It is already practically a consensus (among “investors”) that we will have more volatility and declines in the markets for the next year. This is not just a matter of “cyclical” pressures. It is also a matter of “structural” pressures. Simple and easy. That’s how things are.
Investors are changing their expectations due to changing conditions. And, in this case, when I say “a consensus among investors” I mean surveys and interviews conducted with global fund managers by the big banks. Feel free to dig further and verify this statement. Let us remember that in the world of finance, expectations, in most cases, tend to come true in the form of self-fulfilling prophecies.
Now the big question: Why do institutions expect more volatility and declines?
One of the ways to channel this unknown is by analyzing the valuation mechanism used before and during the pandemic. That is, if investors back then to buy conducted a valuation under certain conditions, You don’t have to be a genius to know that before a change in conditions, these valuations must be readjusted. What were the expectations for then? Where are we at this moment?
Many Big Tech investors made their valuations based on the company’s future earnings. Rather, projections of future income were made and based on these projections the (potential) value of the company was estimated at that time. This methodology is obviously a bet on growth. And, in this respect, there is, of course, a lot of fabric to cut.
Growth investing has many friends, but it also has many critics. For value investors, growth investing is vulgar speculation.. So, this use of the word “growth” is interpreted as a euphemism used to hide what is really happening: Speculation. It is bought expecting the share price to rise in the future. But the company’s current valuations do not match its intrinsic value. That is to say, it does not correspond to the value of the (underlying) assets of the company and/or to the real income of the company at this time. I mean, the fundamentals do not justify the market price of the stock. As simple as that. What is done is speculate on a probable future by making assumptions about the appreciation of the stock in the future to buy today.
Of course, investments in growth and overpriced during a boom speculative are not always a bad idea. If expectations are met and the company does indeed grow at the expected rate, early investors make their December. Suddenly, the income is not so high, because liquidity and greed can finance the premium without major drawbacks. That is to say, the bet can work, because the conditions are given for it to work. And indeed, this type of investing has done very well for the last decade. In other words, when the matter works out, it works out. However, if something goes wrong and expectations are not met, the drop can be big. Well, that’s exactly what’s happening right now.
Investors bought a future that didn’t come. And now there is no choice but to readjust the valuations. In 2020 and 2021, the 2023-2024 season was presented as a stage of growth and prosperity. Why? Because these were the expectations due to geopolitical, macroeconomic and monetary forecasts.
What are the expectations now around 2023? I’m afraid things have changed a lot. The expectations are now different and that forces us to weigh our assessments in a completely different way.
In the crypto world, there is still a lot of denial in this regard. Reading Twitter, we can realize this phenomenon. Apparently, many are underestimating this bear market as just another average cycle. And its exceptionality is not recognized. So $16K today is considered pretty much the same as $16K in 2019. In fact, you fall for the illusion of perceiving that $16K as a discount considering that the price of Bitcoin almost hit $70K last year. The logic goes something like this. Bitcoin price has dropped a lot. So, it means that Bitcoin is “cheap”. That happens, because the same valuation framework used before and during the pandemic is being used. You are still thinking under the old paradigm.
The price is estimated the same. And the times are estimated the same. All we have to do is buy and wait. It will be the same as before. A floor. A recovery. The halving. Breaking of the all-time high. And Bitcoin to the moon. All this respecting the same periods of time as before. Clever. Easy. Easy. Ask: Is this realistic?
Now, let’s go back in time. Why did Bitcoin go up in price during 2013, 2017 and 2020? What were the conditions that allowed these increases? We can go point by point. Macroeconomy? Geopolitics? Productivity? Increase? Expectations?
Unfortunately, this time, it’s not a matter of drawing lines on a graph and that’s it. Why? Because it is extremely naive to anticipate that the fluctuations of the price will imitate the historical one to the letter. Conditions have radically changed and it is only sensible to also change our expectations. Investors are readjusting their stock market valuations because of the new paradigm. Is the crypto investor doing the same? Or are you still thinking with the same mindset of 2020?
The price is a reflection of supply and demand. A price anticipating a high demand environment is not the same as an anticipated price in a lower demand environment. demand. $16K in 2019-2020 is not the same as $16K today.
What do we invest for? To grow financially. And, to achieve that, we must buy today with the expectation of a better tomorrow. In other words, in our expectation, tomorrow’s demand must be greater than today’s demand. At that moment, the opportunity arises. So, it is not a question of talking about “expensive” or “cheap” using the historical reference. This is a matter of demand. Where will the demand come from?
Let’s think about December of this year and the first quarter of next year. What will the demand be like? Greater or less than now? Let’s think about institutions. What do hedge fund managers say? What has the Federal Reserve said? What do the big banks say? What are the expectations?
To all this, we must add the particular situation of the crypto industry at the moment. Is it time to go in? Or is it time to wait? The FTX collapse has generated a crisis of trust and credibility beyond the volatility of Bitcoin. The reputation is lost easily and quickly. But I’m afraid that getting it back requires a much longer process.
It is not the intention here to propose a bearish position. What I really want is to remind my readers about the importance of future demand when making a Bitcoin valuation.. I mean, It is not talking about the price with a false sense of certainty based on past glories. We must look to the future. And we must make an objective estimate of future demand. How do you see the demand in the first quarter of the new year?
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