- Charles Edwards pioneered the famous Bitcoin Hash RIbbons metric.
- He shares what he sees from the metric as well as 3 of his other preferred market signals to insiders.
- He gives his outlook for Bitcoin and the question of whether the goal of reaching $ 100,000 by the end of 2021 has been achieved.
The world of value investing rarely collides with the fast-paced crypto landscape.
Value investors seek to take positions in stocks that appear to be trading below their intrinsic value based on the assumption that as more individuals realize the stock’s true value, the price will rise.
Applying value investing techniques to an asset class like crypto seems like an almost impossible task when prices can move more than 20% per day.
However, Charles Edwards implements this approach for Bitcoin, the leading cryptocurrency.
In 2017, inspired by fundamental onchain research and an interest in crypto, Edwards took his deep value investing mindset and began exploring how to apply it to Bitcoin.
His research led him to pioneer one of the most famous Bitcoin metrics – hash ribbons.
The metric looks at the simple 1 and 2 month moving average of Bitcoin’s hashrate, which is a measure of the total combined computing power used for mining and processing transactions; It can be used to identify market lows and miners capitulating, a time when mining is no longer profitable.
When the 1 month moving average crosses the 2 month moving average, it creates a bullish buy signal, as generally occurs when the miners’ worst surrender is over and the recovery has begun.
Crypto value investing
Now Edwards is using metrics and Bitcoin fundamentals at his new crypto investment firm Capriole.
Through Capriole, accredited US investors can gain access to a fund that aims to outperform Bitcoin over the long term as it has an autonomous strategy that takes long and short positions in Bitcoin based on fundamentals and technicals.
“I see it as value investing in a way that at any given point in time it is only trying to determine demand, supply and whether or not Bitcoin is overall undervalued compared to that balance of demand and supply,” said Edwards. “… over a long period of time we’ve found that this can be a great way to grow a portfolio and manage risk.”
The fourth quarter of 2020 is an example of the fund’s ability to outperform Bitcoin with a return of over 300%, Edwards said. This is compared to Bitcoin’s 150% return over the quarter. Matching technicals, fundamentals and network growth allowed the strategy to place trades with the highest persuasiveness.
“If I compare the conditions now to then, they are definitely more mixed now,” said Edwards. “I wouldn’t have that [same] more persuasive in the direction than then, but still optimistic at the moment. “
Back in December, Edwards had set a Bitcoin price target of 100,000 to 200,000 US dollars for the end of 2021. He also said he would be “shocked” if Bitcoin didn’t hit $ 50,000.
While Edwards was right at $ 50,000, the chances of hitting the year-end goal are much lower now, he said. It is currently at $ 47,700, up around 45% from the $ 29,000 low in mid-June.
Edwards believes the technicals and fundamentals for Bitcoin look good as long as the price stays above the $ 42,000 mark, but his stance can change almost weekly.
“My baseline is that we will likely see new highs this year,” said Edwards. “But that can change very quickly if, from a technical point of view, we spend a lot of time at the $ 42,000 level and the fundamentals deteriorate from here. [for example] If the hash rate stopped growing, I would be concerned. “
One difference between this current rally and others is the comparatively low level of retail interest.
“If we basically hit a daily close and can spend around $ 50,000 for some time, the price will move pretty quickly, I would say, up to the highs of $ 60,000, and when we get to that level, I think it would generate more retail interest, ”said Edwards.
To break new all-time highs this year, retail interest has to exist, Edwards said. All previous Bitcoin rallies have had retail as their backbone, he added.
“I wouldn’t be surprised if we get closer to the $ 100,000 region, maybe not necessarily there [toward the end of this year]”Said Edwards. “But I don’t think that’s going to happen unless we get the retail rates back. or major purchases from leading S&P 500 companies like Tesla. “
Measured values to look at
As the crypto environment is constantly changing, Edwards introduces 4 of its key metrics to help understand the markets:
1) hash bands
As the founder of Hash Ribbons, it’s obviously on the list. At the moment the signal is bullish, he said.
“There have been 15 signals for Bitcoin in the last 10 years, and each and every one of them had a 100 percent hit rate that has increased by hundreds of percent on average,” Edwards said.
2) Dynamic network transaction value
It’s essentially Bitcoin’s price-to-earnings ratio, Edwards said, as it measures how much in dollars is being traded over the network at its actual price.
“Today it doesn’t look very good, to be honest, it means that Bitcoin is very overvalued,” said Edwards in an interview on August 31st.
3) Stock market anxiety and greed index
Edwards also finds more value in the stock market fear and greed index versus the crypto equivalent.
Over the past 12 months, Edwards has seen a strong connection between Bitcoin and the S&P 500. Every time the S&P falls 2% or more, Bitcoin also corrects, he said, describing seven or eight cases that have occurred in the past few months.
“This is a little worrying in that there should actually be a major S&P correction in the near future, the extent to which it is affecting Bitcoin is significantly higher right now,” Edwards said.
4) Bitcoin exchange reserves
Bitcoin exchange reserves are the measure of the supply available to individuals to speculate or trade compared to what has been locked away.
“This looks pretty good, it’s near the lows of the last 12 months, but it could be better,” said Edwards. “Any significant movement, be it a few percent up or down, can tend to continue price movements.”