How much is Bitcoin Cash really worth? A fundamental analysis using "Currencies Fair Value" model

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Written by
3 years ago

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.

Currencies Fair Value Model - LTC in BTC

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. 

Coinfairvalue.com

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.

Bitcoin Cash's Fair Value vs. Price

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.

BTC, ETH and BCH Average Transaction Fees

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:

  1. Nothing here is investment advice.

  2. 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.

  3. Markets can be irrational for a long time, and things may stay ridiculously cheap or ridiculously expensive for a long long time.

  4. Feedback is welcome and appreciated.

Thank you for reading.

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Avatar for Omar
Written by
3 years ago

Comments

Thank you @MarcDeMesel for reading and for the generous tip.

$ 0.00
3 years ago

Confirmation a great

$ 0.00
3 years ago

Thank you very much for this information

$ 0.00
3 years ago

Hi respected sir!
I am new here. I just read your article. Yes sir crypto is no expensive it is game changer. According to me by investing a smell plenty of Money we can grow very well. So sir I just joined this platform so I am looking for seniors people , sir I need guidance and your kindness. So that is begin this work more energy and motivation. Good luck all the best sir God bless you 😊

$ 0.00
3 years ago

Thanks for writing this helpful article... Thanks @omar sir

$ 0.00
3 years ago

The problem with the number of transactions is that they can be faked. So we don't know for sure if all the transactions are real, or if at least some of them are just transactions sent back and forth. I look at the number of unique addresses per day.

$ 0.00
3 years ago

Sure, makes sense. The number of unique addresses per day for BCH is about 100,000, or one tenth of that of BTC. BCH market cap is currently 1/70th that of BTC, so BCH is very undervalued considering that metric also.

$ 0.00
3 years ago

Unique address does not mean that there are more BTC users. Very many BTC transactions are made by the same people and a new address is created each time. So one person creates many addresses. In read.cash and noise.cash there are many active users, but they use only one address for transactions.

$ 0.00
3 years ago

good point, thank you Telesfor.

$ 0.00
3 years ago

You're welcome 😄

$ 0.00
3 years ago

First of all thank you for this worth reading article my experience is nothing in front of you guys but the predictions i made about prices make peoples shocked and i know bitcoincash is valueable in coming month or year as we can see prices are almost there to hit 1000$ hope we will see sucess of bitcoincash from our eye's as i missed bitcoin oppurtunity finally find a hope when i joined bitcoincash conmunity and I'm loving it

$ 0.00
3 years ago

thank you for reading!

$ 0.00
3 years ago

𝑰𝒏 𝒂 𝒘𝒐𝒓𝒅, 𝒈𝒓𝒆𝒂𝒕 𝒂𝒓𝒕𝒊𝒄𝒍𝒆. 𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒔𝒉𝒂𝒓𝒊𝒏𝒈 𝒘𝒊𝒕𝒉 𝒖𝒔. 𝑰 𝒂𝒎 𝒘𝒐𝒓𝒓𝒊𝒆𝒅, 𝒃𝒆𝒄𝒂𝒖𝒔𝒆 𝒕𝒉𝒆 𝒓𝒂𝒕𝒆 𝒂𝒕 𝒘𝒉𝒊𝒄𝒉 𝒕𝒉𝒆 𝑩𝑪𝑯 𝒓𝒂𝒕𝒆 𝒊𝒔 𝒊𝒏𝒄𝒓𝒆𝒂𝒔𝒊𝒏𝒈, 𝒂𝒇𝒕𝒆𝒓 𝒂 𝒇𝒆𝒘 𝒅𝒂𝒚𝒔 𝒊𝒕 𝒘𝒊𝒍𝒍 𝒃𝒆 𝒔𝒆𝒆𝒏 𝒕𝒉𝒂𝒕 𝒕𝒉𝒆 𝒉𝒖𝒎𝒂𝒏 𝒓𝒂𝒄𝒆 𝒊𝒔 𝒅𝒐𝒊𝒏𝒈 𝒍𝒆𝒔𝒔 𝒅𝒂𝒊𝒍𝒚 𝒘𝒐𝒓𝒌 𝒘𝒊𝒕𝒉 𝑩𝑪𝑯 𝒊𝒏𝒔𝒕𝒆𝒂𝒅 𝒐𝒇 𝒅𝒐𝒍𝒍𝒂𝒓𝒔, 𝒄𝒓𝒆𝒅𝒊𝒕 𝒄𝒂𝒓𝒅𝒔, 𝒎𝒐𝒏𝒆𝒚.

$ 0.00
3 years ago

thank you for reading Ostina! don't worry. the point of BCH is to replace "fiat" currencies and become the peer-to-peer electronic money for the world. all will be well!

$ 0.00
3 years ago

𝑾𝒆𝒍𝒄𝒐𝒎𝒆 𝒔𝒊𝒓! 𝑰𝒏𝒔𝒉𝒂𝑨𝒍𝒍𝒂𝒉, 𝒍𝒆𝒕 𝒊𝒕 𝒃𝒆 𝒔𝒐

$ 0.00
3 years ago

thanks for bringing more attention to Coin Fair Value. more need to think about its ideas.

i wrote an article about it as well, haha. i talked mostly about the uncertainty aspect of its modeling. what was so exciting to me was that uncertainty was going up as transactions were going up, as it's hard to judge the value of all the new transactions.

the uncertainty gives the model a range of potential values, and our current valuation is near the lower bound of that range, so BCH is most likely very undervalued. given all the other metrics that point to a similar thing, and our knowledge of consistent growth and improvement, things are looking very good.

$ 0.20
3 years ago

Hello @lerkfrend. I couldn't find your article. Yes, interesting observation about the "uncertainty".
Thank you for reading and for the feedback!

$ 0.05
3 years ago

thank you lerkfrend. nice article!

$ 0.05
3 years ago

thanks so much for the upvotes!

$ 0.00
3 years ago

Hodl for BCH in the long run. really hoping to see it at $2000 each.

$ 0.00
3 years ago

First of all, thank you for posting the article. What is your opinion about Stock-to-Flow model? In my opinion, it makes a lot of sense in theory. Also pumpamentally it is very, well, bullish model for assets like bitcoin (btc, bch, btg, bsv). It is probably the easiest to understand model, but then I am seeing currency like bch having so low valuation so it seems not to make sense empirically. The undervaluation of bch is so low that I guess every measures does not make sense as they all are so far away from reality. A good theoretical model should somehow fit to the empiria as well. Otherwise it is just an idea.

$ 0.00
3 years ago

Thank you for reading! The S2F model is very bullish in theory as you said. It looks at the supply side, just the diminishing supply due to halvings. The on-chain analysis models, like the NVT ratio and the model discussed in the article, look at the demand and network activity / utility side, which I think makes more sense, especially considering the BTC / BCH split. S2F incorporates the price, these models don't. S2F fits more with the "store of value" narrative of BTC. These models fit more with the "medium of exchange". BCH can be both.
BTW have you seen any S2F graphs for BCH?

$ 0.00
3 years ago

No I have not seen anything related s2f when it comes to bch but since bch shares the same price history with btc until 2017 I would assume the same targets should apply.

$ 0.10
2 years ago