A long-term bitcoin bull at a crypto asset manager says bitcoin is currently 71% above fair value, purely on 'narrative'. He breaks down his valuation model — and shares why even more gains are in store this year

Only last year, did Morris return to the idea of adding bitcoin to investors' portfolios with the launch of ByteTree's asset management arm, which offers exposure to two different crypto funds.

This timing was perfect. Bitcoin (BTC) surged 375% from November 2020 as adoption picked up among institutional investors, retail traders and even countries, such as El Salvador, where it is legal tender now.

Just this week bitcoin reached an all-time high of around $66,000 on the back of the launch of the first US bitcoin futures exchange-traded fund, which already has $1 billion assets under management days after launching.

The bitcoin 'hype cycle'

While the ETF launch has driven a burst bullish price action, Morris is not convinced it will last.

He's particularly concerned about the ETF sustaining the momentum, based on the performance of commodity futures ETFs in the past.

"Over time, they just massively underperformed the underlying and you're going to see the same thing here," Morris said. "Now unfortunately, for bitcoin futures, the more demand there is for bitcoin, the worse the roll yield gets. At the top of hype cycles, you get the most underperformance."

Insider recently spoke to several crypto investors and ETF experts who made similar points. Morris draws comparisons to the USO ETF, which tracks WTI crude oil futures and has underperformed relative to the price of oil over the long-term.

"A lot of these things become effective trading vehicles where in the short term, you don't care about the slippage, here and there, for days, weeks, months, they don't really notice," Morris said. "But it's when you're there for years, then it really starts to impinge on performance."

Even before the launch of the futures ETF, Morris was bearish on the sentiment and price action surrounding bitcoin. At the Token2049 conference in London, on October 8, he said bitcoin was "overpriced" and worth no more than $28,000 based on ByteTree's fair value model.

The model calculates fair value based on network value to transaction ratio (NVT-BT) and on-chain data to create a fair price valuation. Morris compares NVT-BT to the traditional price-to-sales ratio in equity analysis as one of the most direct measures in determining fair value.

Leveraging 12-week transaction data, on October 22, the current fair value for bitcoin is around $36,000, meaning it's trading at a premium of around 71%, he said.

Currently, around $50 billion is changing hands each week on the blockchain, Morris said. 

"We've now got a price where you'd normally see about $70 or $80 billion worth of bitcoin changing hands, and now you've got $50 billion," Morris said. "Since I spoke at that conference, that gap has closed by $10 billion, so the chain is picking up, but this is definitely trading on narrative at the moment."

Despite his skepticism over the short term, Morris remains long-term bullish on bitcoin. He believes simply that the market remains ahead of events right now.

"We've had bitcoin below fair value on four occasions in the last 12 months, but just on no occasion since June," Morris said.

Bitcoin could keep going up

2021 has become the year of the bitcoin narrative, Morris said. However, this isn't down to bitcoin alone. Morris believes this is driven by the wider bubble seen across a range of asset classes.

"People just get carried away about cash flows in a zero rate world," Morris said. "You've got this big bubble in pretty much everything, in bonds and in equities and so forth. Now you've got the inflation coming through. And so until they put the brakes on, then I think the bubble is in many asset classes, not just crypto."

With bitcoin now breaking out to new record highs, Morris expects this could attract a lot of money to the space with the potential to go even higher.

"Whenever bitcoin has gotten excited, it tends to be in the fourth quarter for whatever reason," Morris said. "2018 was exceptional, but most years, the fourth quarter is pretty strong and there's quite strong seasonality around that."

Morris focuses on the inverse relationship between gold and bitcoin and offers a strategy that rebalances between gold. Typically gold performs well in the first and third quarters of the year. Whereas bitcoin performs well in the second and fourth quarter, he said.

Morris' general fund is fully invested in crypto right now with an 80% allocation to bitcoin and a 20% allocation to ethereum. 

"I'm naturally skeptical of hype cycles, I'm not enjoying bitcoin in 2021 nearly as much as I did in 2020," Morris said. Yet his long-term thesis keeps him invested in the asset class.