Bitcoin is 3 halvening’s old. A seminal moment for the protocol and potentially paves the way for the next significant move up in price. Long established and respected mining pool F2Pool mined the 629,999th block of the Bitcoin blockchain, and secured the last 12.5BTC reward before this reward is halved to 6.25BTC for approximately the next 4 years. With a respectful nod back to the 1st ever Bitcoin block, the genesis block, where Satoshi Nakamoto included The Times newspaper headline from Jan 3rd 2009 — ‘Chancellor on brink of second bailout of for banks’, F2Pool included an updated message from the NY Times from the 8th April 2020 which reads ‘With $2.3 Trillion Injection, Fed’s Plan Far Exceeds Its 2008 Rescue’.
11+ years after that first block was mined, Satoshi’s invention and underlying core message that Bitcoin encapsulates feels more relevant than ever before. In the presence of state controlled money and central bank manipulation — a decentralized, permissionless, trustless, digital and immutable store of value has a strong justification for existing.
History doesn’t always repeat itself but it certainly seems to rhyme.
Despite the predictions of mining death spirals, miner capitulation and price collapse, BTC currently sits between the log long term trend line and the upper resistance of the triangle it has been trading within since the all-time high of ~$19,800 in December ’17. If prices are maintained at these levels for several weeks whilst the market moves into this new Bitcoin mining epoch, we expect new money sitting on the sidelines ready to ‘’buy the dip’’, eventually capitulating and entering the market. The macro backdrop could not be better, and the narratives that surround Bitcoin are becoming stronger each week. We believe it is only a matter of time before Bitcoin breaks to the upside from this triangle.
As noted over the past month, the progressive increase in positive market sentiment has helped carry Bitcoin’s price up 175% since the lows of December 2018. With the global conversation still firmly fixated on the desperately difficult COVID-19 pandemic, Bitcoin news coverage clearly spikes interest across retail and institutional investors alike.
This week we saw macro investor supremo, Paul Tudor Jones publicly enter the Bitcoin market. Much has been made of the ‘’wall of institutional money’’ that was due to hit the crypto markets. We haven’t, however, as yet seen the number of institutional investors that the commentators prophesied. That said, Tudor Investment Corporation represents this investor subset down to a T, and we anticipate that other institutional firms will come out of the wood work in due course with similar declarations on portfolio allocation, especially if we see price increases over the coming months.
Kenetic Trading have seen an increase in incoming inquires from the once quiet Hong Kong institutional investor base. Our structured products business has had its busiest month to date as investors take advantage of the elevated volatility to generate yield coupled with a bullish undertone to the market.
‘’The best profit-maximizing strategy is to own the fastest horse’’
“If I am forced to forecast, my bet is it will be Bitcoin.”
Paul Tudor Jones
It is interesting and encouraging to see Tudor Investments explain clearly their own reasons for having Bitcoin exposure. As more retail and institutional investors enter the space, these narratives are key to expanding the appeal of the asset class. It is clear that Bitcoin has different meanings and relevance to different types of investors, and here we summarize the most popular of these interlinked and evolving reasons and narratives that will motivate new money to enter the market.
Gold 2.0 and Sound Money
Perhaps one of the most popular retail and institutional narratives is that Bitcoin is the new gold and a store of value appropriate for the digital age. With Bitcoin now technically scarcer than gold — based on stock to flow analysis — and with Bitcoin exhibiting many of the main features of sound money, it is a compelling narrative especially when you consider that gold has a market capitalization of ~$10 trillion compared with Bitcoin’s ~$160 billion. Much of the excitement comes from a rebalancing of this dramatic difference in market cap. If Bitcoin really is the digital revolution’s version of gold, then is a market cap similar to gold that unrealistic? Even at ¼ of the size of the gold market, each Bitcoin would be worth ~$130,000 per BTC.
The rationale behind Bitcoin competing with gold ties back to the principle of sound money, defined as money that is not prone to sudden appreciation or depreciation in purchasing power over the long term, aided by self-correcting mechanisms inherent in a free-market system. Gold and Bitcoin are both forms of sound money but with Bitcoin arguably measuring better on several of the key characteristics of what makes money sound — portability and divisibility as examples.
