Hello everyone!
Is Bitcoin Cash (BCH) currently cheap or expensive?
Well, one way to evaluate the value of bitcoin and other cryptocurrencies is "on-chain analysis", or assessing the value of the network by metrics related to its use and activity.
The following is a fundamental analysis of Bitcoin Cash using the model used in coinfairvalue.com. It is a website that uses "Currencies Fair Value" model to evaluate and calculate an implied "fair value" for cryptocurrencies based on their current usage.
The Currencies Fair Value model was originally published by @pablompa in 2017. You can read the whole article here. PDF format is here. It is a nice read, but there is a lot of math in there.
The concept is similar to the Network Value to Transactions (NVT) ratio explained nicely by Marc De Mesel in a recent article.
However, the Currencies Fair Value model uses a more complex formula to reach a rating of how 'valuable' a blockchain is. It uses a combination of inputs including money velocity, transaction count, value transacted, and "basket".
This is a purely fundamental chain analysis, and has nothing to do with the current crypto prices, so the market cap doesn't influence the "fair valuation".
So, how did this model perform in the past? Here is a chart from the original article plotting the fair value of LTC/BTC pair and the actual price between 2013 and 2017.
Image source: Cryptocurrencies - What is the fair value of a currency?
The fair value appears to converge to the actual price of the currency, despite the fact that the model does not use any market data at all (no prices, no market cap, etc.). This is impressive. Additionally, I noticed that the turns the in the fair value appear, most of the time, to precede the turns in price, a "leading indicator" if you will. It is as if the fair value is acting as a magnet for the price.
The website coinfairvalue.com uses the above model to make "fair value" calculations for 78 currencies, continuously updated.
"OK, Omar", you say; "sounds like you are excited about this website". Well, I am actually excited about Bitcoin Cash!
So let's go to the website, and look up BCH. We find that the current "fair value" for BCH is around $2500. With a current price of around $700, BCH appears to be undervalued.
Interesting. But how do other cryptocurrencies compare? Well, to do that, we can divide the current price of each coin by its current estimated "fair value" to adjust for the current price and reach a number (ratio) that is comparable across all the coins (remember, the model itself does not consider the current price at all).
We find that Bitcoin Cash is the most undervalued of all the 76 cryptocurrencies listed on coinfairvalue.com
If you sort all the coins by "price to fair value ratio"P/FV, BCH comes out on top.
For the past two months or so, BCH's "fair value" has been exponentially increasing. This started in late December, and is probably due to the increase in both 1. BCH transaction count (noise.cash started in late December, likely the main factor), and 2. BCH total value transferred per day.
Image source: coinfairvalue
Image source: bitinfocharts
OK sounds great, but does the model have limitations? Of course. A famous quote in statistics is "All models are wrong, but some are useful".
The model itself has "uncertainty", which is defined and modeled.
Additionally, looking a the bigger picture, the question is, what happens if the network activity starts to decrease? Obviously the "fair value" will also decrease. Anything is possible of course, but I actually predict the BCH network activity to continue to increase due to the following:
The BTC network is becoming more congested day by day and the fees are rising. Bitcoin Cash network offers much lower fees compared to ETH and BTC, and this will certainly draw the attention of cryptocyurrency users. Please see the chart below.
Increased use of BCH in business in more locations using direct payment or through payment processors like eligma / gocrypto.
Increased use of BCH for local and cross-border payments, especially in the developing world.
Increased social media use on sites like noise.cash, read.cash, member.cash, and memo.cash.
Chaintip and other online tipping tools.
Simple Ledger Protocol (SLP) tokens: anyone can issue their own loyalty tokens or digital money on Bitcoin Cash from as low as 1 cent to mint. It's easy and anyone can do it at mint.bitcoin.com
Upcoming applications; such as the Kim Dotcom's recently announced digital content system.
Image source: bitinfocharts
Bitcoin Cash's average transaction fees are in orange; if you can't see them don't worry, your vision is OK, they are around the zero x axis.
Conclusion:
According to the "Currencies Fair Value" model, BCH is still at a bargain price at this point, especially relative to BTC.
Please note the following:
Nothing here is investment advice.
This analysis is interesting and useful; however, the model has its limitations as discussed. That is why I used quotes whenever I mentioned "fair value". Not everything is fair anyway.
Markets can be irrational for a long time, and things may stay ridiculously cheap or ridiculously expensive for a long long time.
Feedback is welcome and appreciated.
Thank you for reading.
Thank you @MarcDeMesel for reading and for the generous tip.