JPM on Bitcoin - current prices well above our most recent estimates of fair value
A note from JP Morgan on the leading crypto, analysts saying the price is above their estimate of fair value.
- Tesla, BNY Mellon, Mastercard and PayPal announced measures that point to growing acceptance and adoption, pushing Bitcoin's market cap up by $700bn since end-September 2020 on the back on just $11bn in institutional flows, which accounts for only a 1.5% increase in market cap.
- Current prices are well above our most recent estimates of fair value based on mining costs and risk capital equivalence in gold.
- Bitcoin does not have any kind of value as a hedging vehicle in the current environment given the same investors drawn to Bitcoin are typically the same type of investors drawn to single name stocks in equity markets.
- The mainstreaming of Bitcoin is raising its correlation with equities. Since holders of Bitcoin and single name stocks have the same risk preference around macro shocks such as in interest rates, there is a risk of simultaneous deleveraging in both of these assets. The correlation between Bitcoin and equities has risen meaningfully over the past year and looks to likely be sustained.
- In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio. However, cryptocurrencies are investment vehicles and not funding currencies, so when looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the Yen or USD instead. If looking to hedge against weak growth, then investors should look to buy 30-year US Treasuries or US dollar versus EM currencies. To hedge inflation, look to take exposure to commodities.
JPM wandered a bit off track in the last bullet .... is there a person on the planet thinking cryptos are a funding currency? Otherwise, some decent points from JPM.
I'll only add that, for traders, viewing BTC as a momo trade is probably pretty helpful (choose your preferred timeframe and risk measures of course). I noted a comment from an astute trader in the comments earlier this week (or it might have been last week), having some experience with technical analysis should enable positive returns trading BTC.