Energy Value Reveals Historic BTC Undervaluation

A key indicator, the “Energy Value” from Capriole Investments, estimates Bitcoin’s “fair value” at $167,800, which is 45% above its current price. Developed by Charles Edwards, this model is based on the energy consumed by the Bitcoin network. The unprecedented gap it reveals revives the debate about the true valuation of the asset and the market’s ability to close this gap in the coming months.

In brief

• The “Energy Value” metric from Capriole Investments evaluates Bitcoin based on the energy consumed by the network.
• According to Charles Edwards, creator of this model, Bitcoin’s “fair value” reaches $167,800, 45% more than its current price.
• Glassnode data reveals a record hashrate of 1.031 ZH/s and an unprecedented gap between the market and energy value.
• A hashrate drop could quickly reduce the estimated “fair value” and limit upside potential.

The bitcoin “fair energy value” according to Capriole Investments

While the hash rate of Bitcoin approached a record, driven by mining profitability, Charles Edwards stated on social network X:

“Bitcoin should trade up to $167,800 per unit if its price fully reflected its energy value.”

Founder of Capriole Investments and creator of this metric in 2019, Edwards explains that his calculation relies on three elements: the energy consumed by the network, the supply growth rate, and a constant representing the dollar value of this energy. According to him, the market massively undervalues Bitcoin today, as the hashrate reached a new record at 1.031 zettahash per second on August 4, proof that the computing power committed by mining companies has never been higher. Data from Glassnode confirms this trend:
• Average energy value: about $145,000 according to the Simple Moving Average of the Energy Value;
• Current price: around $116,000, about 31% discount compared to this estimate;
• Historical comparison: “we are today further from this value at $116,000 than in September 2020, when bitcoin was worth $10,000”, stresses Edwards;
• Recent trend: a drop of about 10% since last month’s all-time high.
This finding reveals the growing gap between the robustness of the technical fundamentals and market behavior, increasing investors’ interest in this metric when analyzing bitcoin’s fair valuation.

Market signals and the shortened time horizon

Beyond the simple comparison between price and energy value, other indicators provide an optimistic reading for mining specialists. The “buy” signal from the Hash Ribbons metric, triggered at the end of July, remains in effect, indicating a favorable environment for profitability and continuation of mining operations. “A constant energy supply represents a balance between supply and demand,” states Capriole Investments. Historically, a sustainable price increase encourages mining companies to increase their computing power, thus improving the network’s energy efficiency and strengthening the Energy Value over the long term. However, this equation can reverse if energy commitment decreases, for example in case of a drop in the hashrate. The calculated “fair value” would then fall, reducing the current gap with the market price. Several analysts believe the current bull cycle would last only a few more months, leaving little time for bitcoin to close this gap. History also reminds us that when prices rise too quickly without a parallel increase in invested energy, it tends to return to its energy value, often abruptly. The unprecedented gap between bitcoin price and its energy value highlights both the strength of its technical fundamentals and the uncertainty inherent in speculative dynamics. If the hashrate continues to rise, the scenario of a partial or full catch-up towards the “fair value” seems credible. However, the time frame mentioned by several observers also requires considering the opposite risk: that of a market unable to follow its own fundamental indicators before the current cycle ends.

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Source: Energy Value Reveals Historic BTC Undervaluation by Luc Jose Adjinacou

FAQ

What is the "Energy Value" metric for Bitcoin?

The "Energy Value" metric, developed by Charles Edwards of Capriole Investments, estimates Bitcoin's fair value based on the energy consumed by the Bitcoin network, its supply growth rate, and the dollar value of that energy.

What is the estimated fair value of Bitcoin according to this metric?

According to Charles Edwards, the estimated fair value of Bitcoin is $167,800, which is approximately 45% higher than its current trading price.

What does the current gap between market price and energy value signify?

The significant gap suggests that Bitcoin may be undervalued by the market when considering the energy invested in its network. This highlights a potential disconnect between the network's fundamental strength and its current market valuation.

How does hashrate impact Bitcoin's "fair energy value"?

A higher hashrate indicates more computing power dedicated to the Bitcoin network, which strengthens the "Energy Value" metric. Conversely, a drop in hashrate could lead to a decrease in the estimated fair value.

What are the implications of the "buy" signal from the Hash Ribbons metric?

The "buy" signal from the Hash Ribbons metric, as mentioned in the article, suggests a favorable environment for mining profitability and ongoing mining operations, which can be seen as a positive indicator for the network's health.

What is the risk associated with rapid price increases without a corresponding rise in energy investment?

Historically, rapid price increases that are not matched by a parallel increase in invested energy can lead to abrupt price corrections as the market realigns with fundamental indicators.

Crypto Market AI's Take

The concept of valuing Bitcoin based on its energy consumption, as proposed by the "Energy Value" metric, offers a unique perspective on its fundamental worth. At Crypto Market AI, we leverage advanced AI and machine learning to analyze a multitude of factors, including network activity, energy consumption trends, and global economic indicators, to provide comprehensive market intelligence. Understanding metrics like the Energy Value helps investors grasp the underlying drivers of Bitcoin's price beyond pure speculation. Our AI-powered trading bots and market analysis tools are designed to help navigate these complex valuations and identify potential opportunities. For those looking to deepen their understanding of Bitcoin's economic drivers, our insights on how cryptocurrencies gain value can offer further context.

More to Read:

• Bitcoin Hashrate Nears Record High as Stable Mining Returns Boost Network Security
• Understanding Bitcoin's Fair Value: A Deep Dive into Valuation Models
• The Impact of Energy Costs on Cryptocurrency Mining Profitability