Fundamentals of Bitcoin


Bitcoin hits new record highs, is it hype or the new future?

Today Bitcoin hit new record highs around US$16,000. There is an argument that the volume of investment into CryptoCurrencies is why Bitcoin and others have fundamental values. Indeed total market capitalization of Bitcoin reached $260 billion and trading volume hit today US$6.6bn.

Other cryptocurrencies are clearly also benefiting from the rise of Bitcoin, and many traders who tried to fight the trend by selling short have suffered accordingly.

Let's look at the fundamentals of Bitcoin:

1) According to JPMorgan, total investments into Bitcoin and Ethereum since 2009 has been about US $9 bn.
The Market is valued at US $230bn and gains 15%, market capitalization becomes US$260bn.
However that does not mean additional US$30bn has been invested into cryptos. If any substantial sellers enter the market the Bitcoin price would no longer reside at the current high levels and the market would be devalued accordingly.

2) Today daily turnover reached about US$6 bn. Most crypto exchanges have commissions based on as percentage of a trade, let us estimate at 0.2%. Every day at least US$12m are paid to the exchanges for the commissions. If we extrapolate that to one year or 360 days, that would be around US$4bn paid every year on the commissions (and lost by other participants).

3) Currently Bitcoin miners generate each day around 7200 BTC, worth about US$115m. That should attract at least US$115m investments every day just to cover the cost of new Bitcoins at the current highs and prevent the market from falling. According to some estimates, miners pay US$35m every day just for the cost of electricity used in mining the coins.

4) Some miners do not sell Bitcoins immediately but hoard them for the future. There are a number of very active miners in China which holds billions of crypto currencies but are not able to convert them into Cash until liquidity improves to the point where such sales can be absorbed.

CBOE will launch Futures on Bitcoin on the 10th of December. CME will also launch Futures on the 17th of December. Official Exchanges attract professional traders and more liquidity. And that would be an excellent time for the large holders to finally convert Bitcoins into tons of money.

I myself missed the trend and decided to not invest into crypto. I expect the market will be very volatile and can easily drop 10 times from the current levels, as it happened many times in the past. I strongly recommend to invest only small part of your fortune into Crypto Currencies.


There is an interesting book by Sornette, Why Stock Markets Crash. The author introduces a mathematical model to predict stock market crashes based on previous events. In short, his formula shows that as bubbles grow, the interval between waves is shortened and volatility is increased. The market grows very fast and although it is impossible to predict the exact timing of the crash, it becomes inevitable. Below is the daily chart of Bitcoin. I have manually represented the waves and it certainly appears that this is following the pattern identified by Sornette.

Yaroslav Efremov, Business Analyst of Make Capital.

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