Quantitative Approach to Crypto Analysis [Current Market Examination]

A lot of things have happened in the last couple of months. The retail market is driving the prices of Bitcoin to $20,000, while institutional players are publishing research that the real price of Bitcoin if $0. So who is right and who is wrong and, most importantly, where the right price of Bitcoin should be?

At AxionV, an algorithmic trading AI crypto hedgefund, we are under the opinion that robust valuation analysis must be conducted before making any significant judgements about the price of Bitcoin, let alone portfolio positioning. Once the valuation is understood then investors can have a much clearer vision about the long-term direction of the asset. It is still possible to capture systematic profits from shorter-term trends. But in this article, let’s look at the longer-term overview of the Bitcoin and crypto market and see if crypto is in a bubble or not.

You could hear all over the media that cryptocurrencies are in a bubble, so let’s address this point first. While there is a clear bubble pattern driven by retail investors, which is reflected in aggressive price spikes and the “shoeshine boy” moment is present as well, we must draw a very clear line: cryptocurrencies are backing up the blockchain technology that will disrupt virtually every business whose business model involves third-party intermediaries.

In other words, cryptocurrencies experience bubble-like price action, but cryptocurrencies are not bubbles themselves, since they are backing up a very influential technology.

The best example here would be Internet. Internet stocks ran into a bubble in 2001. Prices went up too high and too fast. But in 2015, NASDAQ went back to its 2001 level and far beyond it with a total return of 900% since 1995. Blockchain technology integration will take place much faster in part due to the fact that popularization conducted via internet allows new technologies to see the light + practical use cases much faster. It is also important to notice that while there is a bubble behavior, it is significantly hard for this technology to drop to the valuation of $0 offered by Morgan Stanley. Thus, the right price is somewhere in between $0 and $20K. Let’s see what could be the real price.


Figure 1. Internet versus Blockchain


The best methodology to put the right valuation for something is to find fairly priced comparables. This method works especially well for the crypto markets since there is not too much historical data. As I have described in my book Blockchain Applications in Finance, there are three comparables that cryptocurrencies could be compared to: currency, payment network, or a company with a decentralized organizational structure.

I would like to introduce a new comparable: decentralized cloud computing providers. What if these networks could be reprogrammed to process computations for enterprises similar to Amazon Web Services (AWS), Microsoft Azure, or IBM Cloud? A number of startups are already attempting to solve that problem and bring a decentralized computing solution to the marketplace. How would such valuation could be conducted?

The following two formulas can be used to estimate the correct price of 1 Bitcoin. To start, let’s first of all look at the total tangible assets provided by the Bitcoin network. The total hashing power as of December 2017 is around 15 million tera hashes per second. Famous amongst miners, Antminer S9 has a hashing power of 14 tera hashes per second and you can buy it for around $2,000. After we plug in values into the first formula, we get the total tangible assets of the Bitcoin network at $2.14 billion USD.


But what about intangible assets? For that, we need to analyze comparables from the real sector, such as Microsoft, Amazon, IBM, and Salesforce. Going to their 10K and 10Q statements, we could easily retrieve two ratios: intangible to tangible assets of 43% and market capitalization to total assets of 3.4 shown on Figure 2. While real and reasonable, these values look a little bit too low, so we are doing a second examination to retrieve the average market capitalization to total assets ratio provided on Figure 3. As expected, semiconductors are trading at the highest the market cap to total assets ratio of 8.2 with Nvidia and Advanced Micro Devices trading at 13.1 and 3.4 respectively.

Figure 3. Market capitalization versus total assets, by sector analysis


Since Bitcoin and the crypto market overall is all over the press with consistent media coverage, let’s assume that intangible assets are matched with the tangible assets at the one-to-one ratio and that the market cap to total assets ratio is 20. With total number of Bitcoins in circulation of around 16.5 million token evaluate 1 Bitcoin at nearly $5,200.

Is it the price of Bitcoin $5,200? Not necessarily. But the quick approximation method shows two very important conclusions:

  1. The value of Bitcoin is definitely not 0
  2. The value of Bitcoin at $15,000 – $20,000 could be overvalued and is probably somewhere in between 0 and $15,000

Having a number of factors signaling significant selloff from the above $15,000 levels, it might make sense to at least partially unwind the crypto portion of one’s investment portfolio. As the hashing power of the network and more use cases crowd the market, cryptocurrencies could fly to the sky. Thus, temporary weakness expected after aggressive price action in the last two quarters could serve as a great point of accumulating crypto position.


The information found in this article was prepared without regard to any particular investor’s investment objectives, financial situation, or needs. Accordingly, investors should not act on any information in this document without obtaining specific advice from their financial advisors and should not rely on information herein as the basis for their investment decisions. Cryptocurrency trading involves a substantial risk of loss and is not appropriate for everyone. No representation is being made that utilizing the valuation analysis will result in profitable trading or be free of risk of loss. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. The possibility exists that you could sustain a loss of some or all of your initial investment. Only risk capital should be used.

Peter Borovykh

Blockchain Solution Architect

Peter has made his name in the traditional financial background and later became fascinated with digital applications of blockchain in finance. He is a quant who has created his own groundbreaking algorithmic trading strategy based on quantifying the market sentiment and leveraging the emotion of market participants. He set out to illuminate that part of the finance industry. He is the author of the book “Blockchain Applications in Finance”.