Recently, Jurrien Timmer, Director of Global Macro at Fidelity Investments, commented on Bitcoin’s latest price action, and he had some words of comfort with Bitcoin HODLers who might be a bit worried by the currently bearish crypto market.

In March 2021 Timmer published a 12-page research paper on Bitcoin (title: “Understanding Bitcoin: Does bitcoin belong in asset allocation considerations?”).

Timmer started by saying that he intended his paper to serve as “a brief plain-English primer, but also to assess, in a meaningful way, the value proposition of bitcoin as it relates to asset allocation.”

After his study of Bitcoin, here were some of the conclusions he came to:

  • … bitcoin has gone mainstream, already considered a legitimate asset class by more and more investors.
  • … bitcoin has both a compelling supply dynamic (S2F) and demand dynamic (Metcalfe’s Law).
  • “… bitcoin is gaining credibility, and as a digital analog of gold but with greater convexity… bitcoin will, over time, take more market share from gold.

Timmer said that “if gold is now competitive with bonds, and bond yields are near zero (or negative), perhaps it makes sense to “to replace some of a portfolio’s nominal bond exposure with gold and assets that behave like gold.”

He finished by saying:

If bitcoin is a legitimate store of value, is scarcer than gold, and comes complete with a potentially exponential demand dynamic, then is it now worth considering for inclusion in a portfolio (at some prudent level and at least alongside other alternatives, such as real estate, commodities, and certain index-linked securities)?

Despite the many risks discussed—including such factors as volatility, competitors, and policy intervention for some the answer may well be ‘yes,’ at least insofar as that ‘yes’ applies only to components on the 40 side of 60/40. For those investors, the question of bitcoin may no longer be ‘whether’ but ‘how much?’.

Well, on April 20, Timmer tweeted:

Then, over a series of tweets, he explained what he meant:

The chart above shows Bitcoin’s fundamentals. The supply curve is dictated by the S2F model… and the demand curve is driven by network growth (Metcalfe’s Law). Until recently, Bitcoin would often overshoot its intrinsic value to the upside during bull markets and to the downside during bear markets. It was a momentum game with little to no resistance, until the trend reached exhaustion.

But take a closer look at that chart above. In recent months the price of Bitcoin has stopped tracking the S2F model and has instead hugged the pink line (demand model). That makes sense to me. While the S2F model has been an effective model in the past, in my view the demand curve will be the dominant driver from here. So, in a more efficient two-way market, Bitcoin should deviate around that pink line, up and to the right.

Institutional investors have likely created their own models by now, and therefore know when Bitcoin is cheap or rich. For instance, If the demand model says that Bitcoin’s intrinsic value is $50k today and $100k two years from now (my thesis), then at $30k Bitcoin is going to look a lot better than at $70k. That’s the difference between a two-year gain of 3x and 1.5x. While a 25% CAGR is still a lot, at a vol of 50 the Sharpe Ratio would only be a middle-of-the-road 0.5. The starting point matters for all assets, including Bitcoin.

As Bitcoin’s value becomes better understood by more and more investors, there could be more efficient accumulation when Bitcoin swoons, and more determined distribution when it moons. That’s what makes a two-way market.

Remember, price is what you pay, but value is what you get. In the early days, most investors only knew the price. But as investors better understand valuation, Bitcoin is less likely to resemble the early boom-bust days & could start behaving like a traditional risk asset. If indeed price starts to move more closely around an upwardly sloping demand curve, it will be more important than ever to get that demand curve right…


The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.

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