Data shows that in the year following a severe correction, Bitcoin's average increase can reach as high as 190%, far exceeding other assets.
Author: Matt Hougan, Bitwise CIO
Translation: Deep Tide Techflow
Why Bitcoin's Performance During Market Crises is So Unique
One of the most frustrating things for Bitcoin holders is that its performance during market crises often contradicts expectations.
While Bitcoin is frequently viewed as a hedge against risk, it often experiences short-term declines during periods of severe market volatility.
A recent example occurred last week. At that time, both the stock market and Bitcoin faced significant sell-offs due to heightened concerns over tariff issues.
My colleague Juan Leon conducted an in-depth analysis of this phenomenon. He examined all instances in the past decade where the S&P 500 index fell more than 2% in a single day and found that Bitcoin averaged a decline of 2.6% during these market corrections, even surpassing the stock market's drop.
Although this finding may be disappointing, Juan's research also revealed an important fact: if investors hold on during corrections or even buy the dip, the eventual returns can be substantial. Data shows that in the year following these severe corrections, Bitcoin's average increase can reach as high as 190%, far exceeding other assets.
I refer to this phenomenon as "Dip Then Rip." Historically, this is one of the most stable patterns in the cryptocurrency market.
In this week's analysis, I will further explore the underlying reasons behind this phenomenon.
Wall Street's Asset Valuation Logic
Wall Street's asset evaluation 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, calculated by predicting its future performance.
The most common method is Discounted Cash Flow Analysis (DCA). For example, if a company is expected to earn $1 per year for the next 20 years, its value today would not simply be $20. Investors need to consider the time cost and risk, and future earnings must be "discounted" to their present value.
The core of discounted cash flow analysis lies in determining the "discount rate." Analysts typically base this on short-term U.S. Treasury rates (the "risk-free rate") and then adjust for the uncertainty of stocks or the market. For instance, if the risk-free rate is 4.37%, the discount rate for low-risk assets might be 5%, while for high-risk assets, it could reach 10%, 20%, or even higher.
Discounting calculations are influenced by the effects of compounding over many years, so even small changes in the discount rate can significantly impact the current valuation of an asset (net present value). Using the example of the $20 company: if its discount rate increases from 5% to 10%, its current value could drop from $12.46 to $8.51.
Thus, the higher the risk, the greater the discount rate, and the lower the current valuation of the asset.
How Discounted Cash Flow Analysis Applies to Bitcoin
Although Bitcoin does not have cash flows like traditional assets, similar valuation logic still applies.
Using Bitwise's forecast as an example, 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, which is the assessment of Bitcoin's risk. If the discount rate is 50% per year, Bitcoin's net present value would be approximately $218,604; if the discount rate increases to 75%, the net present value would drop to $122,633.
Therefore, Bitcoin's net present value is primarily 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 Reaction to Tariff Issues
Using the framework above, we can analyze the impact of tariff issues on the Bitcoin market.
News related to economic uncertainty primarily affects Bitcoin in two ways. One of the most insightful companies in the crypto space, NYDIG, mentioned in its analysis of the recent sell-off related to tariffs:
"What does the tariff war have to do with Bitcoin? Almost nothing, except that Bitcoin is a highly liquid, globally available, and traded asset 24/7. If there is any connection, it is that Bitcoin may benefit from this global entropy increase—political and economic chaos triggered by government policies."
From this, we can extract two points:
In the short term, tariff issues increase market uncertainty, putting pressure on Bitcoin and other highly liquid assets, thereby raising Bitcoin's discount rate.
In the long term, Bitcoin's role as a hedge against political and economic risks may increase its long-term value target.
Let’s apply this logic to the discount model. Suppose the impact of tariffs increases economic uncertainty, raising Bitcoin's long-term price target from $1 million to $1.1 million, but simultaneously the discount rate increases from 75% to 85%. The calculation shows that this would cause Bitcoin's net present value to drop from $122,633 to $109,521, even though we raised the price target for 2029 by 10%. Despite our more optimistic long-term outlook for Bitcoin, its short-term price has declined.
This explains the phenomenon of market corrections. However, as market sentiment stabilizes, if the discount factor returns from 85% to 75%, Bitcoin's price will not only rebound but may also rise further. This is the logic of "Dip Then Rip."
Implications for Long-Term Investors
It is important to emphasize that this does not mean every investor in the market is actually calculating these mathematical relationships. In fact, it is the "invisible hand" of the market that gradually adjusts price targets through these logics.
For long-term investors, understanding this is particularly important, as it helps you focus on long-term returns rather than short-term fluctuations.
In fact, for long-term investors, the short-term discount on Bitcoin brought about by these discount factors is actually a great opportunity to enter the market at a low price. I have never been more optimistic about Bitcoin's future.
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