Bitwise: Why the tariff war-induced sharp BTC pullback is a buying opportunity from the perspective of discounted cash flow

One of the most frustrating things about owning Bitcoin is that in times of crisis, it doesn’t perform as you would like.

People buy Bitcoin as a hedge asset, but when the market is volatile, Bitcoin tends to fall back in the short term.

The most recent time we saw this happen was last week, when heightened concerns about tariffs sparked a sell-off in both the stock market and Bitcoin.

My colleague Juan Leon has written definitive articles on this. Juan looked at all the times over the past decade when the S&P 500 fell more than 2% in a single day. He noted that, on average, Bitcoin actually fell more than the S&P 500 during these pullbacks — falling by about 2.6%.

ah.

But Juan’s research shows something else: If you stay invested — or buy more after a pullback — you’re doing well. On average, Bitcoin is up a staggering 190% in the year following these big pullbacks, far outperforming every other asset.

I call this pattern the “Dip Then Rip,” and historically it has been one of the most consistent patterns in crypto.

In this week’s memo, I want to explain why this happens.

How Wall Street Values ​​Assets

Basically, all of Wall Street revolves around the idea of ​​"net present value."

Investors know that "net present value" calculates the current value of an asset based on your estimate of its future performance.

The most common application, of course, is discounted cash flow analysis (DCA): if you have a company that you think will earn $1 per year for the next 20 years, how much is it worth today?

Obviously it's not worth $20; why would you give up $20 today just to get $20 back 20 years from now? Instead, you can calculate its value today by "discounting" its future cash flows.

When doing DCA, the big question is how much you should discount these cash flows. Typically, analysts take the "risk-free rate" (i.e., the current interest rate on short-term U.S. Treasury bills) and then increase it based on the level of uncertainty in the stock and the market. For example, today the risk-free rate is 4.37%. If the company is very safe, you might round it up and apply a 5% discount rate. If it's riskier, you might apply a 10% or 20% or higher discount rate.

Because the math adds up over time, a small change in the discount factor can have a huge impact on today's estimate (net present value). Using our $20 example, if you discount these cash flows at a 5% annual rate, the company is worth $12.46 today. If you discount these cash flows at a 10% rate, the company is worth only $8.51.

The greater the risk, the greater the discount – the lower the price today.

How does this apply to Bitcoin?

Bitcoin has no cash flow, but in my opinion the same idea applies.

For example, at Bitwise, we think Bitcoin will be worth $1 million in 2029. So, you might ask, what do we think it’s worth now?

It depends on the discount rate, which is the risk you assign. If you discount it at 50% per year, the NPV is $218,604. If you use a 75% discount rate, the NPV is $122,633.

Note that there are two factors that influence the NPV of Bitcoin: 1) an estimate of its long-term value (e.g. $1 million by 2029), and 2) a discount factor.

Understanding Why the Tariff War Triggered a BTC Pullback

Now let’s use this framework to understand the market’s reaction to a tariff-driven pullback.

News sparking economic uncertainty has a two-way impact on Bitcoin. Take a look at what NYDIG (one of the smartest firms in the crypto space) had to say when writing about the recent tariff-related sell-off:

“What does Bitcoin have to do with tariff wars? Nothing, except that it is a liquid, globally available, tradable asset 24/7. If anything, Bitcoin will benefit from rising global entropy and political and economic chaos caused by governments.”

Notice they say two things here:

• In the short term, tariffs pose a challenge to Bitcoin and other liquid assets because they inject uncertainty into the market. In other words, they increase the discount factor, or the perceived “risk” of an asset.

• In the long run, tariffs are good for Bitcoin because it serves as a hedge against political and economic disruption. In other words, they increase Bitcoin’s long-term price target.

Let’s put this back into discount mode and think about the math.

As you might imagine, tariffs increase our long-term price target for Bitcoin from $1 million to $1.1 million by creating economic entropy. At the same time, they increase the discount factor we use to calculate Bitcoin’s net present value from 75% to 85%. Mathematically, this would cause Bitcoin’s “net present value” to drop from $122,633 to $109,521 — despite a 10% increase in our 2029 price target.

So even though we are more bullish on Bitcoin than ever, our short-term price target has fallen. This explains the pullback. But if the market stabilizes, the world doesn’t end, and the discount factor falls back from 85% to 75%, Bitcoin will recover from the pullback and even rise.

Dip then rip.

Why I think this framework is useful

To be clear: I am not saying that everyone in the market is making these calculations. Rather, I am saying that the invisible hand of the market is making these calculations, groping for new price targets.

For long-term investors, this is important to understand because it helps you focus on the ultimate goal: long-term returns.

If you are a long-term investor, a short-term spike in the discount factor is an opportunity to enter the market at a low price.

From my perspective, I have never been more optimistic.