Analysts are constantly striving for effective methods of determining a fair value for Bitcoin. One approach, which suggests Bitcoin is currently undervalued, involves looking at the amount of electrical energy miners commit to the network.

Analyst and asset manager Charles Edwards details the Bitcoin Energy Value model in a recent Medium post. His hypothesis reads:

Bitcoin’s fair value is a function of energy input, supply growth rate and a constant representing the fiat dollar value of energy.

Periods of wild speculation, such as in 2013 and 2017, see massive price run-ups without a corresponding increase in energy used. Following such periods, the price returns back towards the energy value.

Edwards determines that a fair value for Bitcoin, based on the above, is around $11,500. A considerable increase on the actual market price today of near $6,900, the analyst concludes that a Bitcoin investment now would represent a lower than average risk with a higher than average potential reward.

Edwards demonstrates Bitcoin’s Energy Value versus its actual price on a chart he calls the “Energy Value Oscillator.” It shows how far BTC price moves from its theoretical Energy Value.

During wildly speculative periods, such as in 2013 and 2017, huge spikes appear on the oscillator. The Bitcoin price quickly moves down, back towards the projected Energy Value as the bull run fizzles out. Edwards writes:

“… when speculation causes skyrocketing prices, without a corresponding increase in energy input, price has historically collapsed back to the Energy Value.”

In the above Twitter post, Edwards speculates that the current relationship between Bitcoin’s Energy Value and its actual price looks very similar to previous periods immediately before massive price surges. Both the 2013 and 2017 runs that took prices to their then all-time highs were preceded by price falling to lower than 50 percent below that projected by the Energy Value model before quickly rising above it. This is followed by a new decline that bottoms higher than the previous low. Finally, the price breaks out violently above its projected Energy Value and the major bull run is on.

With the price increase, there is greater incentive to mine Bitcoin and, thus, its Energy Value also increases. However, the new energy being added to the network cannot keep up with the price. Although the theory suggests that prices will once again crash down to the Energy Value, many of those mining the network will continue to do so following a crash. This makes for a higher projected Energy Value and if the theory holds up, higher Bitcoin prices.