An artist paints a Bitcoin mural during the North American Bitcoin Conference in Miami, held earlier this year. Wall Street sees different scenarios for the biggest crypto.
Photo by Joe Raedle/Getty Images
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Bitcoin
investors can breathe easier now that prices, which have fallen to their lowest level in months, have recovered. But the next move in cryptocurrency is only getting murkier.
Crypto markets have become more volatile and closely correlated to equities as investors try to gauge the impact of rising interest rates and tighter monetary policies from the Federal Reserve. Technical analysis proved largely futile –
Bitcoin
price has broken through both support and resistance levels over the past few weeks, challenging chartists trying to predict its next move.
Wall Street also doesn’t seem to agree on where the biggest crypto should go. Strategists at Stifel and
JP Morgan
came out with widely differing opinions this week, highlighting the challenges of trying to price-model an inherently unruly and unpredictable asset.
In the bearish camp, Stifel’s head of equity strategy Barry Bannister sees a crash in 2023, with prices falling as low as $10,000. Bitcoin, he predicts, will fall due to the Fed’s efforts to control inflation, which will translate into higher bond yields and much less capital available to invest in high-risk assets. The crypto has always been sensitive to changes in Fed policies, he says, indicating that the bottom could be well below recent prices in a long tightening cycle.
“The Fed says, we’re not going to give you free money forever,” Bannister says. “It may have a marginal effect this year, but in 2023 the Fed will likely go too far and Bitcoin will be crushed.”
JP Morgan has a more mixed opinion. Bitcoin’s fair value is now $38,000, according to global market strategist Nikolaos Panigirtzoglou. It achieves this goal based on expectations that the cryptocurrency will become four times more volatile than gold, compared to five times currently. Bitcoin’s volatility is its biggest challenge to getting into institutional portfolios as an alternative or complement to gold, he notes. Demand and prices would increase with less volatility.
At three times the volatility of gold, one of Panigirtzoglou’s bullish scenarios, Bitcoin would be worth $50,000. This is well below its high-end “theoretical” price target of $150,000, which assumes that Bitcoin’s volatility matches that of gold and beats the precious metal as an investment asset. “Needless to say, such convergence…is unlikely in the foreseeable future,” he says.
So how much will Bitcoin be worth in a year? “That’s the last question I would try to answer,” says Michael Cembalest, president of markets and investment strategy at JP Morgan, overseeing more than $3 trillion in assets.
The strategist, who is not even taking a guess, wrote a scathing crypto report this week titled Maltese Falcoin. The title refers to a 1941 film about a detective who embarks on a worldwide goose chase to find a valuable statue that turns out to be worthless.
Crypto also promises riches, says Cembalest. But he doesn’t buy into the argument for bitcoin as a transaction currency largely because it’s too volatile, thinly traded, and easily manipulated in price. “I believe in the store of value argument,” he says, “but I don’t have a valuation tool and the volatility is still way too high.” Real estate and equities, he notes, can be measured by expected cash flows, while bond yields are inspired by inflation and commodities by supply and demand curves.
Bitcoin, on the other hand, has few credible benchmarks to gauge its value, says Cembalest. One of the most popular measures is known as Metcalfe’s Law – the idea that the market value of a network increases proportionally with its number of users. Based on its network growth, Bitcoin’s price seemed overvalued by this metric in mid-2021, according to
Goldman Sachs
.
But Cembalest argues that Metcalfe is largely useful as a comparison tool, indicating the relative values of rival blockchain networks. “It tells me if Bitcoin is cheap compared to
Ether
Where
Doge
let alone on the absolute level,” he says.
That said, Bitcoin could increasingly compete with gold and other safe-haven assets. Bitcoin’s immutable software code increases the supply of the token at a rate similar to the increase in the supply of gold, with both increasing by 0.5% to 1% per year. This scarcity helps gold hold up during times of economic stress and high inflation, and it’s no exaggeration to think that Bitcoin could perform the same function in the digital age. Bitcoin could also take off as a store of value in countries with exchange controls, dual currency regimes, governance and corruption issues, observes Cembalest.
The key will be volatility – the longer it remains, the lower the demand for long-term institutional funds. Conversely, lower volatility could drive demand and ultimately support higher prices for Bitcoin as an alternative to gold.
The gold analogy isn’t perfect, says Cembalest, but “a hungry man isn’t picky about what’s on the menu.”
Write to Daren Fonda at [email protected]
