Opinion piece - Bitcoin Metrics
As a long-term value-based fund, we have been studying metrics other than price since 2015. These metrics often provide a deeper view of the network. We take a look at Bitcoin metrics we are tracking and explain what they mean.
1. Github Commits - A project that is constantly being worked on is a great sign. Below is a histogram of all the total commits to the Bitcoin code base since inception. Bitcoin is well known for being extremely picky with who can commit code and slowest to change (a good thing). Even so, you can see the constant development that has progressed over the years.
2. Total Number of Transactions - The steady growth of transactions through bull and bust cycles shows clear signs that point towards adoption, this growth is measurable, trackable and completely open for anyone to examine. It also cannot be spoofed, as the Bitcoin network is completely open these are actual transactions recorded onto the blockchain.
3. Number of Wallets - Wallet growth shown here to be steadily rising over the last two years, the network becomes more valuable with an increased number of transactions (as above), a growing number of wallets (indicating larger user base (noted that multiple wallets can belong to one user)) and the total value transacted also referred to as throughput (Item 4).
4. Throughput - We measure volume against price because as the value of the coin increases the volume naturally goes down, but the overall value amount may be greater. The best way to measure this is by a chart called Network Momentum.
5. Hash Power - We look to see if the number of nodes joining and mining the network is increasing, decreasing, flat or trending. Hashing power indicates network strength, distribution and security. The more hashing power the harder it is to attack the network, the higher the barriers to entry there are for new miners, the more competition there is for rewards. Trending up is a good sign. Even with the dip, the hashing power is orders of magnitude greater than where we were last year.
6. Cost per Transaction - As we strive to drive adoption in the space, the cheaper it is to send money, the more likely people will be to do it. SegWit was the first step in achieving this - which is now at 35% adoption for all Bitcoin transactions and continues to rise - as we increase SegWit we should see the cost per transaction lower further and even in times when the mempool (transactions waiting to be written to the blockchain) starts to grow it should be an incremental increase rather than the larger jumps we saw at the end of 2017.
This is a snapshot of what we look at outside of pricing charts. It's important to understand what each project is working towards, specifically in the case of Bitcoin, it will go through many stages before/if it is deemed Global Money. The stages include Store of Value, Medium of Exchange and Unit of Account before finally Global Money. Once you understand the trajectory you can start to measure what is important to progress to each stage, should the project continue to make improvements on your outlined metrics it is no different to a company that has been invested in by a VC. It will be unlikely that a VC firm will abandon a company that has continually grown YoY on all of the metrics you measure besides one. This is and has always been a long-term game, as long as the fundamentals are sound there is still opportunity in the project. We are agnostic to which project succeeds, a value investor in this space can use a metrics-based approach to supplement their strategy for long-term growth, should these metrics fall out of favour provisions in the strategy should allow for flexibility. As the asset class is developing and still growing, we align to taking a 3-5 year outlook on any Digital Asset.
Disclaimer: Magnet Capital does not accept any liability for any financial decisions made on the basis of the information provided. The above opinion does not constitute financial advice and should not be taken as such. Magnet Capital urges you to obtain professional advice before considering any investment decisions