Topic Tags: Digital Assets

Checking in on Bitcoin’s Fair Value

In May of 2024, we published a Chart of the Week titled “Is Bitcoin Fairly Valued?” At the time, bitcoin and the broader digital asset space demonstrated mixed performance amid heightened market volatility, shifting liquidity conditions, and geoeconomic uncertainty. Recognizing the challenges in determining bitcoin’s fair value, we applied standard valuation principles to estimate bitcoin’s fundamental value at that time. While bitcoin and the broader digital asset space have once again exhibited mixed performance amid a shifting macroeconomic backdrop, much has changed over the last year and recent developments suggest that a reassessment of bitcoin’s fair value could be timely.

To better understand why this reassessment could be relevant for institutional investors, here is a brief and non-exhaustive recap of the key developments in the U.S. crypto space this year:

  • On January 23, the Trump administration issued Executive Order (EO) 14178, Strengthening American Leadership in Digital Financial Technology, signaling a new approach to digital assets and revoking the frameworks and directives established by the Biden administration.
      • Within 180 days, the President’s Working Group on Digital Asset Markets, currently chaired by David Sacks, will evaluate and recommend proposals for a federal framework to govern the issuance and operation of digital assets.
  • On February 5, FDIC Acting Chair Travis Hill and Federal Reserve Governor Michelle Bowman released statements signaling the ongoing reassessment of their organizations’ postures toward the crypto industry — sentiments echoed in recent weeks by officials from the Treasury, DOJ, and SEC.
  • On March 6, President Trump signed the EO to establish a U.S. Strategic Bitcoin Reserve and a separate Digital Asset Stockpile; both to be administered and maintained by the Department of the Treasury.
      • Both are to be initially funded with assets seized or forfeited in criminal and civil cases.
      • Without further executive or legislative action, additional Stockpile assets can only be acquired through forfeiture proceedings and civil money penalties imposed by a government agency.
    • The Secretary of the Treasury and the Secretary of Commerce may develop budget-neutral strategies for acquiring additional bitcoin.
  • As of March 24, 20 states have active legislation advancing the establishment of digital asset reserve funds or diversification of existing public funds with prominent digital assets — with some proposals specifying potential allocations up to 10% of fund assets.

Unsurprisingly, crypto markets responded enthusiastically to the news. By the end of January, the MVDA 10 Index and the MSCI Global Digital Asset Index were both up roughly 10% as bitcoin traded north of $100,000. Then, February arrived, bringing a notable shift in broad market sentiment and volatility, causing digital asset prices to fall alongside public equities. By the end of February, bitcoin was down roughly 18% while some broad crypto indices were down as much as 28%. So where does bitcoin currently stand?

Applying the discounted cash flow (DCF) method used in our prior analysis, bitcoin’s fair relative value range¹ is illustrated above in light teal, with its upper and lower bounds highlighted, respectively, in orange and green. While bitcoin appears to have closed February at undervalued levels, as of March 24, bitcoin appears to be slightly below and advancing toward its fair value range. That said, it is important to clarify that this point-in-time DCF method is just one of several potential valuation approaches, and other estimates may vary. Valuations for both floating fiat currencies and cryptocurrencies are dynamic, constantly adjusting to inflation, nominal yields, and broader macroeconomic conditions. Going forward, future inflation trends and market dynamics will provide further opportunities to validate this fundamental approach.

1The discounted terminal values of bitcoin are based on a discounted cash flow model that incorporates U.S. Treasury yields, inflation rates, and imputed risk premiums. 

Cryptocurrencies Surge Post-Election

The cryptocurrency space is making waves again after a robust post-election rally drove bitcoin over $100,000 earlier this month. While it is tempting to attribute recent performance to speculation or momentum, a deeper understanding of the dynamics that fueled this surge may help investors navigate markets in 2025 and beyond. To that point, this week’s chart outlines the year-to-date performance of Bitcoin, Ethereum, XRP, and the MarketVector Digital Assets 100 Index, a market-cap weighted benchmark comprised of the top 100 cryptocurrencies (excluding stablecoins). The vertical line represents the beginning of the post-election cryptocurrency rally.

