It took just three charts on Bitcoin’s fundamentals for an analyst to convince institutional investors of Bitcoin’s immense underlying value.
Crypto analyst Plan B said he got an ‘amazing response’ from institutional investors when he showed them three charts related to Bitcoin last week.
“It was not a sales pitch, more a peek into the future / alternative investment presentation,” he explained.
“Quants were interested because of asymmetrical returns and rare cointegration. Managers’ main worry was government ban.”
The charts showed three metrics that investors in traditional finance would be familiar with: the Sharpe ratio, its correlation to other assets and his famed Stock to Flow model.
He presented Willy Woo’s chart showing Bitcoin’s Sharpe Ratio over a four year holding period.
It’s calculated by subtracting the risk-free rate of return from the expected return on the asset and dividing it by the standard deviation of returns of the asset.
A ratio above 1.0 is considered acceptable. Bitcoin’s ratio average of 3 outperformed all other assets.
A second chart showed the Bitcoin price was uncorrelated with other assets including shares, fixed income, gold, and oil.
And of course, he wowed them with his Stock to Flow model, which predicts that because of the decrease in supply due to the halving, the Bitcoin price will hit $100,000 next year or in 2021, on its inevitable way towards a $1 million Bitcoin price in 2024.
Bitcoin price assumptions arguable
That’s the bullish take on the Bitcoin price. However, all three of the charts contain various assumptions and are arguable at best.
Despite Bitcoin’s meteoric rise, many would argue with the calculations about the ‘risk-free rate of return’ included in the Sharpe ratio.
Various pundits also think that stock market and gold price moves are starting to affect or coincide with moves in the Bitcoin price and question its status as an uncorrelated asset.
It’s much more highly correlated with European stock markets than US stocks for example.
Doubters include well known Bitcoin bull Thomas Lee from Fundstrat, who tweeted in September:
“Unpopular opinion, Bitcoin won’t make a new high until S&P 500 makes a new high. BTC has been range bound because macro trendless. Confirmed by our Bitcoin Misery Index falling from 66 (50 now). Since 2009, best years for Bitcoin is when S&P 500 >15%.”
Pitched bitcoin to institutional investors last week. Presentation started with these 3 charts: Sharpe ratio (@woonomic ), zero correlation with other assets (@PanteraCapital), correlation and cointegration with stock-to-flow (@100trillionUSD). Amazing response! pic.twitter.com/gDj39MOe7a
— PlanB (@100trillionUSD) December 2, 2019
Plan B conceded Bitcoin’s non-correlation would “get interesting during a recession because we haven’t had a real recession since GFC 2008. How will Bitcoin fare when stocks and/or bonds crash?”
In the event of a major crash, Bitcoin holders may be forced to sell to make up other losses, thereby putting downward pressure on prices.
And there’s plenty of doubters over the Stock to Flow model, which tracks supply but can’t forecast demand.
It’s based on the expected halving of supply due to the Bitcoin block reward halving in May next year which reduces the amount of BTC paid to miners for each block from 12.5 BTC to 6.25 BTC.
Morgan Creek Digital co-founder Jason Williams said this week he doesn’t believe the halving will move markets or do much for the Bitcoin price.
“Bitcoin halving in May 2020 won’t do anything to the price. It will be a non-event,” he summarized.
Unpopular Opinion –
Bitcoin halving in May 2020 won’t do anything to the price. It will be a non-event.
— Jason A. Williams 🦍 (@JWilliamsFstmed) December 1, 2019
Researchers from algorithmic trading software company Strix Leviathan analyzed the history of 32 halving events and concluded the widely believed halving price spike narrative is “a myth”.
Bitcoin’s recent bearish price action doesn’t seem in keeping with the forecasts (though Plan B disagrees) and Litecoin has crashed in price and hash rate since its halving this year.
Willy Woo also isn’t a big believer. A couple of weeks ago he tweeted he was short term bearish. “Don’t expect price to repeat past halvings”.