Three ratios crucial for understanding Bitcoin Price

According to crypto analyst PlanB, who popularized the Bitcoin stock-to-flow model, understanding the world’s largest cryptocurrency comes down to just three things—its Sharpe ratio, its correlation with other assets, and cointegration with the stock-to-flow model.

Boiling down Bitcoin to three crucial ratios

While Bitcoin’s unique proposition attracted hundreds of millions of people in the ten years since it was created, it might take another ten before it attracts the same amount of institutional interest.

That isn’t to say that traditional financial companies have turned a blind eye to the world’s largest cryptocurrency—they just need a gentle push to realize the potential the industry has. With institutional investors being a notoriously difficult crowd, breaking through requires a careful and diligent approach.

According to crypto analyst PlanB, the simplest and easiest way to understand Bitcoin is to represent it through three ratios, all used in traditional finance—its Sharpe ratio, its correlation to other assets, and its correlation and cointegration with stock-to-flow.

The analyst, known for popularizing Bitcoin’s stock-to-flow model, said that using these three ratios in a pitch to institutional investors garnered an “amazing response,” as it shows its immense underlying value.

Apart from that, the analyst said that it was important to highlight that Bitcoin isn’t a fad, but a product of more than 50 years of scientific research and development.

Chart showing the research and development process that preceded Bitcoin (Source: PlanB)
Chart showing the research and development process that preceded Bitcoin (Source: PlanB)

Bitcoin through the charts

The Sharpe Ratio

Used to determine the performance of an investment in comparison to the rate of the return on a risk-free investment, the Sharpe ratio has been a favorite among portfolio and mutual fund managers since the late 1960s. It’s calculated by subtracting the risk-free rate of return from the expected return on the asset and then divided by the standard deviation of…

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