Author: Matt Hougan, BItwise CIO
Compiled by: TechFlow
Why Bitcoin's performance is so special during market crises
One of the most frustrating things for Bitcoin holders is that its performance often runs counter to expectations during market crises.
While Bitcoin is often seen as a hedge against risk, when the market experiences severe volatility, Bitcoin often experiences a short-term decline.
A recent example occurred last week. At the time, as market concerns over tariff issues intensified, the stock market and Bitcoin both experienced significant sell-offs.
My colleague Juan Leon conducted an in-depth analysis of this phenomenon. He studied all instances over the past decade where the S&P 500 index fell more than 2% in a single day, and found that Bitcoin on average declined 2.6% during these market corrections, with the decline even exceeding that of the stock market.
While this finding may be disappointing, Juan's research also revealed an important fact: if investors persist in holding, or even buy the dip, the eventual gains can be very substantial. Data shows that within a year of these severe corrections, Bitcoin's average gain is as high as 190%, far exceeding other assets.
I call this phenomenon "Dip Then Rip". Based on historical data, this is one of the most consistent patterns in the cryptocurrency market.
In this week's analysis, I will further explore the deeper reasons behind this phenomenon.
Wall Street's Asset Valuation Logic
Wall Street's asset valuation methods are almost entirely based on the concept of "Net Present Value".
In simple terms, net present value is the value of an asset today, determined by forecasting its future performance and discounting it.
The most common method is Discounted Cashflow Analysis (DCA). Suppose a company can earn $1 per year for the next 20 years, then its value today would obviously not be $20. Because investors need to consider the time value of money and risk, future earnings need to be "discounted" to their present value.
The core of discounted cashflow analysis lies in determining the "discount rate". Analysts usually start with the short-term US Treasury yield (the "risk-free rate"), and then adjust it based on the uncertainty of the stock or market. For example, if the risk-free rate is 4.37%, the discount rate for a low-risk asset might be 5%; while for a high-risk asset, the discount rate could reach 10%, 20%, or even higher.
Discounting calculations are affected by the compounding effect over many years, so small changes in the discount rate can significantly impact the current valuation (net present value) of an asset. In the example of the $20 company we mentioned earlier: if its discount rate increases from 5% to 10%, its current value may drop from $12.46 to $8.51.
Therefore, the higher the risk, the higher the discount rate, and the lower the current valuation of the asset.
How Discounted Cashflow Analysis Applies to Bitcoin
Although Bitcoin does not have cash flows like traditional assets, similar valuation logic still applies.
For example, based on Bitwise's forecast, we believe Bitcoin's value will reach $1 million by 2029. So what is Bitcoin's reasonable value today?
This depends on the discount factor, i.e., the assessment of Bitcoin's risk. If the discount rate is 50% per year, Bitcoin's net present value is about $218,604; while if the discount rate increases to 75%, the net present value will drop to $122,633.
Therefore, Bitcoin's net present value is mainly influenced by two key factors: 1) the expected long-term price target (e.g., $1 million by 2029); 2) the market's assessment of its risk (the discount rate).
Understanding the Market's Response to Tariff Issues
Using the above framework, we can analyze the impact of tariff issues on the Bitcoin market.
News related to economic uncertainty affects Bitcoin in two main ways. One of the most insightful companies in the crypto space, NYDIG, noted in their analysis of the recent tariff-related sell-off:
"What do trade wars have to do with Bitcoin? Almost nothing, except that Bitcoin is a highly liquid, globally available, and 24/7 tradable asset. If anything, Bitcoin may benefit from this global entropy - the political and economic chaos caused by government policies."
From this, we can extract two points:
In the short term, tariff issues will increase market uncertainty, putting pressure on Bitcoin and other highly liquid assets, thereby increasing Bitcoin's discount rate.
In the long run, as a tool to hedge political and economic risks, Bitcoin's long-term value target may increase as a result.
Let's apply this logic to the discounted model. Suppose the impact of tariffs, by increasing economic uncertainty, causes Bitcoin's long-term price target to rise from $1 million to $1.1 million, but at the same time the discount rate increases from 75% to 85%. The calculation shows that this would result in Bitcoin's net present value declining from $122,633 to $109,521, even though we have become more optimistic about the 2029 price target by 10%. Although our long-term expectations for Bitcoin are more positive, its short-term price has declined.
This explains the market's correction phenomenon. However, as market sentiment gradually stabilizes, and the discount factor returns from 85% to 75%, Bitcoin's price will not only rebound, but may even rise further. This is the logic behind "Dip Then Rip".
Implications for Long-Term Investors
It's important to note that this does not mean that every investor in the market is actually calculating these mathematical relationships. In fact, it is the "invisible hand" of the market that is gradually adjusting price targets through this logic.
For long-term investors, understanding this is particularly important, as it can help you focus on long-term returns rather than short-term volatility.
In fact, for long-term investors, the short-term discounts on Bitcoin due to these discount factors are actually good opportunities to enter the market at low prices. I have never been more optimistic about Bitcoin's future.
