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Analysts at Hedgeye Risk Management, an investment research and financial media firm based in Stamford, Connecticut, analyzed the Bitcoin stock-to-flow argument. This framework suggests that the price of Bitcoin could reach $ 1 million by the second half of the 2020s, and up to $ 10 million per BTC by the 2030s.
“First they ignore you, then they laugh at you, then they fight you, then you win” -Mahatma Gandhi
At its recent peak, Bitcoin’s market cap reached $ 1.2 trillion. To give you an idea, it’s bigger than the four largest banks in the United States combined (JP Morgan, Bank of America, Citi, Wells Fargo), as well as the four largest payment platforms combined (Visa, Mastercard , PayPal, Square).
As most long-term holders understand, a confluence of critical factors will continue to contribute to the proliferation of crypto adoption around the world.
Among them:
Companies accepting payments through cryptocurrency Institutions holding crypto on their balance sheets Asset managers creating new investment vehicles (At the time of writing, there were eight fund managers with apps Bitcoin ETF on hold) The depreciation of the US dollar Growing distrust of centralized political and monetary institutions
The list is lengthened increasingly.
Analysts at Hedgeye Risk Management, an investment research and financial media firm based in Stamford, Connecticut, analyzed the Bitcoin stock-to-flow argument – in line with their approach of looking at financial markets through a quantitative lens. (which is noticeably lacking in quality, narrative “calls”).
This framework suggests that the price of Bitcoin could reach $ 1 million by the second half of the 2020s, and up to $ 10 million per BTC by the 2030s.
Hedgeye was founded in 2008 by former buy-side analysts to democratize access to quality hedge fund investment research for everyday investors. In an effort to broaden the scope of its research process, Hedgeye’s Macro team has created a comprehensive daily quantitative dashboard on a range of cryptocurrencies and ETFs, aptly named the ‘Bitcoin Trend Tracker’. “.
This “Crypto Quant” dashboard breaks down 1) price 2) volume and 3) volatility among several other metrics of each asset it tracks. (You can watch the 30-minute explainer video by Christian Drake, analyst at Hedgeye Macro, on using the Tracker here).
The goal is simple: to give investors the same high-quality quantitative data for cryptocurrencies available for other asset classes, reflecting the reality that crypto is here to stay. The “Bitcoin Trend Tracker” is no different from other Hedgeye proprietary tools that use market-based signaling to stay ahead of large moves in any asset.
In addition, one of the analysts at Hedgeye, Josh Steiner, also performed fundamental analysis by comparing Bitcoin’s Stock-to-Flow model to that of other durable assets and comparing the price movement of Bitcoin to this. Stock-to-Flow framework. Below is a summary of this analysis.
To be clear, it goes without saying that there are many legitimate risks in being Bitcoin long. Smart investors should be aware of these risks. They span the gamut and include potential regulatory risk, as well as competitive and technological risk. Anyone who owns Bitcoin (or any cryptocurrency for that matter) should be aware of these potential landmines and manage them accordingly.
(You can access the slides presented in this article here)
“The idea here is simple,” says Steiner.
“If you look at the ratio of the outstanding offer to the throughput of that offer, you can get the stock-to-flow ratio. Bitcoin’s stock-to-flow ratio is currently 54x; around 344,000 BTC are mined each year on an exceptional basis of around 18.6 million BTC.
But what’s remarkable about Bitcoin is that it has a preprogrammed creation decline roughly every ~ 4 years; during each of these events, the reward for mining Bitcoin is halved.
This means that the stock-to-flow ratio is about to increase logarithmically, about 10 times, every 12 years.
To put that in perspective, by 2036 we should be at a stock-flow ratio of around 1000x – or more than 10x the housing stock-flow (93x) or gold (72x). By 2048, there will be another 10-fold increase, which would bring the Stock-to-Flow to 10,000 times. “
Simply put, Bitcoin is mathematically designed to exponentially increase its stock-to-flow ratio until it mathematically converges to infinity. This is both relative to its current condition and relative to other hard silver assets like housing and gold. A higher stock-to-flow ratio indicates that less new supply is entering the market compared to the existing and outstanding supply of an asset.
