Buyer and Seller Behavior: Analyzing Bitcoin’s Fundamentals

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In this series, Ark Invest introduces a framework to analyze bitcoin’s fundamentals in more depth than we believe is usually possible for any traditional asset. They characterize the depth with a three-layered pyramid, the lower layers serving as building blocks for the higher layers, as shown below.

In Part 1, Ark detailed the data in the bottom layer of the pyramid, which assesses the health of Bitcoin’s network. In Part 2, Ark focuses on the data in the middle layer, assessing bitcoin holders’ positions and cost bases at any point in time.

The value of a monetary asset like bitcoin is a function of demand relative to supply. While the supply of bitcoin is mathematically metered, its demand is a function of the monetary characteristics enabling it to play the unique role of a global digital money. Since its inception more than 12 years ago, the demand for bitcoin has trended upwards[1] but, over shorter time periods, it has fluctuated dramatically. Based on on-chain data, investors can assess the variability of demand, and its likely impact on price, by analyzing the behavior of bitcoin buyers and sellers at any point in time.

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