Pay to Marwadi
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Bitcoin
Techno-Fundamental Report

Introduction

India has the highest number of crypto investors in the world with approximately 10 crore investors, that amount to around 8% of the country’s population. This is a huge number considering the time this asset class has been into existence, and the Indian government recently announcing a tax of 30% on crypto gains signals that it is taking the digital currency seriously. As per CoinMarketCap, there are around 9,341 listed cryptocurrencies currently. Our belief on looking at the historical and current data is that about 90% of these listed cryptocurrencies would either go bust or lose most of their value. Our aim is to filter out the gems from the junk. 

We strongly believe that crypto is a great asset class but it is currently in a nascent development stage and needs a lot of improvement to evolve as a sustainable asset class. With that in mind, we have identified some core technical and fundamental parameters to evaluate cryptocurrencies that can aid our investors make informed and quality investment decisions.

Models used in the report:

Group 295

Key Ratios:

SF Ratio

P/P Ratio

Fibonacci Ratio

Technical Levels:
1 2 3
Support
$30000
$34000
$40000
Resistance
$51031
$55276
$61320

Stock to Flow Model

The Stock to Flow model compares Bitcoin(BTC) to precious metals such as gold, silver, and platinum. Because of their relative scarcity, these commodities are characterised as “store of value” commodities because their value lasts for a long time. It is difficult to considerably increase their supply, because the process of finding gold and then mining it is costly and time-consuming. Bitcoin is similarly limited in supply. It is, in reality, the first-ever limited digital object. Because there are a finite number of coins in existence and mining the remaining approximate 2.5 million outstanding coins would need a significant amount of electricity and computer power, the supply rate is continually low.

Stock-to-flow ratios are used to compare a commodity’s present stock (total amount available) to the flow of fresh production (amount mined that specific year).

Stock to Flow (SF) = Stock (Total Reserves) / Flow (Yearly Production)

  • A larger ratio means the commodity is becoming rarer, and thus is more valuable as a store of wealth.
  • The majority of the money is held as a monetary hedge, causing the stock-to-flow ratio to rise.

The graph has price placed on top of the stock-to-flow ratio line. We can observe that the price has tracked the stock-to-flow ratio of Bitcoin through time. As a result, according to the theory, we can forecast where the price will go by looking at the anticipated stock-to-flow line, which can be estimated if we know the approximate mining schedule for future Bitcoin mining.

The number of days before the next Bitcoin halving event is indicated by the coloured dots on the price line of this chart. The reward for mining new blocks reduces to half on occurrence of this event, meaning miners receive 50% less bitcoins for confirming transactions. Bitcoin halvings are intended to happen every 210,000 blocks – roughly every four years – until the network has achieved the maximum amount of 21 million bitcoins. As a result, the stock-to-flow ratio (scarcity) rises, and the price rises in principle. This has been the case in the past with Bitcoin.

  • On this chart, the stock-to-flow line incorporates a 365-day average into the model to smooth out the market movements generated by the halving occurrences.
  • A divergence chart (lower section of the chart) indicates the difference between price and stock-to-flow in addition to the main stock-to-flow chart.
  •  When price rises above stock-to-flow, the divergence line changes colour from green to red, allowing us to understand how price interacts with stock-to-flow over time.

The table looks at some SF numbers:

Stock (tn) Flow (tn) SF Market Value
Gold
1,85,000
3,000
62
8,417,500,000,000
Silver
5,50,000
25,000
22
308,000,000,000
Palladium
244
215
1.1
11,956,000,000
Platinum
86
229
0.4
2,400,000,000
Stock (mn) Flow (mn) SF Market Value
Bitcoin
18.8
0.33
57
$846,318,595,584
  • Comparing the SF and the Market values from the above two tables, it is noticed that the SF value of Gold and Bitcoin is almost comparable but the market capitalisation of Bitcoin is one tenth that of Gold. 

  • This shows the price increment scope for Bitcoin going forward. 

  • Another interesting factor to note is that Bitcoin experiences halving whereas other commodities do not. 

  • On halving, the ‘flow’ would reduce to half, thereby increasing the SF ratio further. Hence, there is ample room for the price of Bitcoin to appreciate.

Bitcoin price prediction as per the Stock to Flow model:

31 Dec 2022 31 Dec 2023 31 Dec 2024
Price Projection
$78,280
$81,956
$306,984

Bitcoin Miners’ Production Cost

Bitcoin mining is a cost intensive process. The major constituents of the cost include electricity cost and mining hardware. The hash rates which signify the difficulty/computing power required to mine Bitcoin, have been on the rise ever since inception. By clubbing all of the above, we can mathematically arrive at an approximate production cost of mining. The chart below shows the production cost trajectory over time. 

  • Higher the Bitcoin price above the production cost, more is the miner’s profit. 
  • Whenever the Bitcoin price falls or approaches the production cost, there is a fear among miners to liquidate their positions with the intention to avoid losses.

Historically, the production cost zone has been providing good support to the price of Bitcoin. The current production cost stands at approximately $34,000. Recently, during a short term panic in the crypto market, price fell below $34,000 briefly before recovering sharply above it. Logically, that level should act as a significant support level for the price of Bitcoin. Till that level holds, we can see further upside marking that zone as an intermediate bottom.

We back tested the Price/Production ratio historically and found that whenever the ratio drops below 1, there is a significant level of bounce with reasonable probability. Find below the data on how much price move has been observed on such scenarios:

Month Price Prod. Cost Price/Prod % Movement
Mar-16
408
436
0.94
96%
Jul-16
664
1195
0.56
73%
Mar-17
1071
1253
0.85
165%
Jul-17
1970
2098
0.94
865%
Aug-18
6313
6672
0.95
18%
Sep-18
6493
6789
0.96
-51%
Apr-19
4096
4849
0.84
241%
Mar-20
4841
8085
0.60
101%
Aug-20
11471
12932
0.89
471%
May-21
34632
35088
0.99
98%

Technical Structure

From the above explanation, we know that $34,000 is the breakeven price for BTC miners currently. BTC has sharply bounced from that level, marking it as an intermediary bottom. Technically, it had previously taken support around those levels. Extrapolating and combining the above logics, we can derive some short term upside targets using Fibonacci levels. $51,000 (50% retracement) and $55,000 (61.8% retracement) can be short term upside targets and resistance levels of the most recent downward leg.

Conclusion

Keeping in mind the current correction in Bitcoin and overlaying with our analysis, we can conclude that Bitcoin has been finding good support in the $30k-$40k range. It also provides a good risk to reward ratio at the current levels. There is also a reasonable degree of momentum in the current reversal. Going forward, it is imperative to watch the long term holders’ behaviour towards their holdings as well as renewed demand which has been lacking since a couple of months.

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