Bitcoin surpassed $20,000 on Wednesday (December 16) for the first time. This is a new milestone in Bitcoin’s best-performing round of rising prices this year. On Wednesday morning, Bitcoin rose to a level slightly above US$20,500, and on Thursday (December 17) it further broke the US$23,000 mark, with a year-to-date increase of about 226%.
Bitcoin broke through $19,000 for the first time in 2017, and it has broken through this level several times this year. But before hitting $20,000 this time, Bitcoin fell below $4,000 in March this year. The ups and downs of bitcoin prices are difficult to explain, but analysts have set $20,000 as a key psychological level.
“Barron Weekly” believes that the influx of “smart money” pushing the price above $20,000 is very dangerous for a highly volatile asset like Bitcoin. “Barron’s Weekly” contributor Mark Hulburt (Mark Hulburt) also recently wrote an article about the valuation of Bitcoin. When this asset was hyped up, he cited a person who had accurately judged the fairness of gold. A new quantitative analysis of value investors takes the value of Bitcoin calmly and believes that Bitcoin is overvalued by more than 50%; and compared with gold, Bitcoin is not an effective inflation hedging tool.
Market sentiment has become crazy
Bitcoin’s rise this year is driven by institutional investors, and more and more institutional investors have shown their willingness to invest in this cryptocurrency. The 169-year-old Massachusetts Mutual Life Insurance Company (MassMutual) announced last week that it had bought $100 million worth of bitcoin and joined the ranks of companies that invest in bitcoin such as Square (SQ).
Retail investors’ interest in Bitcoin is also heating up. They can now invest in Bitcoin in a variety of ways, including through their PayPal accounts. Nigel Green, founder and CEO of deVere Group, a financial advisory and fintech company, said that the purchase of large companies “aroused the interest of retail investors.” Although there is no universally accepted method for investors to value Bitcoin, and Bitcoin does not generate cash flow, the supply of Bitcoin is limited to 21 million, and strong demand pushes up the price. Now that more than 18.5 million bitcoins have been created, there are less than 2.5 million coins left to mine.
If Bitcoin can hold the $20,000 level, some analysts expect its price to rise further. “If Bitcoin can stay above $20,000 in the next few days, we expect the price to rise substantially in the next six months,” said Greg King, CEO of Osprey Funds, a digital asset subsidiary of REX Shares. However, “Barron Weekly” believes that a high price of $20,000 is dangerous for a highly volatile asset such as Bitcoin. According to a report released this month by the cryptocurrency exchange OKEx and blockchain data company Kaiko, large traders tend to sell when small traders enter the market. This shows that “smart money” has seen the rise in the hype It may sell immediately. Under selling pressure, Bitcoin may fall rapidly. The report pointed out, “When Bitcoin is rising, the market tends to forget the long-lasting decline in the past, and the rise will make the market sentiment crazy.
Overestimated by more than 50%
In an article published on December 16th, Barron’s contributor Mark Hulburt pointed out that Bitcoin’s fair value is $12,000, and its current price is more than 50% higher than its fair value. .
The $12,000 is based on a recent analysis by Herbert based on various valuation frameworks that determine the fair value of Bitcoin. This latest analysis was conducted by Claude Erb, a former commodity portfolio manager of the investment company TCW Group. In February 2013, Herbert mentioned Elb’s analysis of precious metals for the first time in a column in Barron’s. He and Campbell Harvey, a finance professor at Duke University, came to the conclusion that the fair value of gold at the time was less than half of its price.
In the next two and a half years, the price of gold fell by $600. It is for this reason that Herbert is now very concerned about Erb’s views on Bitcoin. The theory behind the valuation framework for deriving Bitcoin’s fair value of approximately US$12,000 is that the value of Bitcoin comes from the so-called “network effect”, that is, the value of a network grows faster than The growth rate of the number of users in the network.
This framework is related to Metcalfe’s law. The content of the law is that the value of a network is equal to the square of the number of nodes in the network, and the value of the network increases with the square of the number of users.
In order to test whether this analysis is convincing, Erb made a simple assumption: each bitcoin that has been mined represents a user in a bitcoin network. Then, he calculated how the price of bitcoin changed over a period of time relative to the number of bitcoins that had been mined at that time. As can be seen from the figure above, his model more accurately reflects the rise of Bitcoin in the past 10 years.
Based on this model, Erb said in an interview that the fair price of Bitcoin as of December 14 was $12,315. The actual price of Bitcoin on that day was US$19,201, which was 56% higher than the fair price. Herbert pointed out that although the network effect valuation framework is not the only method proposed by analysts to calculate the fair value of bitcoin, Erb still recommends that investors consider this seriously, because there is no other more reliable valuation. Method, and his analysis has a significant correlation with the historical price trajectory of Bitcoin. According to Herbert, the network effect valuation framework can also be used to predict how much Bitcoin can rise in the future, because the supply of Bitcoin is fixed (21 million) and the speed of Bitcoin mining is also known (possibly by 2140). Will all be mined).
According to Erb’s econometric model, a network with 21 million users (ie 21 million Bitcoins) indicates that the price of Bitcoin is $74,000. Compared to the current price, this means that the annual rate of return for Bitcoin in the next 120 years is 1.2%.
Hedging inflation is not as good as gold
Some other ways to evaluate Bitcoin’s value are to treat it as an effective inflation hedge. But Erb believes that from an empirical point of view, these methods are not as reasonable as the network effect framework. He pointed out that a key feature of a good inflation hedging tool is that the actual price (that is, the price adjusted for inflation) is relatively stable, but Bitcoin does not meet this condition. In the past 10 years, the ratio of Bitcoin price to CPI has ranged from close to zero to over 73. If compared with gold, Bitcoin’s inflation hedge function is even worse. This is worthy of investors’ attention, because many Bitcoin supporters call Bitcoin “Gold 2.0”.
But in the past 10 years, the ratio of gold price to CPI has only fluctuated between about 3 and 8. Although the fluctuation range of the ratio of the most ideal inflation hedging tool should be narrower, the fluctuation range of the ratio of gold price to CPI is much lower. There is room for fluctuations in the ratio between Bitcoin and CPI. Herbert believes that Erb’s analysis has brought Bitcoin proponents a valuation model that can be used to estimate the fair value of Bitcoin. Herbert pointed out that there must be other more convincing valuation models, but in this hyped investment field, Elb’s quantitative analysis through statistics and mathematics may be more rational.
