It really is hard to value assets that don’t have an intrinsic value. Just ask any commodity strategist. This is why these guys typically develop models of supply and demand to assess the direction of commodity prices. But with cryptocurrencies, it seems even harder because not only do cryptocurrencies have any intrinsic value, their supply is fixed by an algorithm and the demand is the only true variable changing over time. Yet, demand for cryptocurrencies seems almost impossible to forecast.
Apr 21, 2022·edited Apr 21, 2022Liked by Joachim Klement
Joachim, another brilliant post and unique perspective.
I’ve been following all of Erik’s work for many years- I even have Google Alerts set up to get notified when his recent posts get published. He is always ahead of the curve.
The metric is interesting, but I find it problematic: profit per transaction is basically just a function of how many transactions there are: if there are many transactions then they become more expensive, i.e. transaction fees go up and miners make a greater profit. At parabolic peaks when Bitcoin price spikes by a factor of 5-10 a lot of that traffic comes from holders sending their coins to and from exchanges to either sell or after having FOMO-bought.
Sure, it's possible to say the added marginal hash-power increases the supply of Bitcoin temporarily, but I'd guess that it's a very minor factor: let's assume the block reward is 6.25 BTC/block every 10 minutes, which is about 900 BTC/day or 9,000 BTC over a 10-day period. If the hashrate increases by 5%, this will speed up block generation and add about 450 BTC to the supply over 10 days. That's a drop in the bucket, about 25-50 million USD or so.
I doubt that it's enough to crash the market sustainably as in a major top. The simpler explanation would be: transaction fees are correlated with the hype factor. And peak hype = peak price.
Joachim, another brilliant post and unique perspective.
I’ve been following all of Erik’s work for many years- I even have Google Alerts set up to get notified when his recent posts get published. He is always ahead of the curve.
Thank you for sharing!
The metric is interesting, but I find it problematic: profit per transaction is basically just a function of how many transactions there are: if there are many transactions then they become more expensive, i.e. transaction fees go up and miners make a greater profit. At parabolic peaks when Bitcoin price spikes by a factor of 5-10 a lot of that traffic comes from holders sending their coins to and from exchanges to either sell or after having FOMO-bought.
Sure, it's possible to say the added marginal hash-power increases the supply of Bitcoin temporarily, but I'd guess that it's a very minor factor: let's assume the block reward is 6.25 BTC/block every 10 minutes, which is about 900 BTC/day or 9,000 BTC over a 10-day period. If the hashrate increases by 5%, this will speed up block generation and add about 450 BTC to the supply over 10 days. That's a drop in the bucket, about 25-50 million USD or so.
I doubt that it's enough to crash the market sustainably as in a major top. The simpler explanation would be: transaction fees are correlated with the hype factor. And peak hype = peak price.
"Which makes me think if it really could be this easy to make money with cryptocurrencies?"
Its always easier after the fact -- the trick would have been to develop that thesis in 2013 or 17...