Hedge against Central Banks
This narrative overlaps with the theoretical principles of what makes a good store of value and sound money. Whereas Bitcoin and gold both have easily calculated production schedules, with gold being the rate of exploration and mining from the earth’s crust and Bitcoin being the pre-programmed reward for each block that is discovered during the mining process, participants in these monetary systems can make long term investment decision and choices knowing that inflation via increased production is a known variable.
Modern-day central banking is the antithesis of this predictive and reliable inflation/deflation. Owning Bitcoin (and also gold) acts as a hedge against central banking monetary policy that distorts, manipulates, and degrades value in the market via unpredictable inflation (and deflation) of the fiat money base in society. Fiat central banking is a human invention and construct, and by the inherent fallible nature of humans, this system is open to corruption, influence, and coercion. History has shown us many times that when a central bank or a government is in control of the money, the increase and manipulation in the money supply occurs as a result of the need for more purchasing power by those in control, ultimately leading to the destruction of the currency. This is why gold has been survived as a form of money for ~3,000 years… long after many of the 600 or so historical currencies humans have used have collapsed or been replaced, often as a result of their devaluation.
COVID-19 exposed the global economy for the extremely fragile system that it is. Within weeks of entering lockdown, corporations were becoming insolvent, and working parents were running out of cash to feed their families resulting in central banks expanding their balance sheets and governments providing fiscal stimulus to assist in providing the liquidity to avoid a humanitarian crisis. It is horribly clear that few in society have savings. Why is this? Why is our system so fragile and anti-resistant to predictable and known shocks?
As governments borrow more money and central banks expand the money supply, the resultant system is a debt-based economy increasing in size in ever increasing momentum. More money supply is needed to fund the debt, more debt is needed to stimulate growth, etc, etc. Over time interest rates have trended to zero in order to sustain the cost of carrying such vast quantities of debt. When interest rates are close to zero and inflation is greater than zero, the erosion of the purchasing power of money held in saving accounts disincentives anyone from saving. It makes more sense to spend, speculate, and invest, which is great for the economy until there is a shock.
Bitcoin, unlike fiat, is deflationary whereby its value over time should increase as it becomes scarcer, and its utility and network effects increase. This incentivizes anyone holding Bitcoin to keep holding it and potentially adds to their holdings over time as the value increases versus other stores of value. In certain countries where inflation is very high (20%+), Bitcoin is essential as an antifragile savings technology that is designed to incentivize long term time preference saving. This has obvious benefits when holders are required to use their saved wealth in times of difficulty.
24/7 Free Markets
We have seen unequivocal manipulation of global stock markets, acutely so in recent months. Satoshi was clear with his Genesis block message that Bitcoin’s purpose was to remove governments and central banks’ control of money. Today it is hard to find a liquid market that hasn’t suffered from some form of direct or indirect effects of the state’s involvement in propping up their economies and strengthening and protecting their currencies. Recently the best trade in town is to anticipate what the government is going to financial support next and try and front run it — hardly free-market capitalism playing out as the Keynesian’s wanted.
Despite some problems with over leverage and some short-term manipulation from large traders, the Bitcoin protocol is open to transact 24/7 365 days of the year. It does not discriminate, and anyone can buy or sell whenever they wish to. Unlike equity markets, there are no circuit breakers or bailout packages to prop up price, which allows Bitcoin price discovery to be free and unrestrained. The rules of Bitcoin are code and math, which are visible and transparent to everyone. This makes Bitcoin unique as a freely tradable store of value.
As per Bitcoin’s whitepaper, Bitcoin is ‘’Peer to Peer electronic cash,’’ and despite Bitcoin’s many detractors, its use in international remittance is core to its utility. Today, countries which suffer from insufficient domestic banking services, or are subject to internal or international sanctions, can use the Bitcoin network to transfer value anywhere in the world without permission. This is also an incredibly powerful and growing use case to those that are outside, or with limited access to the traditional banking system.
Many questions whether Bitcoin is really designed to be spent, and instead be seen as a savings technology. As Bitcoin grows we expect the volatility which makes using Bitcoin as a payment system more challenging to diminish. With lower volatility and combined with the development of layer 2 and 3 payments technologies (such as Lightening), that provide cheaper and quicker payment solutions, we will potentially see the payments and remittance narrative strengthen.
Buying and holding Bitcoin now is a bet that greater numbers of people and businesses will someday use Bitcoin as financial settlement payment for goods and services.
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