During the months leading up to the election, broad cryptocurrency performance appears to have been largely tied to bitcoin. As bitcoin is the most established, recognized, and capitalized digital asset, it follows that its liquidity and capital base would generally define the market. However, recent divergences between bitcoin and other cryptocurrencies are less intuitive and can largely be attributed to bitcoin’s position in a space beset by regulatory ambiguity and incongruous guidance. Put simply, this year bitcoin appears to have benefited from increased regulatory clarity and investor confidence. By the end of the second quarter, aggregate assets in the top 12 bitcoin ETFs exceeded $50 billion, with the iShares Bitcoin Trust ETF accounting for nearly 40% of that figure. Additionally, the access and standards afforded by the ETFs increased investor confidence, led to modest institutional acceptance, and expanded bitcoin market dominance. Meanwhile, other cryptocurrencies like XRP have faced headwinds that have weighed on performance. Embroiled in litigation since 2020, XRP was delisted by most U.S. exchanges and, as a result, struggled to perform during most of this year despite increased cryptocurrency adoption. This dynamic is demonstrated by XRP’s losses prior to the U.S. election.

So how did these dynamics ultimately contribute to a broad post-election rally, and how could they be relevant in the future? Challenges faced by XRP and the broader cryptocurrency market have led to criticism from industry stakeholders, particularly following the collapse of FTX, which exacerbated regulatory scrutiny. Cryptocurrency advocates and industry leaders widely viewed the responses from regulators as heavy-handed, raising concerns over potential stifling of innovation. As the 2024 election cycle ramped up, stakeholders within the cryptocurrency space increasingly engaged with policymakers, pushing for clearer regulatory frameworks and a more balanced approach. This heightened engagement coincided with a surge in political spending, reflecting the industry’s efforts to influence the regulatory landscape and mitigate perceived risks. Estimates suggest that bipartisan political spending by the cryptocurrency industry during the 2024 election cycle totaled more than $320 million, outpacing the roughly $275 million spent by Elon Musk and $175 million spent by Charles Koch and affiliates.

While it is unclear how cryptocurrencies may benefit from the incoming administration, the nomination of Paul Atkins, a known digital assets advocate, for SEC Chair indicates a potential shift toward more favorable regulatory policies for the sector. Additionally, the appointment of venture capitalist and cryptocurrency proponent David Sacks as the new administration’s “crypto czar” seems to have renewed industry optimism. These and other developments suggest that the incoming administration could provide a more supportive environment for digital assets.

Is Bitcoin Fairly Valued?

Despite mixed performance to start 2024, bitcoin finished the first quarter up roughly 68%. Buoyed by a broad weakening of foreign currencies, persistent inflationary pressures, and the January launch of almost a dozen U.S. spot-based ETFs, an extended February rally drove bitcoin’s market value to several all-time highs, peaking around $73,000 in mid-March. In the face of a relatively remarkable ascension, observers may find themselves wondering if bitcoin’s recent values are fundamentally justified or if they are simply the latest bout of speculative frenzy.

Before delving in, it’s crucial to understand the distinction between market values and fair values. Market values are the day-to-day prices of an asset that tend to fluctuate due to a dynamic interplay of supply, demand, immediate market conditions, and investor behavior. Fair values, on the other hand, represent the intrinsic worth of an asset based on its underlying economic fundamentals. In the context of a currency, inflation rates provide insight into current and future purchasing power, while yields help assess the potential attractiveness and risk of an investment. By analyzing the relative differences in these factors for a currency pair at a given point in time, investors can gauge whether a currency is relatively overvalued or undervalued.

While it is debatable whether bitcoin can be truly be labeled as a currency, we approach this analysis with that presumption, and readily recognize that the infancy of bitcoin and the broader cryptocurrency market lends itself to a wide measure of valuation methods. That said, illustrated above in blue is the discounted value of bitcoin, flanked by its implied fair value range in light teal.¹ Since currencies are free-floating and often subjected to speculative short-term shocks, and because rate environments can shift relatively quickly, fair value ranges tend to be more useful for analysis than a single point-in-time value. As such, the fair value range highlighted in teal reflects the historical variance of discounted values. Critically, the spot price of bitcoin consistently falls within the fair values computed by the model, which allows us to assess today’s price versus the range computed by our model.

So, is bitcoin overvalued or undervalued? Based on the ranges and values implied by the terminal discounted cash flow method, bitcoin appears to have closed the first quarter at elevated levels and moderated near its discounted fair value in April. It is important to reiterate several points. The discounted cash flow method used in this analysis is one of several potential methods for valuation, and other conclusions will likely vary. Floating currency and cryptocurrency valuations are dynamic, constantly shifting with inflation, real yields, and other factors. The fair values illustrated above are exclusive to the U.S. dollar and bitcoin; their bearing on the relative valuations of other currencies has not been expressed or implied. This point-in-time analysis should not be interpreted as forward-looking as past performance trends do not guarantee future results. Ultimately, this is one take on analyzing the price of bitcoin within a historical context and an eye on forward price behavior. Future price behavior will provide further opportunities to validate this approach to pricing.

