Recently, Jurrien Timmer, director of global macro at Fidelity Investments, commented on Bitcoin’s latest price action and had a few words of comfort with Bitcoin HODLers who may be a little concerned about the currently bearish cryptocurrency market.
In March 2021, Timmer published a 12-page research paper on Bitcoin (title: “Understanding Bitcoin: Does Bitcoin Belong to Asset Allocation Considerations?”).
Timmer began by saying that he intended his article to serve as “a brief primer in English, but also to meaningfully assess bitcoin’s value proposition as it relates to asset allocation.”
After his study of Bitcoin, here are some of the conclusions he came to:
- “… bitcoin has gone mainstream, already considered a legitimate asset class by more and more investors.“
- “… bitcoin has attractive supply dynamics (S2F) and demand dynamics (Metcalfe’s Law).“
- “… Bitcoin is gaining credibility and, as a digital analogue of gold, but with greater convexity… bitcoin, over time, will take more market share from gold.“
Timmer said that “if gold is now competitive with bonds and bond yields are close to zero (or negative), it might make sense to “replace some of the nominal exposure of bonds in a portfolio with gold and assets that behave like gold.” ”.
He ended by saying:
“If bitcoin is a legitimate store of value, is scarcer than gold, and comes complete with potentially exponential demand dynamics, then it is worth considering inclusion in a portfolio (at some prudent level and at least alongside other alternatives). , such as real estate, commodities and certain index-linked securities)?
“Despite the many risks discussed – including factors such as volatility, competitors and political intervention for some, the answer may be ‘yes’, at least insofar as ‘yes’ only applies to components on the 40 side of 60/40. For these investors, the question of bitcoin may no longer be ‘if’, but ‘how much?’“
Well, on April 20th, Timmer tweeted:
Then, in a series of tweets, he explained what he meant:
“The chart above shows the fundamentals of Bitcoin. The supply curve is dictated by the S2F model… and the demand curve is driven by network growth (Metcalfe’s Law). Until recently, Bitcoin used to overshoot its intrinsic value to the upside during bull markets and to the downside during bear markets. It was an impulse game with little to no resistance, until the trend reached exhaustion.
“But take a look at the chart above. In recent months, Bitcoin price has stopped tracking the S2F model and has instead embraced the pink line (demand model). That makes sense to me. While the S2F model has been an effective model in the past, in my opinion the demand curve will be the dominant driver from here on out. Therefore, in a more efficient two-way market, Bitcoin should deviate from this pink line, up and to the right.
“Institutional investors have likely already created their own models and therefore know when Bitcoin is cheap or rich. For example, if the demand model says that the intrinsic value of Bitcoin is $50K today and $100K two years from now (my thesis), then at $30K Bitcoin will look much better than $100K. $70 thousand. That’s the difference between a two-year gain of 3x and 1.5x. While a CAGR of 25% is still a lot, at a vol of 50 the Sharpe Ratio would only be somewhere in between 0.5. The starting point is important for all assets, including Bitcoin.
“As the value of Bitcoin becomes better understood by more and more investors, there can be more efficient accumulation when Bitcoin drops and more determined distribution when it drops. That’s what makes a two-way market.
“Remember, price is what you pay, but value is what you get. In the early days, most investors only knew the price. But as investors understand the valuation better, Bitcoin is less likely to resemble early days of bullish and bearish and may start to behave like a traditional risky asset. If, in fact, the price starts to move closer to an upward-sloping demand curve, it will be more important than ever to get that demand curve right…“
The views and opinions expressed by the author, or anyone mentioned in this article, are for informational purposes only and do not constitute financial, investment or other advice. Investing or trading crypto assets carries a risk of financial loss.
Featured image by “tombark” via Pixabay.com