Bitcoin Fundamental Analysis

3 min read

What Is Fundamental Analysis?

Fundamental analysis occurs when a potential investor attempts to determine the real value of an asset. This is done by using all publicly available information about the asset to assess how financially rewarding it will be to own. News about the asset or the economy will reshape fundamental analysis-based estimates.

Investors assume that an asset will gravitate towards its fair market value over time, so if the result of the fundamental analysis is different from the current market price, then there is a trading opportunity. Good fundamental analysis allows investors to buy assets that are undervalued and sell those that are overvalued.

Fundamental Analysis For Debt And Equities

For many assets, their fair value is the discounted value of all their future cash flows. For a stock, that would mean the present value of all dividend payments the shareholder will receive. For debt instruments, this may include several coupon payments and the principal repayment at the end.

These valuation methods will depend on many assumptions, including an investor’s chosen discount rate. Additionally, these investments can usually be sold instead of collecting the cash flows indefinitely. However, the discounted cash flows provide a mathematical model to solve for the fair value of the asset.

Fundamental Analysis Without Cash Flows

Bitcoin and other assets that don’t generate cash flows, such as gold and silver, cannot be valued based on future cash flows. Therefore, fundamental analysis for Bitcoin is aimed strictly at determining where the price of the asset is headed. There are countless methods for determining this number, but most of them hinge directly on the supply and demand of the currency.

Bitcoin’s circulating supply can be estimated easily and accurately due to the predictable monetary policy of the currency. This leads to several models, including the often cited stock-to-flow model. This model aims to predict prices based on the rate of new bitcoins being added to the network relative to the existing supply.

More complex fundamental analysis will aim to determine the demand for the currency. Bitcoin itself doesn’t change very rapidly. The network is very stable, making it difficult to adjust estimates based on the technology. However, macroeconomic events can have effects on how people use Bitcoin. Investors can pay attention to shifting sentiments among prominent investors and track Bitcoin metrics such as onchain activity.

In order to project the demand for Bitcoin, investors may look at global economic patterns. For example, increasing monetary bases of fiat currencies is commonly a precursor of inflation. Fundamental analysis of this macro pattern may lead investors to conclude that demand for Bitcoin as an inflationary hedge will drive up the price of Bitcoin.

Investors can also assess Bitcoin-specific data to gain insights about the asset. Onchain volume, address creation, and network fees are some of the many publicly available statistics about the Bitcoin network. These numbers can indicate future usage of the currency, as well as the ease of transacting. Both of these insights can greatly shape an investor’s projection of the demand and eventual price of Bitcoin.

Learn more about market making.

Key Takeaways

  • Bitcoin fundamental analysis differs from equity fundamental analysis due to a lack of cash flows.
  • Fundamental analysis can be based on macro events that don’t directly relate to Bitcoin.
  • Bitcoin network statistics can offer insight into how people will use the currency in the future.