- Charles Edwards pioneered the famous bitcoin metric, Hash RIbbons.
- He shares with Insider what he’s seeing from the metric as well as 3 of his other favorite market signals.
- He gives his outlook for bitcoin and whether it’s on target to hit $100,000 by the end of 2021.
The world of value investing rarely collides with the fast-paced landscape of crypto.
Value investors seek to take positions in stocks that appear to be trading below their intrinsic value based on the belief the price will rise as more individuals come to realize the stock’s true worth.
Applying the techniques of value investing to an asset class like crypto seems a near impossible task when prices can move more than 20% a day.
Yet Charles Edwards is making this approach work for bitcoin, the bellwether cryptocurrency.
In 2017, inspired by fundamental onchain research and an interest in crypto, Edwards took his deep-value investing mindset and started investigating how to apply it to bitcoin.
His research led him to pioneer one of the most well-known bitcoin metrics – Hash Ribbons.
The metric looks at the 1- and 2-month simple moving average of bitcoin’s hashrate, which is a measure of the total combined computational power that is being used to mine and process transactions; It can be used to identify market bottoms and miner capitulation, a time when mining is no longer profitable.
When the 1-month moving average crosses over the 2-month moving average, it creates a bullish buy signal, as it generally occurs when the worst of the miner capitulation is over and recovery has begun.
Crypto value investing
Now Edwards leverages metrics and bitcoin fundamentals at his new crypto investment firm Capriole.
Through Capriole, accredited US investors can gain access to a fund that aims to outperform bitcoin over the long-term as it employs an autonomous strategy that takes long and short positions in bitcoin based on both fundamentals and technicals.
“I consider it value investing in a way that, at any point in time, just trying to assess demand, supply and whether or not bitcoin is overall undervalued against that equilibrium of demand and supply,” Edwards said. ” … over long periods of time, we’ve found it can be a great way to grow a portfolio and to manage risk.”
The fourth quarter of 2020 is one example of the fund’s ability to outperform bitcoin as it returned over 300%, Edwards said. This is compared to bitcoin’s 150% return over the quarter. The alignment of technicals, fundamentals and network growth enabled the strategy to put on its highest conviction trades.
“If I compare the conditions now to then, they are definitely more mixed now,” Edwards said. “I wouldn’t have the [same] conviction in the direction right now than I did then, but nonetheless, still bullish at the moment.”
Back in December, Edwards set a bitcoin price target of between $100,000 to $200,000 for the end of 2021. He also said he would be “shocked” if bitcoin didn’t hit $50,000.
While Edwards was right on the $50,000, the odds of reaching the year-end target are much lower now, he said. It’s currently trading around $47,700, which is up around 45% since hitting lows of $29,000 in mid-June.
Edwards believes the technicals and fundamentals look good for bitcoin as long as the price remains above the $42,000 level, but his viewpoint can change almost weekly.
“My base case is that we will probably see new highs this year,” Edwards said. “But that can change very quickly if we spend much time down to the $42,000 level from a technical perspective and if fundamentals deteriorate from here, [for example] if hash rate stopped growing, I’d be getting concerned.”
One difference in this current rally from others is the comparatively low level of retail interest.
“If we can basically get some daily close and spend some time about $50,000, price will move pretty quickly, I would say to the highs of $60,000 and once we get to that level, I think that would re-engage more retail interest,” Edwards said.
To go beyond new all-time highs this year, there needs to be retail interest, Edwards said. All previous bitcoin rallies have had retail as a backbone, he added.
“I wouldn’t be surprised if we are closing in towards the $100,000 region, maybe not necessarily getting there [toward the end of this year],” Edwards said. “But I don’t think that will happen unless we get retail interest back. or significant purchases from leading S&P 500 companies like Tesla.”
Metrics to watch
With the crypto environment always changing, Edwards lays out 4 of his top metrics to make sense of the markets:
1) Hash Ribbons
As the founder of Hash Ribbons, it’s obviously on the list. Right now, the signal is bullish, he said.
“There’s been 15 signals in the last 10 years for bitcoin and every single one of them has had 100%, hit rate of price going up hundreds of percent, on average,” Edwards said.
2) Dynamic network transaction value
It’s essentially bitcoin’s price-to-earnings ratio, Edwards said, as it measures how much in dollars is transacting through the network to the actual price.
“Today, it doesn’t look very good to be honest, it’s saying bitcoin’s very overvalued,” Edwards said in the August 31 interview.
3) Stock market fear & greed index
Edwards is also finding more value in the stock market fear and greed index versus the crypto equivalent.
Over the last 12 months, Edwards has noticed a strong tie between bitcoin and the S&P 500. Every time the S&P drops 2% or more, bitcoin also corrects, he said, describing seven or eight cases that have occurred in recent months.
“That’s somewhat concerning in that, if there is actually a major S&P correction in the near term, the magnitude in which it impacts bitcoin is significantly higher at the moment,” Edwards said.
4) Bitcoin exchange reserves
Bitcoin exchange reserves is the measure of supply available for individuals to speculate, or trade, versus what’s been locked away.
“That’s looking reasonably good, it’s near the lows of the last 12 months, but it could be better,” Edwards said. “Any significant movement in that whether it be a couple of percent up or down can tend to proceed price movements.”