MW Why bitcoin needs to fall another 20% before it's even worth a look
By Mark Hulbert
Fair value for the cryptocurrency is currently about $55,000
It would be entirely understandable for Claude Erb to say to the crypto bros: "I told you so."
Erb is the former commodities portfolio manager at TCW Group whose model of bitcoin's (BTCUSD) fair value has been roundly dismissed as hopelessly irrelevant. Last October, for instance, bitcoin traded above $125,000, more than double the fair-value estimate of $53,000 from Erb's model at the time.
What a difference five months can make: Bitcoin now is trading below $70,000. Moreover, given the small number of additional bitcoins that have been mined since last October, the latest fair-value estimate from Erb's model is now around $55,000.
How to value bitcoin fairly
Erb's fair-value model is based on what's known as Metcalfe's law, which assumes that the value of a network is proportional to the square of how many members are in that network. He readily admits that the model has flaws: Some investors own more than one bitcoin, others own just a fraction of one, and some bitcoins have been lost forever. So the number of bitcoins in existence isn't precisely the same as members of the bitcoin "network."
Throughout the several years I have been featuring his fair-value model in my columns, Erb has gone out of his way to stress that his model is primarily useful as a "conversational anchor" in discussing bitcoin's fair value. In a recent interview, Erb would only go so far as to argue that, in light of recent events, his model certainly appears to be a better "conversational anchor" than many other fair-value models that crypto bros have used to justify sky-high valuations - such as bitcoin as currency, bitcoin as inflation hedge, bitcoin as digital gold, and so on.
Erb believes that perhaps the most important investment lesson to draw from bitcoin's recent experience is that a valuation model is not refuted by market prices trading far above or below fair value. On the contrary, it is entirely to be expected that market prices will swing wildly on either side of fair value - not just for bitcoin, but for every investable asset.
Over the past decade, for example, the ratio of bitcoin's actual price to Erb's fair-value estimate has ranged from a high of 4.3 to a low of 0.3. This is similar to the deviation of the stock market's CAPE ratio to its historical average - from a high of 2.5 to a low of 0.3.
The implicit claim of a valuation model is that no matter how far or how long prices may deviate, they eventually will return to fair value. Unlike other bitcoin fair-value models that have been advanced over the years, the Metcalfe's law model passes this test.
A corollary of Erb's investment lesson is that when an asset that previously deviated from fair value eventually returns towards fair value, there is no guarantee that it will stop once it gets there. Consider bitcoin's 2018-19 bear market, which took its actual-to-fair-value ratio down from near 4.0 to below 0.5. The cryptocurrency's subsequent rally took that ratio from below 0.5 to a high over 2.0. That ratio currently is near 1 to 1.
Even still, there's no assurance that bitcoin's bear market will stop at fair value.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
More: What if bitcoin prices fall to $8,000? Michael Saylor says Strategy still won't sell.
Also read: After bitcoin's fall, pity those wildly enthusiastic investors who borrowed billions against crypto
-Mark Hulbert
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February 14, 2026 11:33 ET (16:33 GMT)
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