Unique addresses, total transactions and network hash rate are evaluated side by side.
Why each might give us unique insight into the market right now.
Putting it all together into one simple chart.
Three different ways to look at Bitcoin’s market cap
Earlier I submitted an article about the relationship between the number of unique addresses in use and how it relates to Bitcoin’s market cap (BTC-USD). Today I want to talk about two other pieces of data that can give us more color into this topic. I have found three very strong correlations between the Bitcoin market cap and the data that we can parse from the network. Each of these were derived from log transformations and regression analysis.
|Indicator Name||Unique Addresses||Network Hash Rate||Total Transactions|
|Strengths||Good gauge of actual network activity on a monthly basis.||This metric is less subject to speculation because of the real world implications of mining at scale (moving dirt, laying power lines etc).||Gives a ratcheting up point of view in which Bitcoin’s price is either forced up over time or has to fail completely.|
|Weaknesses||Can be thrown off by batching and volatility in transaction fees due to dust consolidation||Indicator can be thrown off by advances in computing and can lag the market because of the gap in time between investment and operations of large mining facilities.||If people completely stop using Bitcoin, this figure would break down because it would simply flatten out instead of showing the market cap drop to zero.|
|Reasoning||Metcalfe’s Law (the network effect)||Miner CAPEX may reflect future expected earnings of industry insiders||Longer blockchains are more secure and closer to immutability|
|Correlation (monthly sample)||0.9708||0.9567||0.9676|
The chart below illustrates these three signals and their output over time. The yellow line is the actual Bitcoin market cap (taken monthly).
Data Source: blockchain.info