Before we talk about crypto mania or panic, let’s take a look at the current market condition. Recent Fed deliberations on 3 to 4 rate hikes during 2022, and yesterday US Treasury Secretary Janet Yellen reiterating what she already said about FED policy moving forward led to tanking markets (traditional and crypto).

Take a look at the chart below that represents the historical fed rate hikes (max being 20%+ in 1980s). How come 3 to 4 or more rates hikes (of each rate hike 0.25% to 0.5%) really help attracting consumer savings and mitigating inflation (stand at 7%+)? Probably 1% to 2% increase in rate cuts does not yeild any significant improvements.

When Fed rate hikes make borrowing money more expensive, the cost of doing business rises for public (and private) companies. Over time, higher costs and less business could mean lower revenues and earnings for public firms, potentially impacting their growth rate and their stock values. So with 40% of USD printed in the last 12 months. does more printing of money / QE is underway to handle this situation? If rate hikes does not impress much at the present, there is a more pressing need to find an alternative store of value (ultrasound money).

Let’s progress beyond the current market panic…

This blog post analyzes the merit of joining crypto mania amidst The Greatest Wealth Transfer slated over the next 2 decades. Cerulli Associates projects that nearly 45 million U.S. households will transfer a total of $68.4 trillion in wealth to heirs and charity over the course of the next 25 years.

I would like to combine the above data with “The Inelastic Markets Hypothesis” research paper by Xavier Gabaix & Ralph S. J. Koijen, that hypothesizes how assets move based on the in and outflows of capital.

It made the claim that assets don’t move 1:1, meaning that buying $1 of an asset doesn’t correlate to increasing its market valuation by $1.

Instead, the reaction is rather inelastic where a $1 buy increases the valuation by $X, depending on the asset and its liquidity. If you’ve been in crypto long enough, this concept should be rather familiar. According to the study, the stock market has a market inelasticity factor of around 8, meaning that $1 of capital will increase the market capitalization by $8. 

This is due to the fact that there’s a degree of illiquidity as households and institutions hold certain assets with no intention to sell, causing volatility in price movements. They then go forward to theoretically and empirically prove why this is the case. 

They call this the inelastic market hypothesis. 

Interestingly, Nilo Orlando has applied this framework to calculate the market inelasticity of Bitcoin and other crypto assets. It’s harder to identify the exact inelasticity for Bitcoin given that we don’t have nearly the same amount of data; however, the conclusion was tentatively around ~20. 

This means that $1 flowing into Bitcoin increases its market cap by $20. This makes sense as Bitcoin (and the crypto market as a whole) is significantly more volatile than the stock market.

You’re probably starting to see where we’re going with this.

Another key aspect is Bitcoin corelation with other asset classes.

Bitcoin Co-relation With Traditional Asset Classes

As we evaluate bitcoin as an asset class, one critical point is its role and history as a store of value. Global assets have gone through asset price inflation since quantitative easing started in 2008. Yet, when we look at how assets have performed relative to G4 central bank balance sheets, we can observe that equities have traded sideways since 2008. Global currencies, gold, and real estate, meanwhile, have depreciated in balance sheets terms. Bitcoin is one of the only assets that has outperformed the G4 central bank balance sheets since 2008.

Notably, bitcoin’s weekly returns for the last 10 years are slightly positive on average and skewed slightly positive as well. Its volatility has also been in a more stable regime since 2014, hovering between 50% and 100% and lowering over time. Critically, bitcoin exhibits relatively low correlations (on average, approximately 0.1) to other main asset classes, so the impact of its higher volatility is more muted in a broader portfolio.

But returns on Bitcoin did not move in a particular direction with the S&P 500, the benchmark stock index for the United States, in 2017 to 19. The correlation coefficient of their daily moves was just 0.01, but that measure jumped to 0.36 for 2020 to 21 as the assets moved more in lockstep, rising together or falling together.

Even then based on the performance history, stabilizing volatility, and low correlation to other assets make a strong case for bitcoin’s role as a store of value and crypto as its own distinct asset class.

Crypto $100Trillion Asset Class: Back of a Napkin Math 

There’s $68T worth of capital that will end up in the hands of millennials and Gen X in the next twenty years.

While a significant amount will be handed to them in the form of equities, real estate, bonds, and more, it begs the question: how much of it will flow into crypto? 

It’s probably a safe assumption that a marginal amount of that $68T is already in crypto assets – if any. Baby Boomers aren’t known for their interest in magic internet money. We can also imagine that Millennials and Gen X are significantly more open and optimistic about crypto. And they probably won’t want to hold government bonds that are netting a negative return. 

Instead, they’ll want to hold internet bonds. 

This is where our thought experiment begins.

How much of the $68T of capital will end up in crypto? And what’s the effect on the market cap when we factor in the market inelasticity hypothesis?

Let’s start small. 

If 0.1% of the $68T ends up flowing into crypto, that would mean there would be $68B entering into the market.

If we apply our inelasticity factor of 20, this would mean that the market cap for crypto would increase by over $1.3T, roughly representing a 50% gain from where we stand today. 

But 0.1% of the $68T is nothing. To give some context, 83% of millennial millionaires have a substantial position in crypto. The most financially successful young adults today have material positions in this asset class. That’s very telling of what younger generations perceive about this emerging market: They’re bullish.

As such, we can imagine that Millennials and Gen X will allocate more than 0.1% of their inheritance into crypto. 

What if we bump this up 1% of the $68T? 

This would mean $680B would flow into the crypto market, resulting in an increase of over $13T to crypto, bringing the total to $15T. That’s a 10x increase from today! 

At today’s dominance levels, where Bitcoin holds 38% of the market and Ethereum represents 18%, this would put their valuations around $300,000 and $27,000, respectively. Pretty insane right? 

But I still think that’s a relatively bearish case. 

I would personally bet that it ends up somewhere in the 5-10% range. 

At 5%, the crypto market cap would reach $68T. 

At 10% of the $68T, crypto would quickly surpass the $100T mark at $138T. 

For reference, this would finally put crypto in line with major asset classes like equities, bonds, fiat currencies, and real estate.

Isn’t it sounding crazy to some of you reading this…

At the very least, this gives you a framework to consider. You can change the inelasticity factor. You can adjust the forecast on the inflow of capital.

Run the numbers for yourself.

Crypto Adoption Chasm

Crypto has crossed the adoption chasm.

It’s a multi-trillion dollar asset class. It’s being adopted as legal tender by nation-states. Legendary investors are allocating towards it. Celebrities are collecting NFTs.

Crypto is no longer an “if” question, but a “when” and “how”. 

This article outlines one potential avenue for when and how crypto will join the same ballpark as other major asset classes. But let’s be clear: it’s just a simple thought experiment. All of the numbers should be taken with a grain of salt. 

It only factors two independent things. It doesn’t really account for any of the qualities that make crypto valuable. 

It doesn’t account for DeFi as a new, open financial system for the world.

It doesn’t account for the cultural revolution that’s happening with NFTs.

It doesn’t account for DAOs as the new LLC.

And it definitely doesn’t account for the fiscal irresponsibility of central banks and governments that this industry was founded to protect against.  

All we know is that we’re in the midst of one of the greatest wealth transfers in human history. 

The only question you need to ask is: How much of that will flow into crypto?

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Disclaimer: The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such. This content is the opinion of a third party and this site does not recommend that any specific cryptocurrency should be bought, sold, or held, or that any crypto investment should be made. The Crypto market is high risk, with high-risk and unproven projects. Readers should do their own research and consult a professional financial advisor before making any investment decisions.

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