We view Bitcoin's long-term vision as becoming the de-facto non-sovereign store of value for our increasingly digital society, eventually reaching and surpassing Gold. The Gold market cap is ~30x larger than BTC's market cap today, which provides attractive upside if Bitcoin realizes this vision.
In 2022, as inflation and a challenging macro environment have been the dominant driver of investment performance, investors have treated Bitcoin like a risk-asset leading to a period of high correlation with the Nasdaq.
Bitcoin has undergone different periods of high correlation with various financial assets (gold, oil, the Chinese Yuan) over its history 13-year history
We think 2022's Nasdaq correlation is due to the large wave of new investors who recently entered the digital asset space and have grouped all digital assets in one "venture/tech" bucket
The long-term trajectory of Bitcoin vs. Ethereum and other smart contract platforms are very different, and we expect a decoupling over time, with BTC trading more like a global financial asset and ETH trading more like a large-cap technology stock
From a valuation perspective, many of the metrics we look at are at levels consistent with previous Bitcoin cycle bottoms. This does not necessarily mean that Bitcoin won't go lower, however it gives us conviction that this is a good time for investors to patiently accumulate BTC with a long-term time horizon
What is Bitcoin?
Bitcoin is a peer-to-peer electronic cash system created by an anonymous developer, Satoshi Nakamoto, in 2009.
The Bitcoin blockchain is a public blockchain that enables the decentralized ownership and transfer of the world’s first cryptocurrency – BTC. This network operates 24/7 without the need for intermediaries. BTC has a hard cap of 21mm tokens, which are mined by miners as a reward for creating new blocks on the Bitcoin blockchain. Bitcoin utilizes a Proof-of-Work consensus mechanism to incentivize miners to create new blocks and validate transactions on the network.
There are currently ~13mm monthly active Bitcoin addresses, and ~42mm addresses with a non-zero balance.
The Use Case for Bitcoin: “Store of Value” vs. “Money”
Bitcoin’s primary use case is a non-sovereign store of value that can be privately held by any individual. We believe the long-term vision for Bitcoin will solidify around being a Gold alternative for the digital age. While Bitcoin proponents have recently proposed that Bitcoin should be viewed as an inflation hedge, we view Bitcoin more as a hedge against political instability and loss of trust in government institutions. We already see this with higher penetration rates among political unstable countries and expect penetration rates to continue to increase globally.
We are less constructive on Bitcoin as a high-velocity payment system or “money”. To remain resilient and highly secure, the Bitcoin network is relatively slow to process transactions. It takes ~10 minutes for a new block to be added to the chain, making the network poorly suited for payment settlement. While there are workarounds, other blockchains that sacrifice security for faster transaction speeds are better suited for high-volume payment settlement. Bitcoin’s power is in it’s security and aversion to change.
Correlations to Other Financial Assets
Over its 13-year history, Bitcoin has had many investor narratives through multiple market cycles. While in today’s market environment Bitcoin has an elevated correlation with the Nasdaq and risk-assets, there have been periods of high correlation with Gold, the Yuan, oil and other assets.
Although Bitcoin’s 60-day correlation with the Nasdaq reached as high as 0.95 in 2022, this year is an anomaly compared to Bitcoin’s history. We believe this elevated correlation between Bitcoin and the Nasdaq is likely to dissipate when inflation and the macroeconomic challenges are no longer the primary focus of global investors.
Bitcoin Valuation Framework
As cryptocurrencies and digital assets have only existed for a little over a decade, the valuation methodologies and financial metrics are more primitive compared to other traditional financial assets. However, there are several reliable metrics and frameworks we can use to provide context for Bitcoin’s current price vs. historical levels.
Paul Tudor Jones introduced a global store of value framework in 2020, comparing Bitcoin to global financial assets (Stocks and Credit), Cash and the cumulative value of above-ground Gold. Similar to traditional assets, this comparable valuation methodology can provide us with a long-term target if Bitcoin achieves its vision as a non-sovereign store of value.
Below is Paul Tudor Jones’ scoring system and relative value comparison:
Comps Valuation Takeaway: Looking at the global spot Gold market as a long-term comp, the current market cap of Gold is ~$10-12tn, ~30x larger than Bitcoin’s current market cap of ~$350bn. At a $10bn market cap, 1 BTC would be worth ~$500k.
