Study: Observing Bitcoin's network activity can help predict its price?

Determining the value of Bitcoin and its trends is not an easy task. However, some experts and cryptocurrency traders believe that by analyzing Bitcoin’s network activity, it is possible to determine the value of the cryptocurrency.

“Network value should be a function of network activity”

Stock analysts and traders can use a variety of indicators that are derived from financial statements, earnings reports, and economic analysis to determine a stock's value. In addition, they can use a range of technical indicators that show a given stock's trend, momentum, volume, and volatility.

On the other hand, Bitcoin is not a traditional asset. For example, there is no corporate income statement to help infer its value. If BTC is trending at $8,200, is its price high or low? Therefore, to determine its value, we need a reference point or a relationship.

Travis Kling, chief investment officer at Ikigai Asset Management, and Hans Hauge, a senior quantitative researcher, discussed how Bitcoin network activity helps determine the cryptocurrency’s value on the Oct. 14, 2019, episode of Venture Coinist.

(Travis Kling is a capable general of Point72, a well-known American hedge fund, and Point72 founder Steve Cohen is known as the "King of American Hedge Funds"

Kling affirmed that just as there is a relationship between stock price and earnings per share, there is also a relationship between network value and network activity. Earlier, in a separate interview, Kling also said: "Network value should be a function of network activity."

Bitcoin’s network value is easy to determine. It’s its market cap. Kling explained that there are several different ways to measure network activity. One of them is total transactions, transactions per day, active wallet addresses, or hash rate.

Bitcoin hash rate correlates with BTC price

Hash rate is a performance indicator for miners. Specifically, it represents the number of SHA-256 algorithms executed by a computer per second. A growing hash rate means more miners are participating in the network.

For example, according to Hauge, hash rate gives miners a good idea when the bitcoin price exceeds the network’s mining capacity.

But the question is, does an increase in hash rate lead to an increase in BTC price or vice versa?

It can go both ways, Hauge said, “like a vicious cycle.” He sees it as a reflexive system based on human behavior, but it also has a quantitative relationship.

Similarly, technologist Pedro Febrero believes there is a clear correlation between hash rate and price, but he said that “usually, hash rate tends to be the leading indicator, with the exception of the 2012-2014 bull run, when prices started to rise before hash rate followed.”

Another network metric experts mentioned is Metcalfe’s Law, “According to Metcalfe’s Law, the number of unique addresses of Bitcoin is used to measure the size of the network and can indicate the value of Bitcoin.”

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