Remember that I’m not talking about fundamental value. It’s possible Bitcoin is worth twice the proxy portfolio, or half, or 10 times as much, or nothing. All we know is current Bitcoin prices are about 20% below their historical relation to other market prices. If you think Bitcoin was properly valued on average over the last four years, then it’s cheap today.
It’s easy to understand the $82,000 in the Nasdaq portfolio, buying one Bitcoin is like putting $82,000 in tech stocks. If those stocks rise 10%, Bitcoin should increase $8,200. If those stocks fall 10%, Bitcoin should lose $8,200.
Borrowing $21,000 cash and $50,000 of gold is also straightforward. Bitcoin is statistically a levered investment in technology, so dollar-for-dollar its more volatile than the Nasdaq index. If gold goes up 10%, Bitcoin should fall about $5,000. If gold goes down 10%, Bitcoin should rise about $5,000.
The volatility add-ons are somewhat more complicated. Bitcoin has some option-like characteristics, so its price is higher when things are volatile. The current value of the Nasdaq index volatility add-on is $8,000. That means if the index volatility increases 50%, expect Bitcoin prices to go up about $4,000, and down $4,000 if volatility declines 50%. The Bitcoin volatility add-on is $6,000, so the numbers are $3,000 gains or losses in the price of one Bitcoin if Bitcoin volatility goes up or down 50%.
This suggests that Bitcoin’s price decline, and probably crypto in general, was in line with expectations given the crash in tech stocks as well as little change in gold prices and moderating volatilities. For the future, Bitcoin seems attractive if you expect a rebound in the technology sector and stable or falling gold prices, plus a return to high volatility. But if you expect poor performance from tech stocks, soaring gold and dampened volatility, Bitcoin and crypto are not for you.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is author of The Poker Face of Wall Street. He may have a stake in the areas he writes about.