This paper is co authored by David puell (@ kenoshaking). David is a full-time cryptocurrency enthusiast, chain analyst and market researcher. David is known for opening up new areas of on chain analysis, creating the original bitcoin valuation metrics, including MVRV ratio, Purell multiple, and average token dormancy. Bitcoin cannot be fully integrated into the framework of traditional asset classes, which makes institutional investors reluctant to adopt it. We believe that skeptical investors did not consider their unique attributes, but concluded that blockchain and cryptocurrency cannot be analyzed fundamentally. We believe that investors will increasingly appreciate the value of bitcoin through a new framework. Although the traditional analytical framework is not suitable, bitcoin provides a unique set of tools that investors can use to assess its fundamentals. Just as a government statistics agency publishes data on a country’s population and economy, or listed companies publish quarterly financial statements that disclose growth rates and earnings, bitcoin provides a real-time global ledger that publishes the economics of online activity and internal data. Without central control, bitcoin’s blockchain provides open source data, and its integrity depends on the transparency of the network. Investors can analyze open source data and assess the fundamentals of bitcoin, as we will discuss in this three part blog series, where market participants can access data on the chain and analyze bitcoin more deeply than other traditional assets. We will analyze the three-layer pyramid in depth, in which the lower layer serves as the building block of the upper layer, as follows: Note: the market value to realized value (MVRV) ratio is a long-term indicator used to evaluate the long-term market cycle of bitcoin. Hodl is a misspelled term derived from “hold” and refers to a strategy to buy and hold in the context of bitcoin and other cryptocurrencies. Source: Ark investment management LLC. in 2020, data at the bottom of the pyramid will assess the overall health of the network: network security, currency integrity, transparency, and utilization before going into details. Through any blockchain “search engine” access, this layer of data is raw and direct, almost no operation is required. Relevant to all market investors, it provides a basic “fact sheet” about the network. In this blog, we will explore this data layer in detail after summarizing the other two layers. The data in the middle tier goes deeper: through the wallet address, it can disclose each holder’s position and cost base at any time of the day. In the long run, the price of bitcoin may be more responsive to the first tier of raw network health data, but in the short to medium term, buyers and sellers can help investors identify inefficiencies in the pricing and evaluation of such nonproductive assets. Finally, the top layer uses the data of two lower layers, which provide relative evaluation indicators to identify the short and medium-term inefficiency of bitcoin prices. The top data layer is particularly useful for active investors by providing trading signals in crypto markets, such as relative valuation multiples such as ev-ebitda in the open stock market. In this three blog post in collaboration with glassnode, we will explain how on chain data provides a new framework for analyzing emerging monetary assets, such as bitcoin. As institutional investors come into contact with bitcoin, we believe that the three data layers of the network will enhance their understanding and confidence in the fundamentals of bitcoin. Throughout the series, we aim to unleash the power of data on the chain and describe the tools and technologies that enable investors to transform raw open source data into viable investment decisions. While we can extend this framework and analysis to other cryptocurrencies running on open source software, this series focuses on bitcoin and bitcoin networks. It is worth noting that no other network can match the transparency of bitcoin, which, in our view, makes bitcoin the most “analysable” and basically sound network. Why bitcoin? Not all blockchains are equal. The more open and transparent a blockchain is, the easier it will be for market participants to analyze its fundamentals. The most useful public blockchain provides an easy to access tool to audit its network. Today, anyone can download bitcoin clients, install nodes, and extract detailed network data with a relatively low entry threshold. We think that the auditability, openness and transparency of bitcoin come from three characteristics of the network: 1. Bitcoin has a simple audit system: compared with the traditional account based audit system, bitcoin’s utxo based audit system makes it easier to track supply and audit monetary policy. 2. The bitcoin code has been verified: the implementation of bitcoin protocol exists in the code that is more censored than any other open source software code. 3. Efficient bitcoin nodes: bitcoin nodes or volunteer computers running software to verify network integrity are more cost-effective than other cryptocurrency network nodes. Level 1: evaluate the operation of bitcoin network. Investors can monitor the operation of bitcoin network in real time by extracting original open source data from bitcoin nodes. In the figure below, we describe and provide three indicators to evaluate the network health. Table 1: assessment of bitcoin network operation 1. Currency integrity the bitcoin protocol ensures currency integrity by enabling analysts and investors to track bitcoin’s total flow and daily issuance, as shown in the figure below. Total flux supply is a function of historical monetary policy and current monetary policy issued daily. From the beginning, monetary policy has been pre-determined and encoded in the bitcoin protocol to make it fully predictable and verifiable. Supported by a strong system of checks and balances, bitcoin’s strict adherence to the rules based monetary policy highlights its integrity. 2. The safety of bitcoin is guaranteed by miners, who ensure that transactions are verified and verified irreversibly. Hash rate, as shown in the figure below, measures the processing power of miners to protect the network from attacks. With all other conditions being the same, increasing the level of hash rate will improve the security of the network. As shown in the figure above, the hash rate has increased by nearly an order of magnitude every two years in the past six years, which is three times as fast as the price of bitcoin in the past five years. The sharp rise in the support hash rate is the willingness of hardware and miners to invest based on the expectation that the price of Ltd will rise over time. Interestingly, only in the past few months has the price of bitcoin exceeded its 2017 high, during which the hash rate of bitcoin has increased by 950%. Miners’ income (the sum of new bitcoin issues and transaction costs) is also a measure of miners’ investment in cyber security. Since its inception, miners have generated more than 18.5 million bitcoin revenues, about $600 billion at current prices, as shown in the figure below. 3. Usage investors can monitor the network activity and usage of bitcoin by tracking the number of active addresses. This is an indicator adopted by users, and transaction volume is an indicator of economic activity. Active address due to the transparency of bitcoin network, market participants can monitor their activities up to the level of active address. Although the active address is not a direct proxy for the number of users, it shows the number of unique addresses active on the network every day. A single address can represent an individual, as well as an exchange and mining business. There are more than 1 million active bitcoin addresses per day, and its growth is positively correlated with the price of bitcoin over time. A more detailed breakdown of active addresses can capture the distribution of bitcoin in each address over time. As shown in the figure below, the share of addresses with more than 10000 bitcoins has decreased over time, while the share of addresses with less than 10 bitcoins has increased. In other words, the wealth associated with bitcoin seems to be decentralizing and expanding. Since its inception, bitcoin has settled about $10 trillion in transactions, highlighting its ability as a global clearing system. Divided by circulation supply, transaction volume can provide bitcoin’s annualized rate, as shown in the figure below. In the past eight years, bitcoin’s circulation rate has dropped to a level not seen since 2011, which may be due to several reasons: investors may be hoarding or losing bitcoin, and / or trading activities may shift out of the chain. Trading volume is a good indicator of economic activity, but it has no high correlation with price in the short term. Bitcoin has contributed to more than 600 million transactions in its 12-year history, and has continued to be active in recent years despite price volatility. For example, during the bear market in 2018, as bitcoin prices fell by 73%, transaction volume actually increased by about 35%, as shown in the figure below, indicating that online activity is active. Now that we have described how the bitcoin network works, in part 2 of this series, we will analyze the second data layer of the pyramid, including the inflow and outflow of bitcoin, the behavior of holders, and the cost base of various peer groups.