Grayscale Investments has released a report on Bitcoin that indicates that current market conditions are mirroring data seen in 2016 and the months leading up to an historic bull run some 18 months later.
The document is intended to help investors gain a clear understanding of Bitcoin as a digital asset and explore the various market indicators and data that are being influenced by the current socio economic climate around the world.
Grayscale has established itself as the biggest cryptocurrency asset manager in 2020 with over $5.8bln in assets held in various trusts.
An answer to Quantitative easing
There has been plenty of media attention on the steadily rising value in the cryptocurrency markets. Bitcoin has tested and passed the $12000 mark a number of times this month while Ethereum has enjoyed what has arguably been its most successful year on record across a number of metrics.
Investors that are unfamiliar with cryptocurrency markets may be taking a step back and asking why the space is booming amid a global pandemic which has taken its toll on international markets and economies.
The Grayscale report starts off by unpacking the relationship between federal reserve policies and inflation. With a specific focus on American monetary policy, the report identifies the US Federal Reserve’s decision to unpeg the US Dollar from the gold standard.
As a result asset prices soared while wage values stagnated and markets around the world became increasingly incentivized to turn to debt in order to purchase assets. The Federal Reserve had to turn to Quantitative Easing during the 2008 global market crash.
The report highlights how ‘loose monetary policies’ saw money flow into financial assets instead of the real economy. Markets were being propped up by monetary stimulus, instead of that money being used for everyday economic activities. The US debt to GDP ratio nearly doubled since 2008 as a result.
A major problem is that this quantitative easing cannot be unwound without traditional financial markets being negatively affected. The COVID-19 pandemic has brought this to a head as the Federal Reserve has printed more money than it has in recent years.
While the US Dollar still holds its buying power, more savvy investors have recognised the inherent danger of quantitative easing and the inflation caused by the policy. As a result many investors are actively looking for assets that will hold their value, fearing a serious devaluation of their fiat currency holdings.
Identifying Bitcoin’s value
The second half of the report looks at the various ways in which Bitcoin is valued and the inherent qualities that are making it an increasingly attractive store of value for investors.
The major hurdle is attaching a fair value to Bitcoin given its digital nature and the fact that it does not generate cash, like other financial assets:
“Since Bitcoin is not a cash generating asset, investors can’t apply a standard discounted cash flow analysis to model its present value. In many ways, valuing Bitcoin is similar to how some value gold. Instead of depending on cash flows, we can use relative valuation and supply/demand analysis to value Bitcoin as an investment.”
Supply and demand metrics are an important factor but the report also delves into specific supply-based metrics and demand-based metrics. There is a lot of information that can be garnered from different metrics, but the report also outlines the fact that as more Bitcoin transactions take place off-chain, these metrics don’t paint a full picture.
The key takeaway of the report is the fact that Bitcoin has become an increasingly attractive store of value during the current economic climate:
“As demand for stores of value grows during this regime of monetary inflation, Bitcoin may be well-positioned given that it is a scarce digital asset. The plethora of blockchain metrics covered in this report indicate that the current market structure is reminiscent of early 2016, the period that preceded Bitcoin’s historic bull run. Bitcoin continues to command global investor attention, there is scant supply to meet growing demand, and the infrastructure is now in place to satisfy that demand. With the techniques outlined in this report, investors can now measure Bitcoin’s network growth and more confidently assess its value.”