these people were holders. There is no indication of how many of these people were actual hodlers.
To HODL or not to HODL
Both Hodlers and regular day traders of cryptocurrency can make a fair amount of money. But so can any expert in any field. It all boils down to how much disposable cash you have, and how committed you are to the growth of cryptocurrencies. If you’re not investing large amounts of money into bitcoin, there’s probably no point for you to HODL, but you can still look into getting bitcoin for cheap. This is because cryptocurrency is still a fairly new trend, and no investment guarantees a profit. In this situation, day trading or even just buying small amounts of crypto to get a feel is ideal.
“I can imagine a world in which bitcoin becomes a global standard of value — it’s the first global and non-political standard of value — coupled with the first global and non-political standard of settlement” – PayPal’s Wences Casares
Are you a HODLER? Do you think this is a valid approach to determining the bitcoin floor price? Is it simply Zero?
We would love to hear your opinion so feel free to comment below.