Companies are seldom worth their true value when it comes to market capitalization. Some companies are overvalued and some are undervalued but very few are rightly valued. So when it comes to valuation, people have different approaches. Some like Warren Buffet stress on the debt to equity ratio which I also strongly agree with. The debt to equity ratio of a company is one of the best ways to find a company’s true value. However, we would like to move this discussion towards Bitcoin (BTC) and analyze it from a macroeconomic perspective. To do that, we will first look at the SPX/GDP ratio on the monthly chart for S&P 500. The price of the S&P 500 Index is shown by the candles whereas the GDP is shown by the purple area line.
During the industrial revolution, the economy of the United States was booming in the real sense. The SPX/GDP ratio was close to normal and we had real growth. Most of this lasted throughout the 90s just before the dot com boom. During the dot com boom, the S&P 500 rose significantly higher compared to GDP of the United States. However, then the dot com bubble pooped and the ratio started to come back to the mean once again. It did not correct fully and started to take off again, but soon afterwards the global financial crisis kicked in and it finally started to decline again. This time the SPX/GDP ratio fully reverted to its mean. Now, this was the prime time to go long on stocks. So, a lot of investors became greedy and money returned to the market.
The Fed eased things with aggressive quantitative easing after the crisis which made borrowing cheaper and everybody started pumping money into the stock market. The end result of this was a bull run that has yet to stop. If we look at the current SPX/GDP ratio it is mind blowing. At one time during 2013, the market dodged a bullet which would have in fact ended the mania back then and the US economy would have been in a far better shape today, but greed took over and the price kept surging. As long as the S&P 500 remains above the 50 Month MA, things will remain normal. We will see this continue for a while but investors will realize quite soon that the stock market is going nowhere while their colleagues are hitting it big in the cryptocurrency market.
These people are not going to put their money in treasury bonds or in the bank after the stock market fails them. They are going to look for opportunities and they are going to find them in the cryptocurrency market. The Fed recently changed its stance and there are now concerns that further rate hikes might be on the way. This does not look good for the stock market near term and if it does not look good for the stock market near term it does not look good for BTC/USD near term. However, it is important to note that this is the case with most financial assets. There is no direct or inverse relationship at all times, it does not work like that. For instance, during the previous financial crisis, we saw Gold fall and then rise when it should have held its ground or shot up from the very beginning without going down.
However, we have to understand that simple direct or inverse relationships might have theoretical meaning but they do not work like that in practice. If the stock market crashes, investors are going to sell whatever they have to cover their losses. That means selling assets that may be profitable. Now, they are not going to sell all of their assets that would be a good hedge against the stock market but they will sell some in the beginning. This is why in the case of a financial crisis, BTC/USD is likely to crash first, but what happens shortly afterwards? We believe that during the next financial crisis, most institutional investors who want to move out of their stock positions will choose Bitcoin (BTC) as one of their safest bets.