One can't help but look at the price action of Bitcoin with admiration. Despite the ebb and flow of fortunes through boom-bust cycles, it persists with unyielding tenacity. Bitcoin has surprised many with its continued resilience during varied market conditions, with some reconsidering its journey into the financial landscape.To truly appreciate Bitcoin's trajectory, it's vital to consider its intrinsic nature. Bitcoin is an aspirational currency, an unproven form of money not too dissimilar from gold's reputation for over a millennium. Money, in essence, has a tripartite function: a store of value, a unit of account, and a medium of exchange.You don't see a horde of people handing over gold coins at Starbucks; as gold primarily serves as a store of value. Bitcoin, much like its golden sibling, finds itself entangled in a similarly challenging relationship with the medium-of-exchange attribute. This similarity begs the question: is Bitcoin following in the footsteps of gold?
Valuing Bitcoin The trajectory of Bitcoin, and cryptocurrency in general, bears uncanny parallels with the dot-com bubble of the late 1990s. During this time, many fledgling companies saw their stock values skyrocket, only to plummet drastically when the bubble inevitably burst.However, in the ruins of the dot-com carnage, enduring entities like Apple and Amazon emerged stronger. They weathered the storm, establishing themselves as long-term victors, separating the wheat from the chaff. Could Bitcoin, the supposed 'Apple' of the digital asset era, emulate a similar trend?Let's look for a moment at an overlay of Bitcoin's present journey against the backdrop of Apple's progress two decades ago. Noticeably, even stalwarts like Apple weren't immune to the aftermath of the bubble burst, yet they recovered to become dominating forces in today’s world, while numerous lesser entities faded into obscurity. Could Bitcoin replicate this tale of resilience and triumph?
Bitcoin's uniqueness stems from its dual nature: it possesses the supply characteristics of gold (endowed scarcity) while exhibiting the adoption curve typical of disruptive technology.Despite the recent sell-off, which has cooled Bitcoin's adoption curve, the number of Bitcoin addresses holding more than $1 continues to increase. To understand its adoption we compare it to other adoption curves of recent times, such as the historical adoption arcs of mobile phones and the internet. As you can see below, the Bitcoin curve lies beneath both the mobile phone model and the more conservative internet model.
However, it is worth noting that despite the flattened adoption curve, the trend remains intact based on a simple power regression curve reflecting Bitcoin's historical growth.
A Store of Value? Maybe one of the most underrated aspects of Bitcoin is its perceived hedge against falling real rates. This echoes gold's historical utility. Data since 2017 reveals a strong correlation between Bitcoin and real rates (63% to 88%, depending on the real rate used). This correlation is a significant factor in establishing Bitcoin's credentials as a store of value, potentially passing the critical test, despite its volatility inhibiting its function as a medium of exchange. However, on a real rate basis, Bitcoin is well ahead of itself at its current price of $26k (USD).
Current Valuation This raises a pertinent question, is Bitcoin ahead of its current valuation when considering all value drivers? To unpack this, we must examine two aspects: Bitcoin's adoption curve and the real rates of monetary policy. Both have a marked influence on Bitcoin's price, with a 91% correlation since 2017.
The insights from these trends offer a mixed outlook. While Bitcoin's adoption curve has plateaued since the 2021 crypto winter, the impact of monetary policy on real rates has influenced Bitcoin's usability. Essentially, Bitcoin’s network growth and the macro landscape (reflected by real rates) explain most of Bitcoin’s price action since 2016.Drawing from the more conservative of the two S-curves (the internet adoption curve), a fair value band for Bitcoin can be established, accounting for different real rate regimes seen below. Upon analysing the data, it becomes clear that Bitcoin, albeit holding significant potential as digital gold, appears more subdued than it did a few years ago. The crypto winter has cast a long shadow, yet, much like the resurgent spring after a harsh winter, there could still be growth in store for Bitcoin.
Portfolio Adoption When contemplating the inclusion of Bitcoin in a traditional 60/40 portfolio, it is essential to consider the same attributes as other portfolio building blocks: Sharpe ratios, correlation, and volatility. Bitcoin's Sharpe ratio competes well against traditional portfolio building blocks, sitting somewhere in the middle of ‘general’ asset classes. This is primarily dragged down by its past volatility, an annualised value of 64% over the last 5 years remains an impediment and raises the bar for entry into portfolios. Yet expect to see this volatility continue to reduce as Bitcoin matures.
An interesting aspect to note is Bitcoin's correlation with equities. While it has declined in recent months, it maintains a positive correlation of +35%. It's a marked departure from the uncorrelated nature of Bitcoin prior to the pandemic, demonstrating the increasingly intertwined relationship between traditional finance and the world of crypto.Taking all these aspects into account, Bitcoin could still find a place in a 60/40 portfolio. Despite the flattened growth curve and a higher sensitivity to real rates, the positive correlation and high volume present a compelling case for Bitcoin's inclusion, albeit in moderated quantities. True acceptance by traditional finance will be slow given Bitcoins’ elevated volatility, but if it occurs, this in itself will add value to Bitcoin by accelerating its adoption curve.Conclusion We regularly stand on the precipice of a new era in finance, Bitcoin, much like its golden predecessor, still has more to prove. Much of its future relies on overcoming its inherent volatility, fostering a broader acceptance, and solidifying its place as a store of value.Bitcoin's journey is a testament to the disruptive power of technology. Its tale of resilience through the crypto winter echoes the gold's journey of a thousand years. Its narrative is still being written, with each boom and bust cycle contributing a new chapter. As it navigates the tumultuous landscape, Bitcoin, true to its nature, remains undeterred, continuing its pursuit to become the digital gold of the modern era. With its potential still largely untapped, it reminds us that its story is far from over, and the best may yet be on the horizon.