¹The discounted terminal values of bitcoin are based on a discounted cashflow model that incorporates U.S. Treasury rates and bitcoin mining rewards with an imputed risk premium. 

The Dynamic Duo

In 2023, investors were stunned by the robust performance of seven prominent mega-cap stocks deemed the “Magnificent Seven.” Largely beneficiaries of the AI craze, these seven companies comprised almost 28% of the S&P 500 at the end of 2023. This narrow breadth and concentration within the market posed challenges for active large-cap managers who struggled to keep pace with benchmarks without matching the weight of this group in their portfolios. While market breadth has started to improve among large caps, a similar trend is now emerging in the small-cap universe with just two stocks, Super Micro Computers and MicroStrategy — now the two largest companies and weights in the Russell 2000, spearheading the majority of the index’s returns this year.

Since the onset of 2023, Super Micro and MicroStrategy have posted remarkable returns of 1,093% and 936%, respectively, driving up their weights in the Russell 2000 to 1.94% and 0.85%. For perspective, prior to this year, the index’s most substantial single weight since 1985 was 1.45%, at the peak of the dot-com bubble. Like the Magnificent Seven, these two firms have profited from the proliferation of AI. MicroStrategy has also capitalized on the recent cryptocurrency surge over the past six months.

While the performance of these stocks captivates attention, they have become a pain point for active small-cap managers trying to outperform the Russell 2000. Leaving aside fundamental underwriting, many small-cap managers are constrained by prudent limits on market capitalization for the companies they can invest in, and these two outsized outperformers fall far beyond those. As of March 18, Super Micro had a market cap of $55.5 billion and MicroStrategy stood at $25.3 billion, both in large-cap territory. While the Russell 2000 maintains a $6 billion market capitalization threshold for small-cap stocks, the index is only reconstituted once annually, and both companies fell within the limit in April 2023 when FTSE Russell last evaluated index characteristics. Despite their stellar performance, many managers will be unable to allocate to these companies due to their size. Though managers with prior allocations may be able to hold their positions, it could prompt scrutiny regarding the discipline of their investment approach. This predicament mimics the struggles seen in the large-cap space last year, where a select few companies drove much of the market’s performance and active manager relative weights dictated attribution. With the next Russell reconstitution not slated until June 28 of this year, active small-cap managers may have to get creative in order to navigate these challenges.

Livestream Videos: 2022 Investment Symposium

The presentations by our research team from Marquette’s 2022 Investment Symposium livestream on September 23rd are now available. Please feel free to reach out to any of the presenters should you have any questions.

View each talk in the player above — use the upper-right list icon to access a specific presentation.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Past performance is not indicative of future results. For full disclosure information, please refer to the end of each presentation. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.

Defined Contribution Plan Legislative Update – 2Q 2022

This legislative update covers the SECURE Act 2.0, summarizes requirements in the SECURE Act for defined contribution plans to provide participants with lifetime income illustrations, addresses the Department of Labor’s recent guidance regarding cryptocurrencies in retirement plans, and reviews plan features and enhancements employers are considering to improve employee retention amidst the “Great Resignation.”

Read > 2Q 2022 DC Legislative Update

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Digital Assets as an Inflation Hedge?

With inflation a top concern for investors, digital assets and cryptocurrencies have reemerged in several narratives as a potential inflation hedge. Crypto proponents have long purported bitcoin as deflationary, citing the crypto’s finite supply and diminishing mining rewards. This week’s chart looks at daily market values of the S&P 500, CPI, bitcoin, and the Cryptocurrencies Index 30 (CCi30), supplemented with correlations. The CCi30 is an index of the top 30 free-floating digital assets by market capitalization, designed to objectively measure the performance of blockchain-based assets, excluding pegged assets known as stablecoins.

Typically, an inflation hedge should correlate and increase in value as inflation increases. The data suggest digital asset performance relative to inflation is intermittent with negligible correlations ranging between -0.02 and 0.03 over the trailing 1-, 3-, 5- and 10-year periods. Although there have been several periods – April 2020 and May 2021 – where digital assets moved in step with inflation, there are just as many divergent periods – May 2017 or January 2022. With U.S. adoption of crypto prior to 2020 largely driven by retail investors and opportunistic hedge funds, it is possible that the observed crypto-inflation correlations were the result of short-term momentum and investor sentiment. Looking ahead, advances in institutional adoption could change the crypto-inflation dynamic, with implications for market behavior, volatility, and portfolio application. At this point, however, there is little evidence that cryptocurrencies offer a hedge against inflation, but given the limited data available, this is worth monitoring over the coming years.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Observations on Fidelity’s Bitcoin–401(k) Announcement

