This is an except from our January Market Outlook.
Each month we dive into on-chain data to explore interesting trends or movements on the Bitcoin network. (Table 2)
Table 2: Bitcoin network activity — December vs November
Strong network activity in December 2020
After an already high network activity in November, December has seen even higher metrics across the board (Table 2). The number of payments, estimated from the transaction outputs, are up 5.8%, and the number of active addresses up 4.5%.
Table 3: Bitcoin mining metrics — December vs November
The hash rate, an essential component for network security
Table 3 shows metrics related to mining activity. With the increase in price, the hash rate is on the rise (+5.8%), at an all time high estimated at 137 EH/s for the month of December. Interestingly, it has just beaten the rate of 136 EH/s seen for the month of September, despite the mining revenue increase by 27.5% in December and doubling since September. The hashing (computing) power involved in mining blocks is what makes the network resistant to attacks.
Back in June, we created a bitcoin security metric called the Market Value Adjusted Network Security (MVANS) indicator, which is the ratio of the market value and the estimated hash rate.
At a given market cap, the more hashing power the more secure the network is; and at a given hash rate, an increase in market makes the market more valuable and arguably more attractive to attacks.
In other words, the lower MVANS the ratio, the more secure the network is.
Figure 1 shows that the network has become less secure with the market value increasing faster than the hash rate. However, the network went through the previous bull run without attacks even though MVANS was at least 5 times higher.
Figure 1 : An increasing MVANS, even though the network is still relatively secure.
Figure 2 : MVRV reaching extreme level
We have also observed that the Network Value to Realised Value (MVRV) ratio is approaching levels seen during the 2017 bull run. The network value, also known as the market cap, evaluates each bitcoin with the current price, whereas the realised value takes the price when it last moved. We are currently at a ratio of 3.5. At the top of the 2017 blowoff bull cycle the number was 4.5; a value that would put BTC at $45,000. However, as more and more BTC is bought by new entrants and moved off exchanges it will raise the denominator of this ratio, pushing the MVRV metric down.
In other words, if extremeness of sentiment is measured as the value of the asset class relative to its historic cost basis, we are definitely entering the extreme phase. However, current market dynamics are significantly different this time given the global economic crisis and various political developments.