Get Think Tanked Distilled with Jamie Coutts

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.

You can watch a replay of this virtual happy hour on our YouTube channel here. While there, subscribe to our channel to stay up to date on our latest content.

Disclosure

All investments involve risk, including possible loss of principal.

The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit.  While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).

Total
7
Shares
Prev
Get Think Tanked with Jamie Coutts

Get Think Tanked with Jamie Coutts

This is a replay of our August 3, 2023 show with Jamie Coutts

Next
Structure Matters: Policy, Themes and 5% Yield

Structure Matters: Policy, Themes and 5% Yield

Broad Market Commentary & Social Media Shares Fixed income was all in the

You May Also Like