Back in 2019, Charles Edwards, the founder of Capriole Investments, presented Bitcoin's fair value model, which is still quite relevant. It's based on an assessment of the volume and cost of energy consumed, as well as the supply growth rate.
The model assumes that a high level of human effort is associated with high expectations and an increase in demand for the produced product. If demand declines or an 'employee' discovers another, more advantageous area, their efforts will fall to zero.
This statement results in several hypotheses that set up the rule in practice. First, significant price growth leads to the activation of miners and an increase in Bitcoin's energy value. Second, when price growth is caused by speculations without a corresponding boost in energy consumption, the price will fall back to the energy value level.
As the chart shows, the model and Bitcoin mostly move in lockstep. The only exception is the drop in energy value seen in 2013-2014 because of miners' transition to ASICs and a sharp decline in energy consumption.
Last year, the indicators diverged once again, but in the opposite direction. Currently, Bitcoin's fair energy value is $45,300, while its mining cost is $21,600.
According to the model, a sharp drop in energy consumption often signals the best time to exit the market. However, when it rises sharply, it's the perfect time to buy.
Since 2022, the network's overall computational capacity has more than doubled to 389 EH/s, Bitcoin has lost 46% of its value, and the mining yield from a terahash of capacity dropped nearly four-fold to $0.06.
There's been no tech revolution in the past few years, and the network's hash rate has grown with support from the rollout of additional equipment. This increases Bitcoin's fundamental value since every mined coin is more expensive and implies long-term price growth, at least to the level of Bitcoin's energy value.
The model's description ends with the following words:
"As humans, our time is limited — it's our most valuable resource. What we choose to put our energy into, and therefore our time into, is our most valuable choice."
StormGain Analytical Group
(platform for trading, exchanging and storing cryptocurrency)
