The true reason why long-term investors will embrace Bitcoin.

Avantgarde Digital Research Blog
10 min readNov 19, 2020



Disclaimer: This is not financial advice and does not constitute a solicitation to buy or sell any financial instrument and/or virtual currency such as Bitcoin. You should always do your own research and consult a professional financial advisor before investing. The views herein represent the private views of the author only and not necessarily of his employer.

There is already a vast amount of analyses about how an X% allocation in Bitcoin would have enhanced multiasset portfolio returns in the past. For instance, Dan Tapiero has pointed out that only a small allocation of 2% in Bitcoin instead of equities in a traditional 60/40 portfolio would have increased average portfolio returns by 44% with a higher Sharpe Ratio and even slightly lower maximum drawdown.


There are also other studies which have emphasised the benefits of diversification that come with Bitcoin and cryptocurrency allocations in general.

Interesting. But what about the future?

In order to understand the importance of Bitcoin for investors in the future, we need to look at traditional asset classes first.

There is lots of academic evidence that worsened demographics and other structural factors have eroded long-term return expectations in major asset classes. Pundits often mention “the three D’s” with reference to debt, deflation and demographics that account for the majority in the decline of long-term return expectations across assets. Japanification is just another metaphor describing these circumstances with reference to the subpar growth period in Japan since the 1990s. What is important is that these factors are not going away anytime soon especially without a meaningful turnaround of current demographic trends.

There are also other major factors such as ultra-loose monetary policy that have most-likely inflated asset prices in the present in order to stimulate the economy but have further eroded return expectations in the future as well. Central banks openly describe the so-called “asset price inflation channel” as one of their transmission mechanisms of monetary policy. A recent study by the BIS has demonstrated that the post-Corona recovery in equity prices was mainly driven by its long-term expectations components which in turn was mainly supported by a decrease in the term structure of interest rates due to massive central bank intervention.[1]

On account of the steep decline in long-term interest rates on “safe” assets such as government bonds due to the abovementioned factors, investors have been craving for yield in order to prop up average portfolio returns. This has further increased valuations in other asset classes such as equities and real estate as well.

In consequence, current long-term investors are forced to buy overvalued assets and even take on more risks. Some observers already speak of the “everything bubble” describing a situation where basically every asset class is overvalued.

Alright. But how bad can it be?

After all, beauty and valuations have one thing in common — they are subject to the eye of the observer. However, we can make a qualified judgement on valuations by looking at the very long-term evolution of valuations in major asset classes and their implied forward returns.

A prominent go-to source are the data by Robert Shiller who has calculated equity multiples (Shiller Price-to-Earnings Ratio) for the S&P 500 since 1871. His data set also includes 10-year US Treasury yields that can be used to approximate Treasury bond total returns. I will also look at long-term historical Gold price data obtained from the LBMA and WGC since Gold is a major building block in multiasset portfolios (and a Bitcoin contester). Lastly, I will also look at US real estate prices provided by Robert Shiller as well since 1890.

Figure 1 shows the evolution of the Shiller P/E of the S&P 500 and its mean over time. The second panel shows the respective percentile, i.e. how the most recent data point compares to the overall history of the time series. I have used an expanding window that calculates the mean and percentile with the known history at that particular point in time. It shows quite clearly that current equity valuations are relatively high compared to its 150 years of history namely in the 97th percentile.

→ We will get back to the question which forward return this actually implies for the future in the following section.

Fig. 1: Equity Valuation: S&P 500 Shiller Price-to-Earnings Ratio & Percentile

The next figure shows the evolution of the 10-year US Treasury yield and its respective percentile. As with US equity prices, US Treasury bonds are massively overvalued based on yields. Note that bond yields move inversely to bond prices.

Fig. 2: Bond Valuations: 10-Year US Treasury Yield & Percentile

Figure 3 shows the evolution of the real, i.e. inflation-adjusted, gold price denominated in US-Dollars over time. The logic is that the gold price is ultimately cointegrated with the inflation rate in the long-term which means that it cannot sustainably decouple from the rate of inflation. Again, gold is just another overvalued asset since its real price lies in the 99th percentile.

Fig. 3: Gold Valuations: Real Gold Price & Percentile

Last but not least, the next figure shows the evolution of the real Case-Shiller House Price Index and its respective percentile. Same story here: US real estate is comparatively overvalued based on the inflation-adjusted price index. Not as high as during the heights of the Subprime Bubble but still in the 99th percentile and way above its long-term average since 1900.

Fig. 4: US Real Estate Valuations: Real Case-Shiller House Price Index & Percentile

Nice charts. But what does this imply for my portfolio?

The important thing is that the abovementioned valuation metrics are not mere numbers. They are closely related to long-term expected returns on these asset classes. For instance, the Shiller P/E is closely related to S&P 500 total returns 10 years down the road. The higher the Shiller P/E, i.e. the more prices (P) have decoupled from earnings (E), the lower the future expected return for the S&P 500 and vice versa.

The same can be said for US Treasury bonds: The best predictor for the expected return on a passive investment in 10-year US Treasury Bonds is the current 10-year yield itself. The lower the yield, the lower the expected return.

Inflation-adjusted Gold and US Real Estate prices behave similar to the Shiller P/E: The higher the respective metric, the lower the respective expected long-term return prospects.

The following figure depicts the abovementioned relationships in a scatterplot for US equities, 10-year US Treasury bonds, Gold denominated in USD and US Real Estate. I have chosen the period from 1971 onwards, i.e. since the demise of the Bretton Woods System/Gold Standard and the beginning of the Fiat Standard.

