A strong rally over the last seven days sent Bitcoin prices firmly above the $7,000. Ethereum and XRP registered double-digit gains, too—see Table 1.
Most gains came in the last forty-eight hours, following positive comments by Goldman Sachs’ incoming CEO about the digital currency.
Then came a technical buy signal. Bitcoin prices crossed the 50-day moving average with a rising trade volume. Other cryptocurrencies followed suit, with 96 out of the top 100 cryptocurrencies registering big advances—See Table 2.
7d Price Change For Major Cryptocurrencies
Source: Coinmarketcap.com 7/18/18 at 10:10 a.m.[Ed. note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment. Disclosure: I don’t own any Bitcoin, Greg Giordano owns Bitcoin.]
Number of Cryptocurrencies That Advanced/Declined In The Top 100 Ranks
Source: Coinmarketcap.com 7/18/18 at 10:30 a.m.
That’s an indication that new money is flowing into the entire sector rather than to major currencies only. And it means that the rally may have “legs” before it tapers off.
How long are the “legs?” How far Bitcoin prices have to run before Bitcoin becomes overvalued?
It depends on where Bitcoin’s “fair” or “intrinsic” value of the digital currency is. That’s the price based on fundamentals rather than investor emotions.
In research underway with my student Greg Giordano, we applied two econometric models to estimate Bitcoin’s intrinsic value over the last two years. The first model is the Hayes’ cost production model, which estimates Bitcoin based on a number of supply or cost factors — and places the intrinsic value of Bitcoin at $7,185.26.
The second model is the Bitcoin Market Model (our model), which incorporates both supply and demand factors, and places the Bitcoin price at $8,605.80.
That means that Bitcoin is still undervalued, even after the recent rally.
Still, econometric models are subject to all kinds of theoretical and empirical limitations. Investors should interpret findings with extreme caution.