Bitcoin Has Left Deep Value Territory

(the following is an article from Anthony Pompliano’s substack; you can find out how to subscribe at pomp.substack.com) 

To investors,

Most investors would not consider bitcoin a traditional value investment. Warren Buffett, the ultimate value investor, hates the digital currency. Other value investors call it a bubble and a speculation tool. They have to be correct though, right?

Not so fast.

The idea of a value investment is often misunderstood. You don’t have to be a public equity to be nominated for value investors, nor do you have to be a piece of real estate. Any asset that is currently trading at a price that is lower than the value of the asset would fit the framework for most value investors. Buy low, sell high. Timeless advice — but it is pursued by value investors to the extreme.

They want to buy assets for less than they are worth. Thankfully, there are metrics that can help us understand when an asset dips into “value” territory. One of those metrics is the MVRV Z-score.

Glassnode defines this metric:

“The MVRV-Z Score is used to assess when an asset is overvalued or undervalued relative to its “fair value”, as underlined by the deviation between its market cap and realized cap.

When market value is significantly higher than realized value, it has historically indicated a market top (red zone), while the opposite has indicated market bottoms (green zone).”

This is important to understand because bitcoin was in the “undervalued” area for part of the second half of 2022 and then stayed there into the first half of 2023. But as Reflexivity Research’s Will Clemente recently pointed out on Twitter, “Out of the zone of deep value now. You had a year to accumulate cheap magic internet coins, the market owes you nothing.”

You can see in the bottom right of the chart, bitcoin has escaped the green zone. This does not necessarily mean that bitcoin’s price is going to go up from here, but if it does not, then we would be deviating from the historical trend. As you can see in the past market cycles on the same chart, bitcoin has been fairly easy to predict as it oscillates between undervalued and overvalued during bear and bull markets.

I usually do not care about price. I don’t check it on a day-to-day basis. I don’t trade. But the fact that bitcoin has left the undervalued zone around the same time that BlackRock, Fidelity, and others are banging on regulators’ doors to get a bitcoin spot ETF approved is interesting.

You have bitcoin’s price grinding higher, which brings the price closer to the asset’s value, right before you have a drastic increase in demand from the institutional Wall Street world. That seems like a strong tailwind scenario to me.

As Will highlighted, it will be noteworthy to see how this market cycle plays out compared to the previous cycles. Here are price performance charts since past cycle all-time highs and cycle lows.

Now, before I get a bunch of emails from readers, I know that “value” is subjective in our analysis today. One person may think that bitcoin’s current value is $40,000, which makes the current $31,000 price a screaming buy signal. Another person may think that bitcoin’s current value is $25,000 and the current $31,000 price means that the asset is overvalued.

The disagreement is how markets are made. It is proof that the efficient market hypothesis is a lie. Market participants can have the exact same information and still reach different conclusions. Those differing opinions are how we get longs and shorts on the same asset — free markets are a beautiful thing (…so we should keep them free!).

Bitcoin is officially out of the deep value territory. What happens next is anyone’s guess. It should be an interesting 18-24 months with the halving coming up. Hope you all have a great day. I’ll talk to you tomorrow.

-Pomp