According to crypto analyst PlanB, who popularized the Bitcoin stock-to-flow model, understanding the world's largest cryptocurrency comes down to just three things-its Sharpe ratio, its correlation with other assets, and cointegration with the stock-to-flow model.
According to crypto analyst PlanB, the simplest and easiest way to understand Bitcoin is to represent it through three ratios, all used in traditional finance-its Sharpe ratio, its correlation to other assets, and its correlation and cointegration with stock-to-flow.
The analyst, known for popularizing Bitcoin's stock-to-flow model, said that using these three ratios in a pitch to institutional investors garnered an "Amazing response," as it shows its immense underlying value.
When using a 4-year holding period to run the Sharpe Ratio calculation, analyst Willy Woo found that Bitcoin had an average ratio of 3.0.
With a ratio higher than 1.0 considered acceptable, and ratios of 3.0 or higher considered excellent, Bitcoin outperformed every other asset, including U.S. stocks, bonds, gold, and oil.
Apart from its high Sharpe ratio, one of Bitcoin's unique propositions is its independence from other markets.
According to Messari Crypto, Bitcoin has by and large been uncorrelated with other macro classes such as equities, fixed income, gold, and oil.
Popularized by crypto analyst PlanB, applying the stock-to-flow model to Bitcoin highlights its scarcity and shows that it does move in predictable ways.
Bitcoin's stock-to-flow ratio of around 25 puts it in the monetary goods category, alongside silver and gold.
According to the latest data from PlanB, Bitcoin currently has a 95 percent correlation and integration with stock-to-flow, meaning it almost perfectly follows its scarcity model.
Three ratios crucial for understanding Bitcoin Price
Published on Dec 2, 2019
by Cryptoslate | Published on Coinage
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