BitBlock Group is a conglomerate based in Beijing, Hangzhou, Boston, and Singapore, that focuses on early-stage blockchain projects’ investment, incubation, consulting, and marketing. This week it published a report on Bitcoin valuation, using a derivative pricing theory based on the Bitcoin miner’s market.
The central conclusions in the paper include:
(1) In most time period, Bitcoin price aligns with its fundamentals. During November 2017 to mid-January 2018, Bitcoin saw an irrational bubble, while since early June 2018, there has been an oversold in the market. When Bitcoin price exceeds the total cost, because of the arbitrage possibility, short position is favored; when the Bitcoin price falls below the total cost, long position is recommended.
(2) In early December 2018, Bitcoin price almost touched the variable cost line, and immediately rebounded. Most miners have incentives to maintain a Bitcoin price above the variable cost position. They then can ensure mining profits. Therefore, the time when Bitcoin price broke the variable cost is an excellent opportunity for a decisive buy-in strategy if we do not observe a significant loss in computational power of the entire network.
(3) However, the reshuffling and rebalancing of the mining industry lags behind the secondary market price movement. The fall in Bitcoin price recently destroyed many small-and-medium mining machine producers. Hence, even if Bitcoin price climbed somewhat in the near future, in the medium run (one year horizon), the mining capacity might not see significant rises. Before the production line of the new generation machines becomes stable, we believe that Bitcoin market performance will remain in the down beat.
(4) In the short run, the technological improvements in the mining industry, including computational power improvement and unit cost reduction, weaken the markets, because of decreased expected costs. In the long run, the significantly expanded market capacity brings positive news to the markets because new miners can be attracted and thus increase the network computation power.
(5) Without considering future reduced unit hash cost thanks to technologicaladvancement, according to the estimated maximum capacity of global miningindustry, we believe that the total cost line can still be lifted by 10 or even 30 times. Furthermore, around every 45 months the Bitcoin production rate halves, further depressing the return over electricity cost. The Bitcoin mining cost will increase further. If we take a long time horizon, Bitcoin still has high upside.
Read the full report here: A Bitcoin Valuation Model Assuming Equilibrium Of Miners’ Market-Based On Derivative Pricing Theory
The research report is based on data from July 2016 to December 2018, this research paper aims to explain the relationships between Bitcoin price and its intrinsic value based on the market equilibrium in the mining industry. The model has significant explanatory power on some recent cryptocurrency events through microeconomics cost analysis method.