In other words, an asset with a higher Stock to Flow ratio should, compared to other assets, hold its value better over the long term. In a world of easy money and the debasing US dollar, it’s easy to understand the attractiveness of Bitcoin not just as a hard money asset, but as an ultra-hard money asset. Unlike real estate and gold, which have high, but relatively static Stock-to-Flow multiples, Bitcoin’s Stock-to-Flow ratio will continue to rise exponentially over the next 100 years.
Steiner returns to the persistent problem mentioned earlier, the impact on prices.
In the graph below, Steiner plots a time series of Bitcoin’s price (y-axis) versus the stock-to-flow ratio as it moves over time (x-axis) up to 2057. Maybe more importantly, the black dots in the chart on the right reflects the historical price of Bitcoin relative to the theoretical progression implied by the stock-to-flow ratio… and it has followed the pattern very closely so far.
With over two decades of investment analysis under his belt, Steiner has used every regression analysis in the book to model the future price of Bitcoin. The best fit, by far, was for power. The graphs presented are logarithmic; The appreciation in the price of Bitcoin has been – and may continue to be – logarithmic.
“Every 10-fold increase in Bitcoin’s stock-to-flow ratio, which will occur every approximately 12 years in the future, has resulted in an approximately 1,000-fold increase in the price of Bitcoin. And it didn’t happen once, but twice.
Steiner explains that he has yet to see another asset behave this way, even after a decades-long career on both the buy and sell side of Wall Street spanning finance, housing and macro.
In a spirit of total transparency, Steiner does not keep his model a secret. The equation for the theoretical progression of the price of Bitcoin (relative to its Stock-to-Flow) is y = 1.3268×2.4769.
This equation predicts that Bitcoin will reach $ 1 million by the second half of the 2020s and $ 10 million per BTC by the end of the 2030s.
Of course, Stock-to-Flow is not the only factor that will influence the prices of cryptocurrencies in the future. The aim of the model is to prove how Bitcoin could inherently reach these price points.
Additionally, not everyone intends to be a long-term holder of cryptocurrencies. Many people use crypto in various transactions or to store value, but later realize a gain, among many other use cases.
Hedgeye’s goal is to add a quantitative framework for investing in cryptocurrencies, both for short-term traders and long-term investors.
Investors can now better understand the short-term and long-term movements and correlations that are altering the short-term trajectory of various cryptocurrencies and crypto-related ETFs. In other words, Hedgeye injects transparency into what will likely be a massive asset class that could one day compete with stocks, fixed income and currencies.
The Bitcoin Trend Tracker does exactly that.
As a risk management tool, it focuses on the price, volume, volatility, and related characteristics of each asset it tracks. Managed by the Hedgeye Macro team, it continues to evolve based on the new models they develop, subscriber feedback, and innovations within crypto.
Hedgeye’s Bitcoin Trend Tracker includes the exclusive risk ranges of Hedgeye CEO Keith McCullough, Buy Low, Sell High for Bitcoin, Ethereum, Grayscale Bitcoin Trust (GBTC) and Microstrategy (MSTR) … in addition to other critical data from quantitative management of crypto risks that you can’t go elsewhere.
Recently, Hedgeye extended its crypto coverage with proprietary risk ranges for the Amplify Transformational Data Sharing (BLOK) ETF.
BOTTOM LINE: You can now access critical crypto risk management signals with the “Bitcoin Trend Tracker”.
Learn more about Hedgeye’s Bitcoin Trend Tracker here.
Learn more about Hedgeye’s overall investment research process here.
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Image credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. This is not a direct offer or the solicitation of an offer to buy or sell, nor a recommendation or endorsement of any product, service or business. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or allegedly caused by or in connection with the use of or reliance on any content, good or service mentioned in this article.
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