On April 26th, 2022, Fidelity Investments announced plans to offer bitcoin for 401(k) plans. For Fidelity, this plan is a natural next step. As shown in Exhibit 1, Fidelity began exploring digital assets in 2014. Soon after, bitcoin-centric custody solutions began to emerge, followed by a private fund and spot-based ETF. While Fidelity’s embrace of bitcoin could be seen simply as bandwagon hopping, the trend below suggests that bitcoin may be part of a broader long-term digital asset strategy.

In this edition of DC Perspectives, we cover the implications of Fidelity’s announcement for bitcoin and digital assets broadly, for the investment industry, and for defined contribution plan sponsors.

Read > Observations on Fidelity’s Bitcoin-401(k) Announcement

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

In Context Conversation: The Evolution of Cryptocurrency

This video is a recording of a live webinar by Director of Research Greg Leonberger, FSA, EA, MAAA, and Research Associate Nic Solecki covering cryptocurrency and other digital assets. While not an endorsement of cryptocurrency, Greg and Nic approach the topic from several angles, beginning by addressing common misconceptions, how blockchains work and why they require cryptocurrency, the evolution of digital assets as a potential asset class, sectors and subsectors within digital assets, and technology and concepts that have arisen alongside cryptocurrency, including smart contracts and decentralized finance (DeFi). They then examine adoption across the globe — from consumer to commercial to institutional investors — and provide an overview of performance and investment characteristics for digital assets, including risk/return profiles, liquidity, volatility, performance during drawdowns, and correlations to traditional asset classes. Finally, they address the market risks and most important considerations for investors. The webinar finished with a Q&A, which we have also included in this recording.

Marquette’s In Context series brings our latest research to your screen, with discussion led by the authors behind Marquette’s publications. From current events and trends to portfolio strategy and the broader economic landscape, we explore the questions investors are asking with consideration and the context you need to know.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

What Do the Internet and Cryptocurrencies Have in Common?

Discussions surrounding cryptocurrencies and digital assets have become more common in recent months as investors seek opportunities for future growth amidst high headline inflation and mounting recession concerns. While the narratives regarding digital assets vary widely, one of the more intriguing dialogues to emerge is the broad adoption comparison between the internet and crypto.

Illustrated in green on the left is global internet adoption in its first 10 years; measured as the total number of internet users, global internet users as a percent of world population, and U.S. internet users as a percent of the U.S. population. Similarly, illustrated in blue on the right is global crypto adoption in its first 10 years; measured as total crypto owners, global crypto owners as a percent of world population, and an estimate of U.S. crypto owners as a percent of the U.S. population. At first glance, the commonality between the trends is hard to miss. However, there are some notable nuances.

First, as the U.S. led the digital revolution through the 1990s and into the 2000s, internet users and users as % of the U.S. population grew in tandem. Certainly, U.S. crypto adoption is increasing. However, the fluctuations in U.S. crypto adoption — notably from 2016 through 2020 — seems to imply that U.S. adoption has been less influential in crypto than it was with the internet. Global adoption appears to be a more consistent and prominent growth driver for crypto.

Second, the scale of internet adoption in its first decade was almost ten times greater than that realized by crypto. Although there are numerous explanations for this difference that extend beyond the scope of this causal analysis, the difference itself indicates that crypto has not realized the same breadth of adoption in its first decade as that experienced by the internet.

Naturally, no internet-crypto comparison would be complete without referencing the Dot-Com Bubble and the volatility in crypto markets. The third and final observation is the pattern of both internet and crypto adoption during market drawdowns. Despite the Dot-Com Bubble bursting in 2000, global internet adoption appears to have proceeded unphased. Similarly, when the crypto ICO (initial coin offering) bubble burst in 2018, global adoption seems to have steadily increased. In the context of adoption, this may suggest that both the excesses in secondary markets creating a bubble and the ramifications of a bubble bursting may be overplayed or overstated.

Much remains to be seen and there are many variables at play beyond the scope of this comparison. While the first 10 years of crypto adoption appears more modest than that of the internet, it can be said that crypto has steadily advanced on a trajectory comparable to the internet. History may not repeat itself, but it could rhyme. Past performance does not guarantee future results, but nonetheless, we are fascinated to watch this dynamic play out in the coming years.

Print PDF > What Do the Internet and Cryptocurrencies Have in Common?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.