Since Bitcoin does not generate cash like a traditional company, we cannot use discounted cash flow or other inherent valuation methodologies to determine a fair value. Instead, investors and analysts look at a host of different metrics and ratios to evaluate whether Bitcoin is undervalued or overvalued at current prices, relative to historical levels. These ratios evaluate holder activity, supply-demand dynamics, the amount of BTC held on exchanges, long-term vs. short term holders, miner activity and many other creative metrics.
Below we have highlighted three specific metrics that we believe provide insight into Bitcoin’s current price compared with historical levels. These metrics should be used to provide high-level guidance to understand where we are in the BTC market cycle, not as a specific indication when to buy or sell.
1. MVRV Ratio (Market Value to Realized Value)
What is Measures: The ratio of BTC held by long-term holders vs. short-term speculators
How its Calculated: MVRV = Bitcoin Current Market Cap / Bitcoin “Realized” Market Cap, where:
Market Cap is the total number of Bitcoin multiplied by the current spot Bitcoin price
Realized Market Cap calculates the Bitcoin market cap as the aggregate value of all the Bitcoin at the time each individual Bitcoin last moved
Description: Realized Market Cap represents a more “accurate” market cap as it better accounts for the large percentage of BTC held by long-term holders. If the Current Market Cap is much larger than the Realized Market Cap (the MVRV is higher), this indicates a higher percentage of BTC is held by short-term speculators vs. long-term holders.
Over time, as BTC moves from “weak hands” to “strong hands”, the holder base solidifies and creates a strong foundation for market cycle bottoms.
MVRV Valuation Takeaway: MVRV has historically been a reliable metric to signal when BTC is approaching a cycle bottom or top. The current MVRV of 0.9 is in-line with levels reached in previous cycle bottoms (Jan ’19, Jan ’15), however these bottoms can take 12-months+ to play out. The current level of this metric suggests that the Bitcoin holder base has shifted back to long-term holders vs. short term speculators who primarily bought in 2021 and sold in 2022.
2. BTC Price vs. Gold Price Ratio Trendline
What is Measures: How BTC is progressing on the trajectory of overtaking Gold as the de facto non-sovereign store of value
How its Calculated: Spot price of 1 BTC / Spot price of 1oz of Gold
Description: Since its inception, the ratio of 1 BTC to 1oz of Gold has grown from 0.01x to an all-time high of 35x (currently at ~12x). Over the last 10-years, the growth of this ratio has closely followed a logarithmic trendline, with a correlation coefficient of ~0.95. This metric is not meant to suggest that the growth must continue to follow this trendline, however it provides context for how far the current ratio has deviated from the long-term trend.
BTC/Gold Valuation Takeaway: In the above chart, the green line represents the BTC/Gold ratio, the red line represents the trendline and the blue lines represent two standard deviations from the trendline. The BTC / Gold ratio is currently ~2 standard deviations below the trendline, which has a 10+ year correlation coefficient of ~0.95. This indicates that this ratio is either no longer relevant (the correlation is breaking), or that BTC is currently highly undervalued compared to Gold according to the long-term trend.
3. Adjusted NVT (Network Value to Transactions)
What is Measures: Adoption and usage of the Bitcoin network
How its Calculated: Adjusted NVT = Bitcoin Market Cap / 90-day average daily transferred on-chain volume measured in USD
Description: The NVT ratio evaluates Bitcoin’s market value in the context of the usage of the Bitcoin network. It shows how much investors are willing to “pay” (in valuation terms) for $1 of value transferred on the BTC network.
Metcalf’s law describes the value of a computer or telecom network as the square of the number of users on a network – meaning there is an exponential relationship between number of users and network value. Instead of the number of users, NVT includes the total transaction volume (or usage) of the BTC network. If we believe Metcalf’s law is a viable framework for determining the value of the BTC network, NVT is then the closest metric we have to a P/E or EV/EBITDA.
NVT Valuation Takeaway: Given this metric is based on the 90-day moving average, NVT tends to be a lagging indicator, however it is helpful in identifying times of excess to the upside and downside on a fundamental basis. The current NVT of 9 is ~50% below the 10-year average of 19 and reached levels that typically coincide with market cycle bottoms.
Despite the recent volatility, our long-term view of Bitcoin and its potential impact on the global financial system is unchanged. We believe Bitcoin continues to present investors with an asymmetric opportunity as it achieves its vision as the de-facto non-sovereign store of value for our increasingly digital world. It therefore deserves a position among a modern investment portfolio.
While Bitcoin is currently within the historical “value zones” in several of the metrics we evaluate, digital asset bear markets can last longer, and go deeper than many investors may expect. We believe patience, discipline and risk management are paramount when allocating to digital assets.
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