Bitcoin’s True Tipping Point — Market Premiums and Institutional Adoption

David Kern
4 min readOct 21, 2020

Election day is nearly upon us and Americans remain divided as ever over the best path for the country. But before we get to November 3rd, it is important to look at the votes taking place elsewhere…in the bitcoin market and the corporate boardroom. For those of us familiar with bitcoin, we thought 2020 would be a special year driven by the halving. But the pandemic really handed bitcoin investors the ultimate catalysts they had been waiting for: accelerated technological adoption and mass money printing. These catalysts have finally caught the eye of the ever-elusive institutional investors. For years we heard the institutions were coming, but every time we thought they were on the way, those expectations would be met with another bump in the road. The recent allocations from Microstrategy and Square have now made those promises a reality. Publicly traded companies now hold 3.74% of the maximum bitcoin supply.

As of 10/20/2020

These allocations are major developments and have started to reinvigorate bitcoin price action. But are we at the tipping point where institutional investors recognize bitcoin as a true store of value? Premium Equity Valuations, Corporate Actions, and BTC performance vs. traditional assets can provide some interesting answers going forward:

Premium Valuations: Since Michael Saylor announced his bitcoin allocation on August 11th, Microstrategy stock has re-rated significantly (ie. garnered a higher multiple). For example, Microstrategy has outperformed its closest peer, SAP, by ~34% since the announcement.

Stock performance 08/11/2020– 10/20/2020

Put differently, Microstrategy’s forward P/E has re-rated from 21.06x to 28.06x over the past 3 months while its closest peer has de-rated slightly. This is very important, as it is the first indication of the market placing a significant premium on a company with a treasury reserve in bitcoin. It will be important to see if this premium sustains itself with more allocations going forward.

Corporate Actions:

As a former buyside equity analyst, I have learned to understand that game theory often drives discussions in the corporate board rooms and can lead competing management teams to follow a herd mentality. Management is compensated by the performance of their stock and a portion of their compensation is generally tied to share performance relative to a benchmark or their competitive peer set. If the market starts placing a discernible premium valuation on corporations with allocations to bitcoin, don’t be surprised if the bitcoin 8k press releases start scorching the news wires.

Bitcoin vs. Traditional Assets:

The chart below shows bitcoin’s performance in terms of the following assets:

· BTC/XAGUSD (Silver — ~$75 Billion in the world) — Dark Blue

· BTC/XAUUSD (Gold — $10 Trillion in the world) — Orange

·BTC/NDX (Nasdaq 100 — ~$10 Trillion marketcap) — Light Blue

· BTC/SPX (S&P 500 — ~$30 Trillion marketcap) — Green

· BTC/TLT (Treasuries proxy — ~$27 Trillion market) — Purple

Source: Tradingview as of 10/20/2020 close

By charting bitcoin in terms of other major asset classes, we can see that it is currently consolidating within a massive triangle. Each line exhibits a similar pattern, demonstrating that buyers and seller are still trying to decipher bitcoin’s place amongst the largest store of value vehicles in the world. Keeping it simple, if the BTC pairs break to the upside of the triangle, we could see the bitcoin market cap expand significantly relative to some of the largest and most liquid assets globally.

At a current marketcap of ~$220 billion, the Bitcoin network has a value larger than all the silver in the world and is consistent with a megacap stock. At this size, bitcoin will need to see institutional level flows to generate significant relative outperformance. Therefore, a breakout of this triangle could be an indication of sizable institutional adoption and cement bitcoin as a staple financial asset. Assuming equity premiums become a reality for corporations with bitcoin allocations, I suspect these institutional flows will be coming soon. Could this be one of the most important chart patterns in financial history? Time will tell.

To be continued…

Note: I am long Bitcoin and this is not financial advice. Please consult a financial advisor before making investment decisions. If your financial advisor does not seem knowledgeable on this subject, you may want to get a new one.

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David Kern

Former Buyside Equity Analysts. Passionate about Stocks, Crypto, Investing, Economics.