It is not easy to predict cryptocurrencies compared to predicting stocks. A stock is a part of a company, where one can view its revenue, costs, profit, and trends to determine its value.
Cryptocurrency analysis is more ambiguous since the value of coins is usually not related to income, profit, or any of the usual fundamental factors that affect the valuation. This has more to do with public opinion, known as the network effect.
In this week's research report published by the Goldman Sachs Economic Research group, the authors of which are Isabella Rosenberg and Zach Pandl considered the use of some attributes similar to the fundamental indicators of stocks.
Earlier, the authors wrote that equating cryptocurrency with gold was the basis of the forecast, but the difference is that gold does not have user networks.
To estimate the number of users on the network using blockchain addresses, Goldman analysts compared this with the market capitalization of currencies. For example: how many coins are in circulation, multiplied by the value of the coin. This comparison was made for Bitcoin, Bitcoin Cash, Dash, Ethereum, Ethereum Classic, Litecoin, XRP/Ripple, and Cash.
After analyzing it, they wrote in the cross-sectional data that they observe a clear correlation between market capitalization and the size of the network.
However, the question is how big the correlation is. The network effect is often observed in ratios in which the value increases by the number of nodes squared. Thus, 10 nodes will give the value 100, and 9 - 81. Thanks to this theory, the value correlates with the number of connections.
But for cryptocurrency assets, there is already a real value – market capitalization. Therefore, Goldman analysts studied the relationship between the number of participants and market capitalization.
Analysts write that the market capitalization of the cryptocurrency with the size of the network correlated positively one to one. The average growth curve they calculated based on historical data is something like value = 1.4 power users.
According to analysts, the market capitalization of Bitcoin far exceeds its fundamental indicators. For the main cryptocurrency, there is a clear deviation from the value that it should have. The value of bitcoin has increased by 520% over the past few years compared to the 2018 average, while its network has grown only from 60% to 100%.
Some of these factors, such as moods, further complicate the situation. But how many people actually use a crypto asset is a form of sentiment – whether they join the network and create an address or buy or sell cryptocurrency.