While bitcoin (BTC) is far from becoming a typical asset that can be studied using standard frameworks. The blockchain, according to Cathie Wood’s Ark Invest, nonetheless provides a plethora of opportunities for evaluating the asset. Ark Invest released approaches on how to Invest in Bitcoin.
Using a paper titled A Framework to Evaluate Bitcoin, the business argued the case for evaluating Bitcoin as an investable asset through three layers. Each layer is relevant for a different class of investors. Investors such as institutional investors, retail investors, and individuals.
Yassine Elmandjra prepared the whitepaper of Ark Invest. He is an in-house analyst at the firm, in partnership with David Puell, a bitcoin on-chain researcher.
Elmandjra described the document as “the ultimate manifesto on the power of on-chain data” in a tweet. It was the culmination of a year’s worth of effort on building a framework for examining the fundamentals of the bitcoin cryptocurrency.
The three layers to approach Bitcoin according to Ark Invest
Layer 1: The overall health of the Bitcoin network
Starting with the first layer, according to the report, this entails examining items such as the network’s security. This is in terms of hash rate, monetary policy, active addresses, and transaction count, among other things.
A valuable layer for anyone interested in observing and learning about bitcoin as an investment. This is according to the paper, asserting the idea that it’s “a fundamental fact sheet” about the cryptocurrency network.
In the study, the data in this layer is accessible using any blockchain search engine. Data which is “raw and straight-forward, requiring little to no alteration.”
Furthermore, the analysis revealed that transaction volume was an excellent indicator of the overall health of the network. The transaction volume, when divided by the total number of bitcoins in circulation, provides information on bitcoin’s yearly velocity, according to the investing firm.
Layer 2: Buyer and seller behavior to invest in Bitcoin
Long-term holders and investors, in particular, may find it useful to examine what wallet addresses are doing. This is known as “buyer and seller behavior,” according to Ark Invest, as a second layer of evaluation.
As a result of on-chain data, the study speculates that more complex computations may be performed, such as the so-called “HODL waves” or bitcoin’s realized capitalization.
Layer 3: Asset valuation and trading signals
To conclude, the final layer of Ark Invest’s architecture makes use of both of the preceding layers. This is to produce relative valuation measures capable of spotting what the paper referred to as “short to mid-term inefficiencies in the bitcoin’s price.”
According to the paper, this layer is particularly beneficial for active investors and traders. Since it has the potential to provide direct buy and sell signals to invest in Bitcoin. Its usage is similar to the way valuation metrics in the stock market, which makes it very appealing to them.
Regarding bitcoin as an investable asset in general, Ark’s research noted that “no other network rivals Bitcoin’s in terms of transparency”. This is when comparing it to other cryptocurrency networks, among other things.
Moreover, it asserted that the fact that Bitcoin has a simple “UTXO-based accounting system”. It is a verifiable code that has been “scrutinized more than any other open-source software code”. The network nodes that are “significantly more cost-efficient than alternative cryptocurrency network nodes” contribute to its “openness, and transparency.”
Ark Invest, which is led by the well-known technology investor Cathie Wood. She is one of the most pro-bitcoin significant asset managers in the world today. Wood commented on bitcoin during a panel discussion hosted by derivatives marketplace Cboe in early 2021, claiming that “we have only just begun to explore the possibilities.” A trillion dollars is nothing in comparison to where we’ll be in the end,” says the author.