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Sean Farrell, head of digital-asset strategy at Fundstrat, says Bitcoin has reached points that could be overvalued in the past—but cautions that it would imply there is a fair value for Bitcoin.
ADAM SHAPIRO: When we talk about crypto's ugly weekend and specifically Bitcoin, which, by some calculations, you know, fell to $43,000-- it depends who you're talking to. Some say it went in reality even lower than that. Remember that the trend for Bitcoin over more than 10 years has been up. And with these kinds of assets, which are new, and a lot of people, a lot of us don't truly understand them as well as we should, you get some big swings in volatility.
Let's figure out for those who do want to invest in crypto what you should consider when you jump in. And we're going to do that with Sean Farrell, Fundstrat's head of digital asset strategy. Appreciate your being here. And I'm going to quote. We had Charlie Munger. We know he doesn't think that crypto assets are worth, you know, snake oil.
But we also had a guest on Friday. Ryan Payne is president of Payne Capital Management. They've got about a billion dollars under management. He's calling it a bubble that's going to end ugly. I don't think you agree with Mr. Munger or Mr. Payne. What are they missing that crypto investors seem to understand?
SEAN FARRELL: You know, first off, thanks for having me on. Happy to join. Yeah, so I guess, first off, you have to think about incentives, right? I mean, Munger, he's a giant in the industry. But I think his best years are probably behind him. And quite frankly, Bitcoin is largely a demographics play. We have a digitally native cohort of millennials and Gen Zers that are going to eventually come into some kind of wealth. And I don't think their wealth is going to be going into Coca-Cola. It's going to be going into things like Bitcoin.
And on the bubble comment, I mean, calling something a bubble, you know, it implies that something is overvalued, which we've noted in our research that Bitcoin has reached points where it has been traded at prices that could be considered overvalued. But that implies that there is a correct value for Bitcoin. So I think I would probably ask Mr. Payne what he considers the appropriate value for Bitcoin.
ADAM SHAPIRO: Emily, go for it.
EMILY MCCORMICK: Sean, I'm wondering, what do you then consider to be the fair value for Bitcoin, especially considering Fundstrat's outlook appears to be a bit more upbeat than some of these other analysts and pundits may expect?
SEAN FARRELL: Yeah, so I mean, the correct way to probably look at Bitcoin and to trade it is to assess where it is being traded as it relates to the total miner spend. So, you know, obviously, when you use the Bitcoin network and you pay fees to transact and send data over that network, you're essentially paying miners to secure said network and preserve the immutability and the immutability of the ledger.
And you can think of that as a price to book multiple, more or less. And we've seen in history when this price to book multiple gets above, we'll call it, a 4x to 5x range. That's when things start to get a little overheated. We probably advise clients to maybe scale out of their position into other less riskier assets. But there are tangible ways to actually assess the relative value of the network at any given time.
ADAM SHAPIRO: When we talk about the value of these different assets, we've had different discussions with people like you that may be calling them currencies isn't quite accurate, but call them assets that, you know, there's still price targets for Bitcoin of 100,000. Are those out the window? I realize the people who make headlines when they give us those kinds of calls get to change them repeatedly. But where do we stand on it?
SEAN FARRELL: No, certainly not. I think 100,000 right now would put us at a pretty reasonable place. And I think it's a good expectation for Bitcoin either towards the end of Q4 or through Q1. I mean, you know, you can look at several different models that kind of coalesce around this 100 to 120 range. And they all come back to the fact that Bitcoin is a network. And it benefits from network effects. And depending on whatever regression model you use it gets to a value somewhere in that range depending on network participants and the value being accrued to the network. So 100,000 for Bitcoin's current usage and security metrics is certainly reasonable and something we expected to reach, if not end of Q4, likely into Q1.
EMILY MCCORMICK: Sean, how concerned should Bitcoin investors be about a potential acceleration of the Fed's tapering program and eventual interest rate hikes because what many have been saying is that the Fed's policy has been supporting these more speculative areas of the market with all this liquidity in the system. So how is Bitcoin going to be affected by that?
SEAN FARRELL: Yeah, that's a great question and something we're getting a lot. You know, I think first off, I think we'd still go risk-on into the end of the year at some point. However, we do have precedent. If we look back at Bitcoin's last bull market cycle back in 2017, there are actually several Fed rate hikes during that bull run through that fall into winter. Additionally, there wasn't any tapering to point to. But there certainly wasn't any continued stimulus, which, you know, tapering, it's not tightening. So it's not a concern for us. And I think there's precedent that the Fed tightening doesn't necessarily equal Bitcoin coming to a halt
ADAM SHAPIRO: Sean, it would be great to get you back, especially what you pointed out at the beginning of this discussion that a generation that's about to inherit or is in the process of inheriting billions upon billions of dollars of wealth, they're not going to do what their grandparents did. They're not going into Coca-Cola. So we're going to continue this with you another day. Sean Farrell, Fundstrat head of digital asset strategy, thank you so much for joining--