- Lyn Alden, an engineer-turned global macro investor, is the founder of Lyn Alden Investment Strategy.
- In recent interviews, Alden breaks down bitcoin’s multi-week correction and its declining volatility.
- Alden, who is not a perma-bull on bitcoin at any price, also shared three reasons to remain bullish now.
- Visit Fintech Zoom’s homepage for more stories.
Bitcoin‘s notorious volatility was on full display last week.
The digital asset, which briefly tumbled below $30,000 on Thursday, had declined almost 12% to $32,517 per coin in the week through early Friday.
The sudden plunge contrasted with bitcoin’s meteoric rise in early January when it doubled in two days and reached $42,000 per coin on January 8.
“Bitcoin has been in a multi-week correction, which is normal for this point in its supply-halving cycle. A number of indicators were showing that it was near-term overbought at around $40,000,” Lyn Alden, founder of Lyn Alden Investment Strategy, told Insider in an email.
Alden believes that this correction “let out the excess euphoria and cleaned up some leveraged positions.”
“The 2017 bull-run for the asset had several corrections of over 30% during an otherwise very strong year,” she explained, “so this correction continues to be in line with (and so far slightly below) its historical volatility profile, including during bull markets.”
Bitcoin‘s volatility has made a lot of investors question whether it can be a store of value, but Alden views the digital token as “an emergent store of value.”
“It’s basically a whole new asset class,” she told Brett Messing of SkyBridge in a recent SALT Talks interview, “and it’s currently in the price discovery phase where the whole world kind of discovers what is this thing worth.”
The discovery, which began with early adopters and retail investors, has gained significant institutional support in 2020. But bitcoin is still far from entering into the mass adoption phase or the maturity phase, Alden said.
“Bitcoin is still in that earlier phase of its adoption cycle, so it has more risk, it has more volatility,” she said. “But then people that are investing in it are basically expecting that it’ll become more widely distributed, more broadly owned, and that its volatility will go down over time.”
Bitcoin‘s volatility reduction over time
In Alden’s view, bitcoin’s volatility has been reducing over time, but investors would not notice that by looking at its drawdowns, which measure the peak-to-trough decline during a specific period for an investment.
She believes that one of the best ways to measure bitcoin’s volatility is by comparing its market capitalization to its realized capitalization, which refers to the realized value of all bitcoins in the network, according to data firm Coin Metrics.
“The realized cap is basically the weighted average of looking at the blockchain and seeing when coins last moved,” she said. “And looking at the price at which they moved, you can kind of come up with a cost basis of when the system has moved, and then compare that to the market cap.”
If investors monitor that ratio, they would notice that bitcoin’s volatility has reduced in every four-year cycle.
“The actual cost basis where people bought their coins has generally become a little bit more stable each time, although it still is significantly volatile,” she said. “Because if you were to listen to the bitcoin bulls, it’s still fairly early on in its adoption cycle and that it could become several times larger before the volatility would go down and perhaps resemble more like gold or silver.”
3 reasons to remain bullish
Amid the volatility and price decline, some investors are buying the dip.
Michael Saylor, the chief executive of software company MicroStrategy, bought another 314 bitcoins for $10 million, bringing the firm’s total holdings to 70,784 bitcoins, according to a Friday regulatory filing. Saylor has invested over $1.1 billion in bitcoin as MicroStrategy’s corporate treasury reserve.
Alden, who was initially skeptical about bitcoin, bought into the digital asset in April 2020 at around $6,900 per coin.
“My base case is for Bitcoin to perform very well over the next 2 years, but we’ll see. I like it as a small position within a diversified portfolio, without much concern for periodic corrections, using capital I’m willing to risk,” she wrote in a piece last summer.
She shared three reasons for remaining positive on bitcoin in the near term, but cautions that investors should monitor institutional demand and narratives around the asset since those have been big performance drivers over the past year.
(1) Scarcity and network effect
Bitcoin‘s limited supply of 21 million has been well documented.
In addition to its scarcity, Alden believes that Bitcoin is the dominant and most secure monetary network among cryptocurrencies.
“Bitcoin has far more full nodes verifying the network from enthusiasts and all sorts of people around the world and is far more globally distributed,” she said. “Because it’s the leading brand and it has the most security, and it has a ton of liquidity, that’s the one that people go to when they want to get into the [crypto] space.”
(2) The halving cycle
A bitcoin halving event, which takes place every four years, cuts the number of new bitcoins rewarded to miners in half.
This process, which limits bitcoin’s supply and maintains a predictable release rate, has triggered bitcoin bull runs in the past. The most recent halving event took place on May 12, 2020.
“So far bitcoin has done very well in every halving cycle,” Alden said. “I think it’d be pretty bearish if you were to see a halving cycle where Bitcoin does not reach new all-time highs because that kind of kills the long-term structural momentum and its adoption cycle.”
(3) An ideal macro backdrop
Like many investors who embraced bitcoin last year, Alden thinks 2020 is the perfect storm for the digital token.
“In addition to being in a good place in its own halving cycle and in addition to having won over some of those fork competitors, the macro environment couldn’t be more attractive,” she said. (Bitcoin forks are splits that create new versions of bitcoin currency such as bitcoin cash).
To revive the pandemic-stricken economy, the Federal Reserve has adopted unprecedented monetary policies, increasing broad monetary supply in the US by about 25% over the past 12 months.
“When you have that kind of massive increase in money supply, if it doesn’t show up in price inflation, it can show up more easily in asset price inflation,” she said. “So you’ve seen a reflation in anything that’s kind of scarce, so real estate, commodities, most equities, things like that.”