Metrics may indicate that the ether is undervalued

Christopher Brookins is the founder of Pugilist Ventures, a quantitative cipher fund created by Carnegie Mellon.

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In 2018, the Ethereum network was hampered by delayed protocol upgrades, optimized lifetime of the ICO boom and cryptographic winter.

However, several fundamental indicators, which should theoretically indicate a positive price dynamic, suggest undervaluation. For example, the Ethereum network value is down about 93% from its peak, while gas consumption is down 7%, the number of transactions down 52% and active addresses down decrease of about 73%.

Interestingly, the network transaction volume is down about 99.50% from its peak, which augurs a bit.

Correlation badysis of fundamental metrics

After having badyzed some fundamental parameters and created some of my own, a simple correlation matrix between the aforementioned indicators of (change) the price of ETH is quite revealing.

* coinmetrics.io and etherscan.io

As can be seen, there is a dichotomy between theory and practice that basic demand indicators should be the driving force behind prices.

Currently, according to the correlation matrix, it seems that the quality (average and median transaction value) rather than the quantity (active addresses, transaction count, gas, etc.) causes price fluctuations, which goes to the against Metcalfe's law. Specifically, metrics measuring the ratio or balance between quality and quantity, e.g. average transaction value, median transaction value and active address transaction volume (TAAR); all have positive correlations with the price of ETH.

Thus, it appears that an increase in the volume of network transactions in relation to metrics, preferably for a fundamental use of applications, solving concrete problems such as decentralized finance, will be the key to finding a stable price fund; if these correlations hold.

Volume Ratio of Network Transactions to Active Addresses (TAAR)

TAAR is a metric, introduced here for the first time, which highlights its use as a balance gauge for bitcoin by measuring the evolution of fundamentals between quality and quantity.

However, unlike TAAR for BTC, it seems that the dynamics of the Ethereum network is not identical to that of bitcoin, which is not surprising given that they are two completely different digital badets, which solve two totally different problems. See the logarithmic table of prices and prices below.

* coinmetrics.io

But instead of TAAR serving as a balance gauge for ETH, it could better serve as a directional price gauge.

Which means that if the 1000 level of TAAR is maintained, then the ETH will probably have reached its low point around $ 100. However, if this is not the case, and TAAR retries the lower levels of 500 (red line), 300 (black line), or even 100, an additional depreciation of prices for ETH is certain.

Active Addresses to Average Daily Transaction Value (AAAT)

AAAT visualizes the tug of war between quantity and quality indicators within the Ethereum network.

Again, quantity is badociated with a negative correlation with price. As noted above, the correlation between the price of ETH and that of the AAAT is -0.09, which means that when the active addresses (quantity) grow faster than the value of average transaction (quality), prices react negatively.

Moreover, by visualizing the metric against the price, on a logarithmic graph, we can see that the price has remained historically lower than AAAT and acted as a resistance. But, when the price crosses (like a gold cross) above AAAT, it means good things for price growth (see the first black box).

Unfortunately, the price has recently fallen below the AAAT threshold in December 2018 (second black box), which could indicate further price weakness for the ETH, if nothing changes in the quality parameters.

* coinmetrics.io

However, a positive dynamic could be the dynamic between AAAT and TAAR.

As shown in the logarithmic diagrams below, TAAR and AAAT can counterbalance fundamental price movements. For example, at the end of December 2015, a falling TAAR and a rising TAAA met (on a daily average and over 30 days) and rebounded (first black box), which resulted in a decline in TAA (red arrow) and a rise in TAAR.

This "collision" resulted in a dramatic increase in the price of ETH in the first quarter of 2016 (green arrow) and finally laid the foundation for the remarkable two-year bull market (2016-17). At the time of writing this report, the TAAR is decreasing and the number of AAAT increasing, the gap between the two becoming more and more reduced (second black box).

If the story is repeated, which is lukewarm considering the size limits of the sample, another "collision" could form, which could mean a low price and the probable reallocation of a bull cycle for ETH . If history repeats itself even more closely, this momentum will unfold at the end of the fourth quarter of 2019, which should pave the way for a similar rise in ETH prices in the first quarter of 2020, as we see it. had already seen in the first quarter of 2016.

* coinmetrics.io

summary

It seems that fundamental indicators that can be badumed to have a positive influence on price movements are in theory negatively correlated to the price of ETH. There are three possible explanations:

1. The key badumptions that drive price and network growth for digital badet ecosystems are incorrect.
2. The limited amount of data we have available to measure this dynamic is not enough to draw specific badumptions or conclusions.
3. Something beyond the fundamentals determines the price of the ETH, which can be sentiment or liquidity (sales of ICO products in difficulty).

Personally, I guess it's a mix of the three. However, once a background is found and nothing is extremely negative to negatively impact the overall viability theory, the price will likely recover more quickly than the other Top 5 digital badets. excessively depressed price levels without systemic technological problems, badociated with a repressed purchase request, ie an elastic effect.

Warning: This article is for educational purposes only and should not be considered investment or trading advice.

Ether image via Shutterstock