Foreword
As for the technical part, we will be focusing on the numerous tools to evaluate bitcoin rather than just considering factors in the fundamental element discussed in the previous article.
Technique Analysis
Bitcoin-Gold Comparison
There is a reason why bitcoin is called ‘digital gold’, due to its scarcity and limited amount. Under this situation, we could use gold as a measuring standard or an indicator, making a comparison to bitcoin. I will illustrate down below.
Let G be the total market capitalisation of gold,
B be the total amount of bitcoin.
1 tonne = 35273.9619 ounce
The Formula (Calculated in July 2021)
Total market capitalisation of gold (G)
= Tonnes of discovered gold * Ounces * current price of gold
= 244,000 * 35273.9619 * 1800
= 15,492,324,066,480
Fair Price of Bitcoin
= G/B
= 15,492,324,066,480 / 21,000,000
= 737,729.717 (Around 7 Hundred Thousand Dollars)
MVRV Z-score
This tool is to evaluate how’s the price is overvalued or undervalued in a specific time frame.
Here’s the formula of the MVRV Z-score
= (Market Capitalisation – Realised Capitalisation) / Standard Deviation of Market Capitalisation
Here’s a graph above for you to easily understand.
At the top of the graph, the area of the red bar is mean overvalued, and at the bottom of the graph, the green bar is mean undervalued. The blue line represents market value, and the orange line means the actual value.
It would be a splendid tool to identify the better timing to purchase or sell, long or short bitcoin.
Mining Hash Rate
The movement of bitcoin is also highly affected by the hast rate. As you could see, the hash rate obviously bounces up, start from 2017.
Mining Difficulty
Another factor is when the mining difficulty decreases, meaning the mining machine is reduced and the competitor in the same mining network decrease. As a result, it reduces the difficulty in the network.
*To conclude the mining hash rate and the difficulty, it is essential to analyse the overall environment since it is based on the mining machine. Both of the graphs, just as shown it uses as visualisation tools.
200 MA on the weekly Timeframe
200 Moving Average, I believe it could be used as a support for the value of bitcoin. When the price to too far from the support, it might fall back to the support and bounce again. If the value falls under the 200 moving average, the situation might vary and lead to a different result.
Bitcoin Spent Output Profit Ratio
Before I explain how’s this indicator works and what’s the formula.
SOPR = Bitcoin Price sold / Price paid
So what does this indicate? What insight could bring to us?
When SOPR is above the level of 1, it means the bitcoin holder is in profit at the moment of transaction, vice versa.
Therefore, when the SOPR is below the level, it would be a great entry point because others are eager to sell their position to recover the loss. They would see it as an investment, and I will see it as a retainment of my purchasing power, as I treat it like gold and silver.
Click here to check out the reason why I believe in bitcoin.
Net Unrealised Profit/loss
For the chart, there is 5 stage which are capitulation, hope/fear, optimism/denial, greed, and euphoria.
If you have noticed, this NUPL graph is a greed and fear indicator of bitcoin, measuring the market sentiment; a similar tool used in the stock market is the VIX index.
Click here for further details on the VIX index.
Thoughts
Congratulations! You have made it. Acquiring these tools would increase the chance of accuracy. You will become knowledgeable than the vast majority in the area of bitcoin.
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