Bitcoin Surges Past $46,500
When an investor chooses to purchase Bitcoin, they are not just buying Bitcoin, they are choosing to sell fiat currency (GBP, USD, EUR etc). Bitcoin is a hedge against the fiat system.?In this report we take a dive into the macros that will potentially play a pivitol role in the upcoming bull market cycle, as well as recap the inflows into the Bitcoin spot ETFs.
Macros Driving Bitcoin
The strength of a fiat currency can be determined by central banks' money supply (quantitative easing). The financial market cycles between times of growing money supply, in which central banks print money to support or stimulate financial markets, and declining money supply, in which central banks reduce or withdraw liquidity from the system to calm an overheating economy. Both activities have effects on many asset classes and the economy. During periods of increased money supply, the local fiat currency devalues, and as a result, inflation rises.?
The most recent example was during the Covid-19 epidemic, when central banks issued trillions of dollars to support the financial markets, and have subsequently moved to reduce that stimulus through one of the most aggressive rate-hiking cycles in history while also lowering their balance sheets. The existing financial system is reliant on central bank policies and addicted to "free money".?
Bitcoin was created as an alternative to traditional financial markets. The supply of Bitcoin is limited to 21 million, whereas the supply of fiat currency is unlimited. When we plot the price of Bitcoin against the M2 growth rate of major central banks (FED, ECB, PBoC, and BoJ), we can see that Bitcoin moves in tandem with the growth rate of the M2 money supply, eventually acting as a hedge against fiat currency devaluation (recent examples: Argentina and Turkey).?
Why is this important??
Since the peak of the Global M2 money growth rate in 2021, when central banks began winding down balance sheets and lowering the money supply, there have been many problems/crisis with the existing financial system around the world (regional banking crisis in the US, bond market crash, fiat currency collapse).
Bitcoin and other risk assets lost value as the global money supply shrank, and strength returned to the US Dollar. Recessionary signs in the United States have been flashing red for some time (an inverted yield curve, followed by a steepening yield curve in recent weeks).?
China's consumer prices fell at the highest annual rate in 15 years in January, falling short of experts' expectations and highlighting the difficulty for officials attempting to restore investor confidence in the world's second-largest economy. With defaults afflicting China's property sector, the country's economy as a whole may suffer. The real estate sector accounts for almost a quarter of the country's GDP and 70% of household wealth.
If the recession indicators are correct, this could indicate that easier financial market conditions are potentially on the horizon as central banks around the world begin to taper interest rates from current highs later this year, potentially turning the printing press back on to support the financial markets during extreme conditions.
When we plot the Fed Funds rate against the Core PCE 6m annualised (a measure of inflation), we can notice a significant difference between the two measurements. History suggests that the Fed Funds rate will need to fall considerably to align with the Core PCE in the near future. This chart shows a decrease in interest rates is a strong possibility, which supports the hypothesis of easier financial market conditions in the near future, and so supports a higher price action for Bitcoin due to a devaluation of the local currency (USD).
Bitcoin is likely to benefit not just from lower interest rates, as seen in the chart of FED Funds rate against Core PCE, but it also stands to benefit from an increase in the Global M2 Money Growth Rate.?
Bitcoin Spot ETF Update:
We now have institutional liquidity flowing into the Bitcoin Spot ETFs.
The Bitcoin spot ETFs will play a pivotal role in Bitcoin's adoption, providing institutions with a gateway to allocate funds to BTC. As such, monitoring the flows into and out of the Bitcoin spot ETFs', as well as the underlying holdings is a crucial metric for understanding market dynamics.?
The holdings displayed in the chart above are cumulative holdings of all of the 10 Bitcoin spot ETFs as of Thursday 9th February 2024, but any cash holdings inside the funds have been removed.?
Grayscale Bitcoin Trust (GBTC) held approximately 625,000 BTC before the launch of the ETFs. The GBTC holdings dropped drastically during the first few days of trading as investors rotated into cheaper alternatives, putting downside pressure on Bitcoin. Grayscale charged north of 1% management fees, whereas the other ETFs were positioned closer to 0.25%. Despite billions leaving the GBTC, the other ETFs have absorbed the outflows, with BlackRock and Fidelity being the main beneficiaries, and the overall fund flows have remained positive. The outflows from GBTC appear to be easing somewhat. The overall holdings across all 10 ETFs currently sit north of 659k BTC.?
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It is too early to confirm a trend or correlation between the cumulative holdings of the ETFs compared to the price of Bitcoin. However, Bitcoin’s price appears to be following the cumulative holdings, which theoretically makes sense as this is liquidity moving into and out of the market.?Bitcoin bottomed on the 23rd of January at roughly $38,500, along side the change in flows into the Bitcoin spot ETFs. Bitcoin is now trading north of $46,500.
Bitcoin Halving Spiral Update:
Analysing Bitcoin in terms of blocks mined X price, rather than time X price, allows for a more in-depth look at market averages. Every lap around the spiral represents 210,000 blocks mined, which is roughly a 4-year cycle.
1) The white circle represents Bitcoin halving events.
2) The green circle represents bull market tops.
3) The red circle represents bear market lows.?
The 4-year cycle of Bitcoin is dictated by blocks mined rather than time. Each year, 52,500 blocks of Bitcoin are mined (1 quarter of the spiral), implying that 210,000 blocks of Bitcoin are mined in the four years between halving events.?
Every mined block currently contains 6.25 BTC and 144 blocks of Bitcoin are mined each day. This equates to an increase in the supply of 900 Bitcoin every day (at the current rate, which will be cut in half in April 2024).
Looking at previous cycles, we can observe that Bitcoin has on average reached a bull market peak halfway through the second year, around block 78,750 (roughly 1.5 years after a halving event). With the next halving due in April 2024, using previous market averages we can estimate the next bull market peak may occur during Q4 of 2025.?
Furthermore, Bitcoin bear market bottoms have on average occurred halfway through the third year of the cycle. After a halving event, Bitcoin has typically bottomed at block 131,250 (about 2.5 years after a halving event, or 1.5 years before the next halving event).?
This cycle can and will change depending on the number of miners in circulation and the strength and power of the new miners coming into the market.
How to prepare for the upcoming bull market:
Blockchain Index (BLX) - passive index portfolio
The Blockchain Index provides investors with a passive portfolio that diversifies across the top 27 major cryptocurrencies. The BLX holds 40% Bitcoin, and 30% Ethereum, and the remaining 30% is allocated to the top 25 cryptocurrencies, each with a different weighting.?
Since its inception, the BLX has generated a 3244% ROI in just under 7 years. In that same time frame, Bitcoin has increased in value by roughly 2163%. The BLX has outperformed Bitcoin by more than 1000% since its inception due to its weightings and allocation across the market. This portfolio is a useful tool to access during a bull market phase, not necessarily during a bear market phase.?
ICONOMI not only provides investors access to a variety of different digital asset portfolios (index portfolios, discretionarily managed portfolios, quant portfolios), but investors can build and manage their portfolios using the ICONOMI portfolio management portal.
If you want to learn more about the Cryptocurrency market - Schedule a 1-on-1 consultation with the author Anthony Fernandez - Head of Business Development at ICONOMI:
Risk Warning: Cryptocurrency is classed as a high-risk investment. Previous returns do not guarantee or guidance of future performance. Don’t invest in cryptocurrency unless you’re prepared to lose all the money you have invested. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
Entrepreneur | MBA | Fintech | Payment Solutions | Crypto
9 个月Excellent analysis!!!