Five key indicators for Bitcoin investors to watch in 2021

Bitcoin prices have recently hit multi-year highs, and many fundamental factors indicate that Bitcoin will perform better in 2021.

With PayPal’s integration into Bitcoin and high-profile figures like Michael Saylor, Jack Dorsey, and Paul Tudor Jones strongly endorsing Bitcoin, demand for digital gold has reached an all-time high.

Recently, traditional insurance companies such as MassMutual also disclosed that they had purchased $100 million worth of Bitcoin, which continued to boost the price and popularity of Bitcoin.

It is not difficult to find that more and more people believe that 2021 will be an important year for the Bitcoin network to open the next chapter. Let’s take a look at some key indicators that need to be paid attention to in 2021.

1. Bitcoin Miner Valuation

Bitcoin mining shares many similarities with gold mining, however, there are some key differences to explore in the complex task of evaluating a Bitcoin miner’s operation. We will use Riot Blockchain as an example, a Bitcoin mining company based in Colorado, USA.

Riot started mining in 2017, and the company recently announced plans to increase its computing power, with the goal of delivering mining hardware in the spring of 2021. Currently, Riot has a computing power of about 1.5 EH/s, accounting for about 1.11% of the current total computing power of the Bitcoin network (135 EH/s).

According to Riot's third-quarter financial report released on November 9, it mined 224 BTC in the third quarter. Calculated at a price of US$18,500 per BTC, Riot's total revenue for the quarter was US$4.1 million.

Given the above data, investors will wonder: Is there a problem with a company with a market value of $670 million but only revenue of $8 million for several quarters and huge operating and power costs?

Even with more than 1,000 BTC on Riot’s balance sheet ($18.5 million at current BTC prices), the company’s valuation is a bit outrageous.

There are two considerations at play here. Assuming Bitcoin does enter a major bull run, the market capitalization of Riot and other mining companies may be reasonable.

2. Expectations for future BTC prices

There have been a range of optimistic targets for how high Bitcoin’s price could go a year from now, including Mike Novogratz’s estimate of $65,000 and PlanB’s estimate of $288,000 based on the popular S2F model.

Meanwhile, Citigroup recently gave a prediction of $318,000, while the Winklevoss twins gave a prediction of as high as $500,000.

These price targets will obviously affect many Bitcoin participants (including miners), which is why some miners continued to mine even when they suffered losses during the bear market in 2018, expecting that the Bitcoin network will continue to exist for the foreseeable future. Miners also know that being a validator of network transactions carries a lot of power, and the continued rise in network computing power shows that Bitcoin is becoming more secure and increasingly competitive.

If the price of Bitcoin is not capped, then Riot’s 244 BTC mined in Q3 will expand its revenue stream to a much larger, more ambiguous number. This means that if BTC goes parabolic again, Riot’s profit estimates will be unfettered.

3. Shortage of mining hardware

The last time Bitcoin experienced a parabolic rally was in 2017, when there was a shortage of ASIC chips and other mining hardware, and suppliers such as AMD, Nvidia and Bitmain were unable to meet demand.

If this happens again with Bitmain and MicroBT, any miner that currently has next-generation equipment will have an advantage until more hardware gets involved.

Conversely, if the price of gold doubles to $4,000 an ounce, gold exploration will increase and the rate at which miners dig up gold will increase. This, in turn, will bring supply and demand into balance, and if supply exceeds demand, the price of gold will fall.

But for Bitcoin, no matter how long the mining hardware arms race lasts, the mining rate of Bitcoin cannot exceed 6.25 BTC every approximately 10 minutes, thanks to the supply schedule and difficulty adjustment scheme built into the protocol by Satoshi Nakamoto, which seriously affects the supply and demand dynamics of Bitcoin.

4. GBTC and Bitcoin

As we know, Grayscale’s Bitcoin Trust (GBTC) allows investors to gain exposure to the underlying digital currency BTC in an ordinary brokerage account (like a closed-end fund).

After deducting GBTC's 2% annual fees and premiums, each share of GBTC represents 0.00095346 BTC. Below is a comparison of GBTC's performance with BTC over the past four months.

GBTC and Bitcoin Price

GBTC tends to slightly underperform BTC during periods of price consolidation, as can be seen in the narrowing gap between the asset prices at the end of September.

As the premium widens, GBTC performs slightly better than the underlying assets, and the increase in market demand will cause the price difference between GBTC and BTC to become larger and larger.

This is evidenced by the widening gap between the two during the price increases over the past two months.

The chart below shows details of GBTC’s premium over the past 12 months:

During the BTC price declines (April, July, and September), the GBTC premium bottomed out at 10%, while during the rapid price increases in February and August, the GBTC premium widened to 30% to 40%.

It remains to be seen what impact competitors offering Bitcoin exposure will have on GBTC. On November 25, VanEck launched a Bitcoin ETN on Germany’s Böerse Xetra exchange. With SEC Chairman Jay Clayton stepping down in December, the likelihood of a Bitcoin ETF being approved could increase if the newly appointed SEC chairman is more favorable to BTC.

5. Supply and demand

Fasten your seat belts.

Currently, every approximately 10 minutes, 6.25 BTC is given as a block reward to compensate miners.

That means about 900 BTC are added to the Bitcoin network every day, while before Bitcoin experienced its third halving on May 11, this number was 12.5 BTC every 10 minutes.

At the current price, the market value of Bitcoin increases by about $16.7 million every day. According to the GBTC report, on November 12, GBTC's single-day inflow reached $115 million, an increase of 11 times from the previous weekly inflow of $50 million.

This demand is 6.9 times the new supply, so the gap between the market demand for Bitcoin and the supply is getting wider and wider. Historically, this dynamic has occurred within a year or so after the block reward halving.

In the last cycle, it briefly brought Bitcoin into the mainstream retail investor consciousness, when the price of Bitcoin rose from $1,000 in January to nearly $20,000 by the end of the year.

And in this cycle, if we compare Bitcoin to a substitute for gold, then the $9 trillion gold market is the benchmark that investors pay attention to.

As we continue to make sense of this rapidly changing digital ecosystem at our own unique pace, the Bitcoin network continues to move forward and gain further traction, taking no one prisoner in the process.

Let us look forward to what 2021 will bring us.