For now, this bull market is defined by the demand for digital gold as a hedge against fiat. Pure and simple.
This week in Crypto
Bitcoin is doing what we always thought it would do, albeit slightly sooner and faster than most had expected, which is typical for so many technology adoption S curves. Over the course of the last 24 months in this weekly, we have consistently discussed that we believe BTC, along with a select few other cryptocurrencies, represent massively bullish asymmetric investments that hold different use cases for the many varied users and investors across the world and societal structures. We have repeated many times that we firmly believe that eventually, it will become a fiduciary duty for FDs, CEOs, pension fund managers, and IFAs to do the work to properly understand BTC in order to allocate capital to the market. Failure to do so will result in a loss of AUM or treasury value as expectant investors move their capital to get the exposure they require or balance sheets are eroded from the effects of fiat debasement.
Q4 2020 leading into 2021, confirmed many of these ideas and beliefs. Perhaps most importantly the ‘’Bitcoin is an inflation hedge / digital gold’’ has now become mainstream as the leading narrative discussed by mainstream media and now understood by retail investors and Wall Street alike. Consequently, institutions have started to pile into the industry and last week pushed the total crypto market capitalization value to over a trillion USD for the first time in history with Bitcoin holding ~$750 billion of this value. As each corporate and institutional investor goes public with their Bitcoin investment strategy, the inflation hedge narrative comes up every time, therefore being reinforced over and over in the collective hive mind of the decentralized market. The recent outstanding public statement from CIO of One River Asset Management, Eric Peters, is not only superbly written but encapsulates perfectly just how ingrained and important this narrative really is and most certainly shared amongst all the institutional capital driving the market gains at present.
Every digital asset can theoretically fall to zero, though it is terribly hard to imagine that they all will. It is much easier to imagine that in a world where fiat can be created without limit, and where the practical uses for these digital assets continually increase, their values can rise many, many times. Surely the value of Bitcoin can surpass that of gold. Owning these assets is a mere toehold to the future, a deposit on the view that everything we know about financial intermediation and its relationship to centralized policy will change in ways we cannot yet foresee. Holding these assets over the long-term aligns yourself with the macro mega-trends of technological advance and currency debasement, both of which appear to be accelerating — Eric Peters, CIO, One River Asset Management
For now, forget transactions per second, block size, scaling debates, eCommerce utility, transaction costs…dare we even say forget Peer-to-Peer Electronic Cash? For now, this bull market is defined by the demand for digital gold as a hedge against fiat. Pure and simple.
That said, it can’t go ignored that last week saw the entire Bitcoin network transfer in aggregate reach over $10 trillion in value over its lifetime — see the below chart. This has been achieved without any banks or asking any permission of anyone — a truly astonishing feat. It is hard to imagine the scale of the value proposition of Bitcoin, as layer 2 starts to evolve and $10 trillion eventually becomes an annual volume. The recent product release from trailblazing Jack Maller’s Zap is an astonishing glimpse into where this part of the ecosystem is going. The Strike Global product demo is outrageous and well worth a watch as he leverages the Lightening Network for instant, permissionless fiat payments at close to zero cost. Watch this space and watch it carefully as this is where the narrative evolves from ‘’inflation hedge’’ to include ‘’permissionless peer-to-peer electronic cash’’ and would be the natural evolution of the industry in the coming years.
Stronger and stickier hands
With BTC now trading at 7% of gold’s market cap and increasing, at Kenetic Trading, we are looking and planning ahead and developing a hypothesis that this institutional led bull run may turn out to be different when we consider previous cycles. Institutions have stronger and stickier hands, and they are driving this cycle.
Long before institutional capital can be allocated, much thought, analysis, evaluation, and discussion is made before a proposal reaches an Investment Committee to be considered as an investment. Most of the institutional investors we are seeing now enter the market are fundamentally longer-term investors that have done the detailed work that allows them to not get shaken out by 20% or 30% drops in price as BTC price appreciates in value. They are happy to wait years for their gains to be realized and have allocated capital that doesn’t need to be used to pay for phone bills, mortgage payments, or grocery shopping at a later date. Will some investors sell during this first cycle they are exposed to? Sure, some will sell, but most will stay holding their BTC locked away in cold storage, fully subscribed to the narrative that BTC is digital gold protecting their purchasing power from inflation. For centuries, gold was bought, hoarded, and used as payment when needed and in more recent times as collateral…BTC is likely following this same path but in digital form. The type of new capital which has taken Bitcoin to the recent dizzy heights of $40K+ is not temporary, skittish, or nervous when it comes to market volatility like retail capital. Therefore, this current cycle, currently defined by institutions aggregating around one specific narrative, is in our opinion very different. If the numerous public statements and attestations from investors such as One River are even partly believed, then these investment teams are not selling for a very long time and even if they are, they will remain in the market. As an institution, you don’t buy Bitcoin with a short-term time horizon, you are betting that BTC will be here decades down the road. The cyclical nature of BTC price appreciation may still play out, but the stickier longer-term nature of the capital now supporting prices, in our opinion, means corrections may be less severe, less sustained, and crypto winter may turn out to be less cold.
The OCC leans in
The standout story from last week in what is already shaping up to be an eventful year was the press release from the regulator to the US federal banking system, the Office of Comptroller of the Currency, OCC. Rather contrary in nature to Steve Mnuchin’s aggressive attack on self-custody and privacy for crypto users via his rushed FinCEN rule change proposal, the OCC has opened the doors for Federally regulated banks to host nodes and settle value on public blockchains. Banks can now view stablecoin settlements in the same capacity as SWIFT, ACH, and FedWire systems…the Interpretive Letter from the OCC can be found here in full.
This is a major development and a major step towards the US financial system embracing public blockchains and their superiority over legacy systems. Acceptance of this industry gives massive validation to all the crucial innovation going on in the industry, which is much needed in the US right now as a continued hostile environment will drive innovation, capital, and talent away.
Considering so much of the stablecoin value is currently settled on Ethereum’s blockchain, it’s not surprising to see the ETH/USD and ETH/BTC pairs dramatically strengthen these past 10 days since the OCC release. ETH is up ~40% against the USD and ~30% against BTC at the time of writing.
We will continue to monitor this significant news…
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