According to a leaked communique to institutional clients, Citibank analysts have analogized bitcoin’s current trajectory to that of gold’s notorious rally in the 1970s—advising that BTC could surpass $300,000 by the end of 2021. But how realistic is this?
The analyst in question, Thomas Fitzpatrick, a managing director for CitiBank, argues that while such a leap in price seems improbable, given bitcoin’s past inclination for “unthinkable rallies and painful corrections,” the gargantuan price point is feasible. In fact, he suggests that it’s these invariable boom and bust cycles that sustain bitcoin’s long-term growth.
A Gold Standard
Citibank’s report, entitled “Bitcoin: 21st Century Gold,” delves into similarities between bitcoin’s renowned rise and that of gold during the ’70s—a period characterized by inflation, unemployment, and sluggish economic growth, collectively known as stagflation.
The ’70s was also notable for gold as it brought an end to the Bretton Woods agreement, which witnessed the decoupling of gold and the US dollar.
Backed by the impetus of economic turmoil and the dollar de-tethering, the gold market went almost vertical, climbing from $35 in 1971 to around $850 at the end of the decade—a 2,300% increase.
Fast forward to 2020, and a global recession coupled with mounting sovereign debt, debasement of fiat currency, and looming inflation have drawn parallels between the gold and bitcoin markets. At least, that’s the image sketched by Citibank.
The report highlights that bitcoin, born out of a global recession in 2008, is seemingly coming of age in this current one. The unprecedented monetary and fiscal stimulus recently spun out by central banks only adds to the argument, with Fitzpatrick steering to bitcoin’s fixed supply and non-conformance to the whims of policymakers.
While gold will undoubtedly gain from this scenario too, the analyst caveats that the precious metal’s lack of portability—among other trappings—may hold it back from attaining the same heights as bitcoin.
But it’s not just a historical precedent making a case for a bitcoin boom; there’s a price precedent too.
The Citibank analyst submits that there have been two major bull runs in bitcoin’s lifetime, each followed by a bear market. The first, lasting from 2011 to 2013, observed bitcoin’s price increase 555 times. The second, lasting between 2015 to 2017, witnessed value multiply 121 times.
Fitzpatrick proposes that bitcoin may have just entered a 2 year-long bull market based on these regular bear and bull market cycles. Another move up from previous fractals would see the rally end ending in December 2021 and at a peak price of $318,000, he suggests—a 19x move.
“Time will tell if we end up seeing such lofty levels, but the backdrop and the price action we are looking at clearly suggests the potential for a major move higher nonetheless in the next 12-24 months,” Fitzpatrick added.
Stock-to-Flow: A Case for Bitcoin Parabola
While seemingly improbable, Citibank’s technical analysis appears to be in line with a similar basis for long term bitcoin parabola: the stock-to-flow model.
Continuing the gold analogy, bitcoin’s value is likewise backed by the principles of supply and demand. Put simply, the less of an asset there is, the more valuable it becomes. Couple that supply deficit with demand, and you have a catalyst for growth.
The theory of supply and demand and its influence on price is applied within the stock-to-flow (SF) model. The model is typically used within the commodities market to ascertain scarcity, and thus value, in assets such as gold and silver. Measuring circulating supply (stock) against annual production (flow) produces an SF ratio. The higher the ratio, the greater the asset’s market value—or so the theory goes. For illustration, Gold currently holds the highest SF among all commodities, with a ratio of approximately 62.
Analysts have applied this model to bitcoin with some compelling results. Thanks to its quadrennial halvings, which divide the asset’s annual supply in order to control inflation, bitcoin is one of the only assets in the world whose supply is deflationary. As a result, bitcoin’s SF ratio continues to rise.
Historical performance shows a remarkably tight correlation between bitcoin’s price, and it’s ever-expanding SF ratio.
This seems to prove the principle of supply and demand is as applicable in bitcoin as it is in the commodities market. Moreover, it may indicate continuing price appreciation.
This very model was picked up by another bank, BayernLB—one of the top state-owned financial institutions in Germany. Bank researchers applied the model to plot their own resolutions on bitcoin, ultimately concluding that BTC was conceived to be an “even harder asset than gold,” and endowing it with a theoretical estimated value of $90,000 based on its current SF ratio.
Optimistic technical analysis aside, Citibank’s dissection and advocacy of bitcoin represent an important signal of legitimacy for institutional players.
Of course, institutional investors know better than most that diversification is critical. While bitcoin may represent an unmissable opportunity, overexposure can be just as dangerous as non-exposure. This year alone, even as bitcoin has outperformed the traditional asset market, several altcoins have more than exceeded bitcoin’s returns—in some cases by over 500%.
In order to have a clear steer on which assets to invest in, it’s essential to do your own research and select a portfolio based on quantitative and qualitative analysis.
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