I’m a recent crypto convert who completely missed what crypto was all about for the first decade or so of its existence. By way of background, for the first 10 years of my career, I worked in the capital markets division of what is commonly viewed to be one of the top 3 investment banks in the world. The next 10 years were spent in institutional investment management, as the senior portfolio manager of a $6 billion macro fund at a $100+ billion dollar US pension plan. I remember when crypto was first brought to the attention of our investment committee sometime around 2012; the response was universal laughter and ridicule. In hindsight, we were clearly wrong. I am now fully convinced we are on the eve of another tectonic shift in the paradigm of money. Think livestock to metals to fiat to crypto. In each one of these shifts, the old guard, particularly those who have a lot to lose, have always pushed back against the new as it represented an existential challenge to their way of viewing the world. I can almost hear the arguments of livestock shepherds thousands of years ago arguing that there was no intrinsic value in precious metals. After all, you can’t get milk or meat from metals and they don’t replicate by breeding. This paradigm shift will be no different. It will be bumpy but it will happen as crypto provides way too much utility for humanity to ignore.
I know that I want to be in this space long-term but don’t have the time to trade the markets and the tax-drag/transaction costs that come with trading are difficult to overcome. Neither do I believe in indiscriminately buying, regardless of price, as I’d rather let others try to figure out where the top is. I would much prefer to buy only when I believe reasonable value exists. That obviously led to the question of how does one measure value in the crypto space? One of my early observations in this arena is that technical analysis seems to be the preferred lens through which to view decision making. There is absolutely nothing wrong with this and it can be quite effective. However, other tools are also available, derived from a concept called risk budgeting, more commonly used in the institutional investment management world. I strongly believe these can compliment the technical analysis approach.
Knowing that traditional measures of value don’t really apply here, I pulled out a trusted tool I use to evaluate the results of quantitative hedge fund managers, another asset that can be difficult to apply valuation to. I call this analysis StratVal, short for strategy valuation. It looks at the recent risk adjusted performance of a strategy and strives to tell you whether it is cheap or expensive, relative to its own history. The closest thing in the technical study world might be something like RSI but I much prefer this as I believe in using risk-adjusted performance, a topic for another day. I downloaded a daily time series of Bitcoin and ran it through this analytical technique to arrive at the chart listed below. The intuition here is simple: Buy low/Sell high. Or… avoid buying high.
If you are a long-term holder like I plan on being, take a look at the chart and consider how much nicer your journey might have been if you had focused on buying only when you believed it to be cheap and/or avoided adding to your crypto portfolio when it looked expensive. If people find this analysis useful and are willing to support it, I am happy to provide a weekly update. The date of the last update on this chart was 6/9/21. Lastly, this is not investment advice so please do your own research. You should never rely on one tool alone and always consider risk from a variety of different angles as it truly is multi-dimensional.