by Charlie Erith
Looking back over the past months, it’s been a torrid time for Bitcoin. But just as much a torrid time has been seen across other global markets too.
Bitcoin has gone with the bunch in what is clearly a nasty period of tech de-rating. However, with the additional collapse of UST, attention has flooded towards the crypto space, raising further questions over the legitimacy and plausibility of its products.
Whilst there has certainly been an impactful hit to the crypto market capitalisation as a consequence, it is in thinking long-term, however, where the real value can come to be seen. Both in respect to, firstly, Bitcoin becoming a reserve asset to be used in international transactions and payments and, secondly, a store of value that can remain safe in times of economic unpredictability.
Looking long-term, advocates see Bitcoin as one day becoming a form of global reserve asset, alongside the more analogue gold and $USD. While its volatility – a function of its immaturity – raises concerns over its ability to protect wealth, the key point remains that, in the long-term, Bitcoin aims to be a solid store of value.
It is in turning to the combination of its technological brilliance and inviolability that, over time, there exists the value in Bitcoin that lends itself towards becoming a global reserve asset and store of value. This is because Bitcoin is a network effect asset, where its value hinges on a consensus built up by a global network of users and the more users that join that network, the stronger and more valuable bitcoin becomes.
Furthermore, with temptation for policymakers to borrow money in a period of weak growth, it is hard to see further currency debasement – and therefore inflation, and therefore Bitcoin – becoming a thing of the past. Take, for example, the impact on currency debasement in emerging markets like India. With the recent move in the Rupee, once again looking to be breaking down out of a multi-year range against the $USD. It is no surprise that the nation is one of both gold hoarders and great crypto enthusiasts.
However, its success is by no means a certainty. This is why I like Ruffer Investment’s Duncan MacInnes’ current description of Bitcoin as “an option on a store of value”. If the network shrinks over time, its appeal and value will follow. But, long-term, indicators suggest that to be unlikely.
Bitcoin’s trajectory will be uneven, driven by factors such as usage, regulation, and broader macro settings. As it gains acceptance, its credibility will increase, and its volatility will decrease. However, as time progresses, what factors indicate a good time to buy? When to buy Bitcoin can be hard to judge, but both asset valuation and the Bitcoin cycle should not be overlooked.
At ByteTree, with respect to valuation and the cycle, we look to three models. Firstly, we look at Bitcoin in terms of ‘epochs’ which tally the four-yearly Bitcoin halving events (when the amount of new Bitcoin that can be mined halves). The second part of our valuation toolkit is a multi-factor model to guide us on network momentum. And, thirdly, we track price regression which is now showing us to be in oversold territory.
Additionally, the size of your asset allocation should be weighted appropriately according to risk. Investing in Bitcoin could lead to many sleepless nights. Hence why ByteTree Asset Management has launched the BOLD strategy which mixes Bitcoin and gold according the riskiness of each asset and balances monthly.
Charlie Erith, CEO of ByteTree