The fundamentals of Bitcoin and Ethereum networks have not fallen as much as prices have, author of the popular book Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond, Chris Burniske, writes in a blog post. In his research, he found that the fundamentals are outperforming the prices currently, although all of them are down since December 2017 and January 2018.
Although there are many who do not believe cryptocurrency networks have any fundamentals at all, Burniske believes that this role is filled by the health of the supply-siders and demand-siders. Supply-siders are those who provision the network’s service, in most cases miners, and demand-siders are the ones who consume the service. The research focuses on Bitcoin and Ethereum, comparing how fundamentals and network values have performed since December 17th, 2017, and January 13th, 2018 - the peak network values for both.
What he found is that, although network values (“Network Value” = “Price per Unit” x “Units of the Cryptoasset Outstanding”) were down, the number of daily transactions, as well as demand for their native functionality, is not following suit. Hash rates, or processing power of a cryptocurrency network, of both, are up compared to their peaks; although they are on negative slopes, they are still outperforming the price. Another supply-side component is developers, and Burniske writes that according to the internal analysis of venture firm Placeholder, of which he is a partner, those metrics are also outperforming the market.
“Most asset classes have widely agreed-upon models to value them; analysts just bicker over the inputs to those models. In crypto, we currently bicker over both the models and the inputs, hence the insane whiplash of the markets,” Burniske concludes, adding that the growth of network fundamentals is sure to attract analysts which, in turn, will help stabilize the market.
In reply to Burniske’s tweet featuring his article, the crypto community points out that taking the peak values from the December 17 - January 18 time frame means assuming that the market priced network value correctly back then.
Just published: "Bitcoin & Ethereum: Prices are Down More than the Fundamentals" https://t.co/Mzuq1alObO pic.twitter.com/Xlt6T1ySrR— Chris Burniske (@cburniske) December 9, 2018
“What if at the peak of the mania (at that seems to have been mania phase) [network value] got ahead of fundamentals by, say, 300%? Wouldn't it mean market still searches for a fair price which may be lower? Even if NV/fundamentals equations does not show that?” asks user @Staska.
Burniske wrote about that in a comment on Medium, “We could solve [the overvalued market problem] by looking at the cycles over time, checking in at troughs and peaks, and looking at the relative change in fundamentals and prices between the two. A more time-intensive analysis, but doable.” However, he did not add whether he intends to do such research in the future.
On this potential overvaluation also hangs the question: is the current market drop a justifiable correction? However, with the lack of data, “it’s clear to me that Mr. (Crypto) Market has only a vague idea of what he’s doing right now,” Burniske adds.