Fig. 5: Valuation metrics and long-term expected returns since 1971

As you can see, the abovementioned valuation metrics fit future returns quite well. More specifically, these metrics can explain at least 60% of the variation in 10 year forward returns since 1971 for Gold and US real estate and even up to 88% in the case of US Treasury bonds. The Shiller P/E explains around 67% of variations in S&P 500 10yr forward returns.

If you look at the latest estimates, the abovementioned valuation metrics imply an expected return of only 0.7% p.a. for US equties, -2.4% p.a. for US Treasury Bonds, -25.1% p.a. for Gold (!) and -0.8% p.a. for US Real Estate in nominal terms for the next 10 years.

No, that is not a typo. Gold is likely to be the worst major asset in the next 10 years since it is extremely overvalued as well. The only major asset class that will deliver positive nominal returns is US equities. The abovementioned return includes dividends as well meaning that the price return is likely to be negative since the current dividend yield stands at ~2% p.a. Accounting for inflation, all these assets are bound to yield negative long-term returns since the expected inflation rate over the next 10 years currently stands at ~1.7% p.a.

In sum, this implies an average nominal portfolio return of only 0.2% p.a. in the next 10 years which is way below the average of 5.8% p.a. in the last decade and below average expected inflation rate of ~1.7% p.a. for the next 10 years. In order to grasp the importance of this, the following table shows the performance of a so-called naive “Austrian portfolio” consisting of US equities, US Treasury Bonds, Gold and US Real Estate with 25% weighting each for comparison:

Table 1: Austrian Portfolio Performance since 1971

To cut it short, given the meagre long-term return prospects in the coming 10 years, investors will continue to search for alternative assets in order to increase average portfolio returns they and their clients were accustomed to in the last decades.

Okay. But what does this all have to do with Bitcoin?

Here comes Bitcoin into play. Some pundits like Raoul Pal have praised Bitcoin as a potential “life raft” against a future characterised by stricter government control over finance. Raoul Pal has also made the case for Bitcoin and other cryptocurrencies based on the poor outlook for investment returns in light of a potential pension crisis caused by worsening demographics and a flood of retirees.

As it turns out, in contrast to other major asset classes, the long-term return expectations for Bitcoin are anything but grim.

Bitcoin derives its long-term return potential mainly from its ever increasing scarcity due to the algorithm that halves the so-called Block reward approximately every 4 years. In turn, this decreases the money creation dynamic in the Bitcoin network — the inflation rate. This bull case was famously quantified first by Plan B on Medium.[2] He argues that the log of the Stock-to-Flow Ratio (henceforth S2F) of Bitcoin is linearly-related to the log of Bitcoin’s market capitalisation. The S2F Ratio simply relates the amount of Bitcoins in circulation to the annual of flow of Bitcoins that are being created.

Fig. 6: The linear relationship between scarcity and Bitcoin’s market capitalization

Although this hypothesis has been subject to a lot of dispute, the dispute mainly centres around potential misspecifications of the relationship itself. However, the S2F model itself has not been falsified to this day.[3] Based on my calcualtions, the log S2F Ratio can already explain ~90% of the variation in the log of Bitcoin’s market capitalisation, i.e. the large majority of changes.

Since the S2F Ratio continuous to increase in the future, we can extrapolate long-term expected returns for Bitcoin from the abovementioned relationship. Until the end of 2029, the S2F Ratio is going to increase from ~60 years to ~253 years, meaning that theoretically it will take 253 years of mining rewards in order to replicate the current supply of Bitcoins in circulation, although this is not going to happen since the Bitcoin’s supply is ultimately capped at 21 million coins.

Fig. 7: Log of Bitcoin’s market capitalisation vs Log of S2F Ratio

The current S2F Ratio of ~60 years implies a current model value of Bitcoin of around 60k USD which is quite close to forecasts made by other cryptocurrency experts like Mike Novogratz and still implies 233% upside at the time of writing.

A S2F Ratio of ~253 years by the end of this decade even implies a model value of approximately 7 mil. USD per 1 BTC which implies a staggering 4,342% p.a. expected return at the time of writing. By that time, Bitcoin has probably become the next international reserve asset if this were to materialise.

Bottom Line

Major structural factors such as demographics in combination with unprecedented central bank interventions have eroded long-term return expectations in all major asset classes.

Gold has the worst long-term return expectation among major asset classes and therefore is not a legit alternative to Bitcoin.

In comparison, Bitcoin’s scarcity is bound to lead to extraordinary long-term returns based on the Stock-to-Flow model which is why long-term investors are bound to embrace this emerging asset class.

Thanks for reading!


[1] Avalos, F. & Xia, D. (2020) The short and long end of equity prices during the pandemic, Valuations and the shift in interest rates; BIS Quarterly Review September 2020

[2] Plan B on Medium: Modeling Bitcoin Value with Scarcity

[3] Cf. for instance Btconometrics on Medium: Falsifying Stock-to-Flow As a Model of Bitcoin Value, The Drunken Value of Bitcoin


About the author of Avantgarde Digital Research Blog:

André Dragosch has been working for almost 10 years in the German financial industry, mostly in Portfoliomanagement and Investment Research. He is currently working as a cross asset analyst and investment strategist at one of the largest German asset managers in Frankfurt. He is currently doing a PhD as well in financial history at the University of Southampton, UK, where amongst others Prof. Richard Werner has supervised his work. He is been a private crypto investor since 2014. He is a married father who loves playing drums, running and travelling.