{"id":71252,"date":"2023-10-11T02:35:30","date_gmt":"2023-10-11T06:35:30","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/bitcoin-is-undervalued-now-but-just-look-at-its-projected-long-term-return\/"},"modified":"2023-10-11T02:35:34","modified_gmt":"2023-10-11T06:35:34","slug":"bitcoin-is-undervalued-now-but-just-look-at-its-projected-long-term-return","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=71252","title":{"rendered":"Bitcoin is undervalued now \u2014 but just look at its projected long-term return"},"content":{"rendered":"
\n

Bitcoin over the next 100 years will produce an annualized return of 1.1%.<\/p>\n

That\u2019s the prediction of a fair value model that\u2019s based on something called Metcalfe\u2019s Law. According to it, the value of a network is proportional to the square of the number of users.<\/p>\n

\n

Claude Erb, a former commodities portfolio manager at TCW Group, applies Metcalfe\u2019s Law to bitcoin
\n BTCUSD,
\n -1.08%<\/bg-quote>
\n by assuming that each mined coin represents one user in the network. Since the number of bitcoins that can ever be mined is known, along with when that total number will eventually be reached, Erb\u2019s Metcalfe\u2019s Law model is able to calculate the cryptocurrency\u2019s long-term expected return. That\u2019s the source of the projected 1.1% annualized return.<\/p>\n

It\u2019s easy to poke holes in the model, as Erb himself is the first to point out. Some \u201dusers\u201d in the bitcoin network own less than one coin, while others own more than one. And many bitcoins have been lost. So the number of bitcoins that have been mined doesn\u2019t exactly equal the number of users.\u00a0<\/p>\n

In an email, Erb said he offers his Metcalfe\u2019s Law-based model in the same spirit as those who observe that \u201call models are wrong, but some are useful.\u201d He added that his model is \u201ca way to anchor a conversation\u201d about the cryptocurrency\u2019s valuation that is sufficiently \u201cintriguing\u201d to warrant our serious consideration.<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n
<\/div>\n<\/figure><\/div>\n

The model has done an admirable job, as you can see from the chart above. It has issued warning signals when bitcoin reached unsustainably high levels and provided encouragement when its price fell too low. I first devoted a column to the model in late 2020, just as bitcoin was about to triple from around $20,000 to over $60,000. The model held that such a price rise was unjustified, and bitcoin subsequently fell back below $20,000. At that point I reported that, per the model, bitcoin had become undervalued \u2014 and it subsequently rallied more than 50%.<\/p>\n

I last wrote about Erb\u2019s model in early June, reporting that bitcoin\u2019s fair value was about 10% above its then-current price. It\u2019s gained 4.2% since then. The model currently calculates that bitcoin\u2019s fair value is about $31,400, or around 14% above where it currently is trading.<\/p>\n

Even if the model continues to do as good a job forecasting bitcoin\u2019s price, you should still expect the cryptocurrency to oscillate between extremes well-above and below fair value. That is something all assets do, and bitcoin is no exception.<\/p>\n

Consider the stock market on the assumption that its fair value is based on its long-term average price\/earnings ratio. Over the past 150 years, the S&P 500
\n SPX
\n has traded for as much as seven times its fair value and as little as one third. That\u2019s similar to bitcoin\u2019s range in recent years.<\/p>\n

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at <\/em>mark@hulbertratings.com<\/em><\/p>\n

More<\/strong>: Bitcoin is set to thrive in October no matter where rates go, analyst says<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Bitcoin over the next 100 years will produce an annualized return of 1.1%. That\u2019s the prediction of a fair value model that\u2019s based on something called Metcalfe\u2019s Law. According to it, the value of a network is proportional to the square of the number of users. Claude Erb, a former commodities portfolio manager at TCW […]<\/p>\n","protected":false},"author":1,"featured_media":21730,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-71252","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\nBitcoin is undervalued now \u2014 but just look at its projected long-term return | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Bitcoin over the next 100 years will produce an annualized return of 1.1%. 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