Bitcoin is trading at a 71% premium but could go even higher: Charlie Morris

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Charlie Morris is the co-founder of crypto data provider ByteTree and CIO of its asset management arm. He’s a long-term bitcoin bull, but he’s skeptical of the current “hype cycle” with bitcoin trading at a 71% premium. Here is how its fair value model works and how it is positioned for the fourth quarter.

As a seasoned fund manager with 17 years of experience managing a multi-asset portfolio at investment titan HSBC, Charlie Morris has spent a lot of time researching different and interesting asset classes that could offer uncorrelated returns.

Bitcoin was one of the assets that caught Morris’s attention in 2013.

But, at this point, it wasn’t quite ready to be neatly integrated into an investor’s portfolio, so Morris instead focused his attention on the data behind the asset class. He co-founded ByteTree.com, an institutional crypto data provider that gives investors access to a terminal with metrics to analyze the price action of bitcoin as well as traditional commodities, like gold and silver. .

Just last year, Morris returned to the idea of ​​adding bitcoin to investor portfolios with the launch of the asset management arm of ByteTree, which offers exposure to two different crypto funds.

This timing was perfect. Bitcoin (BTC) jumped 375% from November 2020 as adoption accelerated among institutional investors, retail traders and even countries, like El Salvador, where it is now legal tender.

Just this week, bitcoin hit a record high of around $ 66,000 following the launch of the first U.S. bitcoin exchange-traded futures fund, which already manages $ 1 billion in assets within days of launch. .

The bitcoin ‘hype cycle’

While the ETF’s launch resulted in a spike in bull prices, Morris is not convinced it will last.

He is particularly concerned about maintaining the momentum of the ETF, based on the performance of commodity futures ETFs in the past.

“Over time, they’ve just massively underperformed the Underlying and you’re going to see the same here,” Morris said. “Now, unfortunately for bitcoin futures, the more demand for bitcoin, the worse the roll returns. At the top of hype cycles you get the most underperformance.”

Insider recently spoke to several crypto investors and ETF experts who made similar remarks. Morris compares with the USO ETF, which tracks WTI crude oil futures and has underperformed the price of oil over the long term.

“A lot of these things become effective trading vehicles where in the short term you don’t care about the slippage here and there for days, weeks, months, they don’t really notice,” Morris said. “But that’s when you’ve been there for years, then it really starts to interfere with performance.”

Even before the futures ETF launched, Morris was bearish on sentiment and price action surrounding bitcoin. At the Token2049 conference in London on October 8, he said bitcoin was “too expensive” and was worth no more than $ 28,000 based on ByteTree’s fair value model.

The model calculates fair value based on the network value to transaction ratio (NVT-BT) and on-chain data to create a fair valuation of the price. Morris compares NVT-BT to the traditional price-to-sales ratio in equity analysis as one of the most direct measures for determining fair value.

Taking advantage of 12-week transaction data, on October 22, bitcoin’s current fair value is around $ 36,000, which means it is trading at a premium of around 71%, he said. he declares.

Fair value model ByteTree October 22 ByteTree

Currently, around $ 50 billion changes hands every week on the blockchain, Morris said.

“We now have a price where you would normally see around $ 70 billion or $ 80 billion worth of bitcoin changing hands, and now you have $ 50 billion,” Morris said. “Since I spoke at this conference, that gap has closed by $ 10 million, so the channel is picking up, but it’s definitely trading on the narrative for now.”

Despite his short-term skepticism, Morris remains optimistic about bitcoin in the long term. He just believes the market is staying ahead of events at this time.

“We have had bitcoin below fair value four times in the past 12 months, but on no occasion since June,” Morris said.

Bitcoin could continue to rise

2021 has become the year of the bitcoin story, Morris said. However, this is not just due to bitcoin. Morris believes this is due to the larger bubble seen across a range of asset classes.

“People get carried away by the cash flow in a zero rate world,” Morris said. “You have this big bubble in just about everything, in bonds and stocks and so on. Now you have inflation. Classes, not just crypto.”

With bitcoin now hitting new highs, Morris expects it to pull a lot of money into space with the potential to go even higher.

“Anytime bitcoin has gotten excited it tends to be in the fourth quarter for whatever reason,” Morris said. “2018 has been exceptional, but for most years the fourth quarter is pretty solid and there’s pretty strong seasonality around it.”

Morris focuses on the inverse relationship between gold and bitcoin and comes up with a strategy that rebalances gold. Generally, gold performs well in the first and third quarters of the year. While bitcoin is performing well in the second and fourth quarters, he said.

Morris’s general fund is currently fully invested in crypto with an 80% allocation to bitcoin and a 20% allocation to ethereum.

“I’m understandably skeptical of the hype cycles, I don’t enjoy bitcoin as much in 2021 as I do in 2020,” Morris said. Still, his long-term thesis keeps him invested in the asset class.

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