| 1) Low correlation to other markets. Any 60/40 portfolio that moved just 1% of it's allocation to Bitcoin would have produced a higher sharpe ratio (higher return, less volatility) over past 5 years. 2) Many crypto protocols are already capital assets that generate income streams. These income streams can be discounted to the present just like the income streams of companies.
Examples:
- Ethereum (ETH): It has multiple use cases such as collateral and gas for execution (think oil) both of which contribute to it's value as usage grows, but it's also a capital asset that can be staked and used to validate transactions to generate an income stream. This is not much different than real estate or farm land being used as a productive asset to generate returns.
- MakerDAO: Protocol that generates a stablecoin (DAI) backed by debt based collateral (think mortgages against homes). The interest from minting DAI is repaid to unlock the collateral and burns (think stock buybacks) MKR.
- Yearn.finance: Protocol that takes stablecoin (crypto pegged to USD) assets and generates returns across decentralized money markets. Returns have been averaging between 10%-35% APR depending on the pool and strategy. Finally consider the current macro environment. Stocks generate a stream of future income based in USD and fiat currencies. In 2020, the central banks of the major currencies have not only increased currency supply by over 50% (FED balance sheet in march was 4.3T, today 7.2T) but worked with top level governments to hand out the new printed money directly to consumers which is now money that will be hard to pull back out of the economy and they did it while GDP and economic activity has been stifled. So a larger amount of currency backed by a smaller amount of economic activity is a depreciating asset. If the return on equity of your profitable companies is smaller rate than the depreciation of the currency you have a negative real return. In order to prevent this companies may start to transact in a currency that has a deterministic monetary policy and can not be changed by the whims of a select few bureaucrats. As the most stable and longest running crypto network, Bitcoin stands to be such an asset. See Micro strategy (MSTR) and Square (SQ) moving treasury reserves into Bitcoin. The way you value Bitcoin is you estimate the amount of global GDP (140 Trillion) that will shift to transacting in it and then divide that by the velocity of money or how often it changes hands. This will tell you how large a marketcap it will have in order to support that level of economic activity. So for example if 1% of global GDP is transacted in Bitcoin and it's velocity becomes something like USD (1.5x) or the Euro, let call it a velocity of 2 then: 140 * 1% / 2 = $700 Billion marketcap. |