38-Bit Coin

Weekly Briefs
06 Jun 2022
6 min read
38-Bit Coin

Another week, another record inflation print in the eurozone. Should you turn to gold or bitcoin (“digital gold”) as a hedge? Who knows, but on a related note, here’s something else interesting that came out this week: JPMorgan said bitcoin is now undervalued by around 28% to the investment bank’s fair value estimate of $38,000 per coin. That raises an interesting question: how did JPMorgan arrive at $38,000 in the first place? Let’s find out.


Data out on Tuesday showed eurozone inflation hit a record high of 8.1% in May – larger than the 7.8% economists were expecting and a marked acceleration from April’s 7.4%. A big part of the increase was driven by food and energy after the Russia-Ukraine conflict sent commodity prices soaring. But even core inflation – the closely watched measure by the European Central Bank (ECB) that excludes volatile food and energy prices – accelerated from 3.5% to 3.8%. That suggests price growth is gathering pace across most categories of goods and services, and could push the ECB to outline a more aggressive rate-hiking plan in the coming weeks.

Eurozone inflation accelerated in May to a record high. Source: Bloomberg

The worse-than-expected inflation data led to a sell-off in eurozone bonds, as investors increased their bets on how much the ECB will raise rates this year. They’re currently pricing in slightly more than four consecutive 25 basis point increases at each of the bank’s meetings between July and December. Still, many wonder if the ECB is too behind the curve: despite inflation that’s four times above the bank’s target, its main deposit rate has been stuck in negative territory since 2014. In contrast, the Federal Reserve and Bank of England have raised interest rates twice and four times respectively to combat inflation that’s at similar levels to the eurozone.


Shares in Salesforce rose the most in almost two years on Wednesday after the company reported better-than-expected earnings and raised its annual profit forecast, signaling that demand for cloud business software is holding up despite a broader downturn for major tech firms. Salesforce, the leader in cloud-based customer management software, made 55% more in subscription revenue from its platforms division last quarter than the same time last year, making it the company’s fastest-growing segment. One of those platforms was Slack, which continues to outperform: the number of customers who spent more than $100,000 on the messaging software grew by more than 40% for the fourth quarter in a row.

Saleforce's quarterly revenue has consistently grown at or above 20% (on a YoY basis). Source: Bloomberg

Moving from the cloud to physical stores, retailers – who are already seeing their profit margins eroded by inflation (see our weekly review two weeks ago) – are suddenly facing another challenge: selling all the products they've stacked up. According to new research by Bloomberg out this week, retailers like Walmart and Target saw their inventories balloon to $45 billion last quarter – up 26% from a year ago. While well-stocked warehouses can be helpful if supply chains worsen again, changing tastes and inflation-related consumer belt-tightening could leave retailers with a glut of merchandise people just don’t want.

The retailers with the biggest absolute inventory gains. Source: Bloomberg


The volatility in commodity markets continues, with oil having a bit of a wild week. Brent crude futures, the international benchmark, closed above $120 for the fourth time this year on Monday, as the European Union reportedly edged closer to banning Russian oil imports altogether. But then prices slid on Thursday to $113 on reports that Saudi Arabia is ready to pump more oil should Russian output decline substantially under the weight of sanctions.

Oil prices have been very volatile since Russia's invasion of Ukraine. Note that this graph shows Brent futures. Source: Bloomberg

The news came on the same day as the monthly OPEC+ meeting at which the group of the world’s biggest oil-producing countries ratified a higher-than-expected increase in output for July and August. That comes after repeated calls from the US and other major economies for the cartel to increase production faster to deal with surging gasoline prices and the hottest inflation in decades. But that’s a long shot: OPEC+ is benefiting from the current environment, meaning it has no real incentive to ramp up production much faster than it was planning to anyway.


On Wednesday, JPMorgan published a report that touted bitcoin as its preferred alternative asset for investors – beating out real estate, hedge funds, and gold. The report said that the current fair value of bitcoin is $38,000, meaning the largest cryptocurrency is undervalued by around 28%. That raises an interesting question: how did JPMorgan arrive at $38,000 in the first place?

First, the investment bank calculated a long-term theoretical price target for bitcoin by assuming that its total market value is equal to that of all gold held privately for investment purposes. That assumption is based on the growing argument that bitcoin is “digital gold” – i.e. a store of value in the digital age. After all, it shares many similar characteristics with the shiny metal: it’s in limited supply, it’s durable, it’s fungible, it can be divided into smaller “nuggets” (satoshis), and so on.

According to the World Gold Council, there are 205,238 tonnes of mined gold with a total market value of over $10 trillion. But it wouldn’t exactly be fair to equate bitcoin’s total market value to this figure: almost half of the 205,238 tonnes of gold out there is used as jewelry, and another 17% is held by central banks as reserves. Bitcoin, you might be disappointed to hear, can’t be used as jewelry, and it’s unlikely we’ll see major central banks holding onto cryptocurrencies as part of their reserves any time soon (but never say never).

That’s why the figure JPMorgan is focused on is the amount of gold held privately for investment purposes – that is, gold held by individuals and investors (both retail and institutional) as a store of value. The figure includes all the bars held by gold ETFs, since they’re ultimately owned by private individuals and investors.

According to the World Gold Council, there are 45,456 tonnes of gold held privately for investment purposes. One tonne is equal to 35,274 ounces, which – at today’s gold price of around $1,800 an ounce – brings the total value of gold held privately to $2.9 trillion. And if we divide this by the total number of bitcoins in circulation (around 19 million as of the time of writing), we get a theoretical price target of around $150,000 per coin.

Now here’s where things get a little interesting. The assumption JPMorgan is making is that investors won’t allocate an equal amount of bitcoin in their portfolios for store-of-value purposes as they would gold because, let’s face it, bitcoin is a lot more volatile – and therefore a lot riskier – than the shiny metal. In fact, bitcoin’s price movements are around five times more volatile than those of gold.

Ratio of 3-month and 6-month realized volatilities for bitcoin vs. the corresponding volatilities for gold. Source: JPMorgan

If, hypothetically, bitcoin’s volatility was equal to gold’s, then JPMorgan’s framework would assume that the crypto’s fair value is the $150,000 per coin we calculated earlier. But in reality, bitcoin is more volatile, so the framework linearly adjusts the $150,000 by the expected bitcoin-to-gold volatility ratio in the future. JPMorgan assumes this ratio will decline from 5x today to 4x in the future, and will stay roughly steady there. That would value bitcoin at $150,000/4 = $37,500, which is how they arrived at their (rounded-up) figure of $38,000.

Next week

Busy week ahead on the macro front. The outcome of the ECB’s meeting on Thursday will be in big focus, with all eyes on how the central bank reacts to eurozone inflation hitting yet another record. And speaking of inflation, the US will release its figures for May on Friday, with economists expecting the inflation rate to remain roughly flat at 8.3%. Finally, over in China, the world’s second-biggest economy will release services PMI, trade numbers, and inflation data, all of which will be closely scrutinized to see how the country’s Covid lockdowns have impacted its economy.

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The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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