And the winner is... "to BTContinued"
- Mathias Talmant
- 11 janv. 2021
- 6 min de lecture
Bitcoin was by far the best performing asset in 2020 (+362%), followed by gold (+25%) and the S&P500 (+16%). In this article, I will shed light on the four main catalysts for the current run up in cryptocurrencies, most precisely in Bitcoin. In the end of the day, the guiding principle is merely the Law of Supply and Demand. Bitcoins are created at a slower pace, while global demand from retail and institutional investors is ballooning, which puts upward pressure on market price. In addition, I will briefly expand on my view on inflation and Bitcoin.
2020 Performance Comparison
BTC (Green) ; Gold (Red) ; S&P500 (Blue) ; Hang Seng (Yellow) ; Stoxx600 (Pink) ; Oil (Black).
Scarcity means value
One of the main reasons behind the recent surge in price of Bitcoin is the last halving, which occurred in May. Every four years, the reward given to miners for processing transactions is cut in half, until the maximum supply is reached. Once 21,000,000 bitcoins will have been mined in 2140, the tap will be turned off. This is the self-disciplined mechanism that the Mother Coin follows to ensure a low and predictable level of inflation.
Unlike fiat currencies, there is no such thing as a “Cryptocurrency Central Bank”, which means no quantitative easing and no unlimited supply of currency. At time of writing, 88.5% of the total supply is already available, which means 2.4 mn bitcoins are left to be mined, knowing that three to four million of those already mined are thought to be lost forever.
In the past, halvings coincided with massive surges and then sharp corrections. As shown on the following graph, the most recent ballooning in price is clearly following the same scheme as the preceding two post-halving periods. However, there is no guarantee this pattern will hold on in the future. Cryptocurrencies remain highly volatile and unpredictable assets whose peaks and troughs are largely dictated by behavioral finance, more than fundamentals.
Sources: MT Finance, Trading View.
Hedging inflationary risk
After a $2.2 tn Cares Act approved in March 2020 (including direct payments of up to $1200 for US adults) and another $900 bn stimulus package just approved in December, fears of inflation are creeping. The anticipated erosion of the US dollar led Michael Saylor, CEO of Microstrategy, to venture into Bitcoin to preserve his $500 mn treasury.
As of December 4, MicroStrategy held a total of 40,284 bitcoins and planned on raising $400 mn through convertible bonds to buy more bitcoin. At this point, I am not sure we can talk about a hedge against inflation, but rather a speculative bet. That being said, the business intelligence firm and international giant has already made triple digits profits on this risky bet and may pave the way for other entrepreneurs, starting with famous Tesla CEO Elon Musk, who showed interest on Twitter.
Incidentally, the paradigm defended by Milton Friedman stating that money supply is the one and only determinant factor in inflation variations may not be true anymore. As explained in this video from Dr Mark Meldrum, velocity, the speed at which money changes hands in the economy, seems to be the new leading indicator.
Despite massive quantitative easing, the inflationary mechanism is jammed because of paradoxical government policies. On the one hand, the US governments wants to spur lending and economic growth, but on the other hand it ties the hands of banks with restrictive capital requirements. While the Fed’s assets skyrocketed in the last decade, the amount of excess reserve held by commercial banks saw a parallel shift because they do not want to be the only one with their skin in the game. We can see flat inflation, while money supply is increasing. Therefore, the quantity of money is no longer the only determinant in the inflation equation.
Fiscal policies on infrastructures with strong multiplier effects or direct payments to low to middle income citizens will have ripple effects on the economy via velocity and thus increase inflation. Unless President Biden announces such measures, regardless of the increase in money supply, a greater velocity will not be achieved. Consequently, you should not invest in Bitcoin to shield yourself from inflation, because it may take a lot of time to arise, if ever. Besides, Bitcoin should be seen as an alternative and uncorrelated speculative investment rather than an inflationary hedge, in spite of its limited supply.
Going mainstream
Retail investors - Mass Market
On December 2017, Revolut was one of the first neo bank to roll out a feature which allowed its users to buy, sell and hold cryptocurrencies. On October 21st, Paypal followed in the footsteps and announced its intention to let all eligible PayPal accountholders in the U.S to buy, hold and sell four of the main cryptocurrencies.
Some 346 million active accounts can now access to the digital gold in the snap of a finger. Besides, PayPal will enable Cryptocurrency as a funding source for purchases at its network of more than 26 million merchants in 2021. This is the first step to let cryptos go mainstream for retail investors, although the fact that users do not have their private key is a big drawback in my opinion.
Insitutional investors - Microstrategy Effect
Institutional interest for Bitcoin, and more broadly for cryptocurrencies was kickstarted by Microstrategy, but other big players are now speculating. One of them is hedge fund One River, which has reportedly bought more than $600 million in cryptocurrencies and committed to having Bitcoin and Ethereum holdings of $1bn by early next year.
Institutional investors want return, but what they cherish most is safety; not always from an allocation perspective, but from a regulatory one. One of cryptocurrencies’ pitfall was the lack of safeguards, but this issue is starting to fade away as anti-money laundering, tax and custody problematics are progressively being addressed by watch dogs.
New crypto custody services from big players like Coinbase and Fidelity have shaken up the nascent market. PWC’s 2020 report described the correlation between the price of Bitcoin and the number of crypto hedge funds, but I personally think that the evolution of the regulatory framework is another explanatory factor, the proof being the increase of crypto hedge fund using an independent custodian.
Source: PWC 2020 Crypto Hedge Fund Report
The institutional scramble to secure as many bitcoins as possible has started. The following picture depicts the top public companies and their Bitcoin holdings. It is now easier for Big Money investors to lay hands on the digital gold either through institutional vectors or via direct equity.
Source: BitcoinTreasures.com
This opening can easily explain the bullish momentum at time of writing, but what goes up must come down. When hedge funds have secured juicy profits, they will be quick to escape no matter how promising the underlying technology might be, and there will be blood in the streets. It is hard to tell if all this money is supporting the ecosystem because it believes in its revolutionary potential or because it wants to take advantage of the hype and exit with quick profits.
Is it a good time to buy?
In December 2017, euphoria led BTC to unprecedented levels flirting with the $20k threshold. Shortly after, whales took their profits and exited the market quickly slashing the market cap by hundreds of millions of dollars. Three years later, almost to the day, Bitcoin broke its ATH and hovers around $40k while I am writing this article in mid-January 2021. Part of this success comes from the fact it is uncorrelated with traditional market, an interesting feature in times of pandemic.
Sky is the limit since technical traders have no resistance stopping their craze, which means there is potentially “unlimited” upside. But remember gravity is an immutable Law : what goes up must come down. Any negative news or major psychological level like the $50k could trigger a devastating series of take profits, followed by cascading stop losses.
Personally, I would not be surprised to witness a major retracement around the $40k (twice the latest ATH) or the $50k psychological milestone. Consequently, I would rather wait for the dip before getting buying. There might be some cost of opportunity not to invest in cryptocurrencies at the moment, but FOMO (Fear Of Missing Out) is a dangerous thing.
Sources used in the article: CoinDesk, Investopedia, BitcoinTreasures.com, FRED, PWC, Tradingview, MT Finance.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
MT Finance - Mathias Talmant.
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