Bitcoin may or may not become the next great revolution of finance, but it’s become increasingly difficult to determine what exactly a Bitcoin is worth. Is there a good way to value cryptocurrencies in a similar way to how we value stocks today? Jamie Coutts, the crypto market analyst with Bloomberg Intelligence, has developed a model that attempts to do just that.
Coutts says that valuing cryptocurrency can be a challenge, but he actually uses some of the same fundamental techniques, such as adoption and user activity, to gauge interest. In originally developing his model, he wanted to look at what could work for this asset class. That isn’t to say that some methodologies don’t work at all, but some work better than others. Technical analysis definitely helps with Bitcoin because it is momentum based. He uses fundamentals, but not traditional fundamentals, and also incorporates quantitative analysis. He says that he draws from a lot of disciplines that have come before, but tries to customize it to a unique asset class.
One thing that Coutts is a believer in is Metcalfe’s Law, which generally says that the value of a network is proportional to the number of users on that network. He notes that you can’t quantify all of that with Bitcoin, but at the base layer, you can get some data points that are useful. You do, however, have to triangulate them with other metrics in order to get a more complete picture.
Coutts’ process begins by looking at more secular trends, such as technological adoption and government centralization. He also looks at interest rates and the quantity of money available, believing that if they’re working in your favor, you should see demand follow. From there, he begins looking at the crypto supply out in the system and how it relates to current demand. In the end, a lot of the basic interaction between supply and demand should help to drive valuation. Coutts says that he is involved in crypto because our fiat currency is being debased. He also sees some of that in crypto, which shouldn’t be surprising.
Coutts says that crypto prices often move rapidly based on excitement & news, but his model doesn’t adjust for short-term volatility. He likes to focus on the bigger picture and the longer-term perspective. He finds that working with the weekly charts for longer time frames has been really helpful. One simple measure Coutts finds valuable is the Bitcoin price divided by volatility to determine what risk-adjusted performance looks like. Traditionally, Bitcoin usually falls at the bottom during corrections on a risk-adjusted basis. In 2022, however, Bitcoin was actually in the middle of the table. His takeaway is that all other asset classes are becoming more volatile. That could mean the system is more fragile and traditional safe havens, such as fixed income, are beginning to break down. He believes that the Sortino ratio is superior to the Sharpe ratio when judging risk-adjusted returns.
One of the things that Coutts has found is that current store of value metrics are in contrast with volume activity. Quite simply, people aren’t transacting as much. The number of total addresses is at an all-time high. The number of non-zero address balances is at all-time highs. The number of people who’ve held crypto positions for more than 6 months is at all-time highs. The number of crypto users is rising even though the volume or activity of those users is decreasing.
Coutts thinks that we’re currently running the risk of calamity. He believes that there are still multiples of upside left. He thinks it’s possible we’ll see a $90,000-$180,000 price on Bitcoin during this cycle. There are plenty of maxis out there who believe this will happen, but even if we see 25-50% of the return of the previous cycle, he thinks these price targets are possible. Active entities & adoption are the keys to this valuation and likely need to double in order for this to be achievable.
Other key takeaways:
- According to several of the metrics that Coutts looks at – price/active entities, price/Bitcoiners and the Puell multiple (which looks at miner revenues) – Bitcoin, overall, looks expensive right now. TerraLuna spiked a lot of metrics, which was an indication of lack of liquidity and stress.
- Coutts doesn’t want to underplay the issues within this space, but the availability of real-time data, such as how much is being moved on the system, has been a game changer.
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