Have I Missed It (3)?
Not In Our Opinion. The Institutional Cycle gets underway
The price performance since the US election has been fabulous, but it’s entirely rational. We make the case that the change of leadership in the US heralds the start of a new “Institutional Cycle”. It is impossible to overstate how significant the election result is for the asset class and for bitcoin in particular. Fleet-footed investors have a chance to front-run the behemoths who will lumber in behind.
There will be many investors wondering if they’ve missed it…again. This edition follows previous versions in November 2023 and March of this year, and the answer remains “not in our opinion”.
Our conviction in the outlook has strengthened given the above events, and we’ll cover a lot of the ground in this note.
As ever, the secret is to be patient, don’t commit beyond your means and study hard to properly understand this remarkable asset.
Technical
Bitcoin has broken to new highs after 8 months of range trading, so the question is “what’s next?”.
Let’s think first about the size of this move in absolute terms. At US$90,000 the price is 25% higher than the March 2024 peak. It’s decent, but not indecent. For an asset that moves in multiples over cycles, and which is dismissed by many because it is “too volatile”, a 25% move is a mere bagatelle.
It’s particularly trifling when you consider that recent events are game-changing for the asset class. The election of Trump – as we discussed in the last letter - will change everything in terms of the investability of the asset as far as large institutions are concerned.
Even a small number of these institutions making a small allocation will move the needle, as we will show later.
High Level Consolidation
We return to the recurring phrase for bitcoin, namely “high level consolidation”. This is where we see the price settle at a new high for a while before moving higher.
It’s a familiar pattern in a bull market, characterised by the absence of any pullback normally associated with a short term spike in the price. It’s a key difference between bitcoin and most of the rest of crypto. Bitcoin tends to rise and stick, the rest bounce all over the place.
Two prior incidences are shown below. The first is in the 2020/21 bull run, where the consolidation was barely discernible it was so brief. The second is earlier in this cycle, a couple of weeks before we wrote Part 1 of “Have I Missed It”.
Back above the S&P500
It’s astonishing to think that even if you bought bitcoin at its highest price back in 2021 - literally the worst moment possible - you’d still be doing better than the world’s most eminent equity index.
Those who bought any other time, of course, have done even better.
Bignumberitis
The price of BTC now hovers below US$100,000.
Just because it’s near a headline-grabbing number shouldn’t be any cause for alarm. Yet you know that for many, it probably is.
This is a tremendous advantage to those who believe that it’s going to over US$220,000 in this cycle and therefore work on the basis that it must pass through US$100,000 in order to get there.
Will there be resistance at US$100,000? It depends on how it gets there. As long as it continues along this cautious path, we doubt it. If anything, the lack of resistance is likely to act as an upward propellant once through.
The point, though, is not to make short term round numbers a part of your long term investment thinking.
Dominance persists
Last edition we warned of falling into the trap of thinking bitcoin’s dominance would fall as crypto-mania took hold. This has proved correct. The early part of this episode is heavily bitcoin focussed. It has the narrative and the audience.
It wouldn’t surprise us if its dominance reaches 70%.
Cycle patterns
Another way of avoiding vertigo is to look at the price behaviour now compared to previous cycles. You can see that there is a recurring theme.
Don’t forget, the chart below is on a log scale. Where do you think that red line is heading to?
On-Chain
Unsurprisingly the on-chain metrics are perking up. This is great to see. We have a monetary network that is booming.
Long time readers might remember that we used to run a Network Demand Model, which can be attributed to the brilliant Charlie Morris at ByteTree. The aim of the model was to understand cycles through the lens of on-chain data. It works well as a momentum guide. Assuming the trend is your friend, we are now into very friendly territory.
Of the 5 signals in the model, 4 are now “on”.? This is bullish. One of the signals that has just turned on is “Velocity”, which tells us the turnover of coins. It has just risen above the 2 year median, denoting bull market territory.
Our fair valuation model (blue line, below, is fair value), which acts as a sense check since it lags on-chain activity, is racing to catch up with the price.
What we want to watch from a trading perspective, is the green line in the chart below. In the 2020/21 bull market, the premium to fair value reached around 70% before the market took a breather.
Fair valuation today is around US$70,000, so we should perhaps get ready to wind in our horns at around US$115,000, but this will be a moving target.
One metric I particularly like is the activity in BTC (as opposed the US$ equivalent). This is shown in the blue line. Clearly this price action has lured out some longer term holders, but that’s what we want, ultimately.
Dispersion of ownership enhances the strength of the network.
The rise echoes late 2020, the early stages of the bull market in the last cycle.
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Hash Rate
If you’re worried about network security, don’t be. The amount of energy being used to provide network consensus continues to rise.
You’re probably wondering about the scale on the y-axis. That’s the hash rate.
A hash is a guess. At the moment the hash rate is around 800 exahashes per second. One exahash is a quintillion hashes per second.
A trillion dollar bills put into a line would reach the sun. A quintillion is a million of those.
Per second.
It’s a lot. The network is rock solid. And those numbers continue to grow.
Macro
It’s important to understand the scale of potential demand now that the US election is behind us.
The next chart gives a breakdown of liquid assets, globally. The equity and debt numbers are from the end of 2023, but you get the picture. Note that illiquid assets like real estate, private equity and private credit are not included.
Institutions effectively have a zero percent allocation to bitcoin and crypto. Of course there are some outliers and early movers, but they remain vanishingly small in the context of this picture.
The question to ask, then, is what does a 1% allocation of US$275 trillion do to a market valued at US$3 trillion (which is approximately the size of all crypto)? What does it do to bitcoin, which is valued at US$2 trillion…and where we know that the supply is incredibly tight.
New bitcoin creation is now running at around US$32 billion a year at a price of US$94,000, an annual increase of a mere 0.8%. If you think US$32 billion is a lot, it’s estimated that US$60 billion has come into BTC in the last 30 days.
So if you think you’ve missed it, you might want to reconsider.
The Trump Effect
At the time of the last edition we didn’t know details behind the US election results. Things are now falling into place, and we have a better idea of the makeup of the Trump government.
As most will know by now, Trump has control of all branches of the government. He is in position to make radical changes, and make them quickly, a luxury rarely afforded an incoming President. But while he has a Republican majority, does he have a pro-crypto majority?
The answer is unequivocally yes.
We must hope that the new government finds the time to honour its promises to the crypto community. The signs are refreshingly good. The new President seems to have no problems with assigning people closely associated with controversial causes, to confront those issues. Elon Musk to deal with government waste, RFK to have a go at the state of US health, for example.
It’s hard to imagine anyone being more difficult for crypto than Gary Gensler at SEC. New names and faces should herald a new direction of travel. We’d like to see the FIT21 Bill become law, giving regulators more scope about how they can consider what a security looks like than is possible under the Howey Test. The Howey Test originates from legislation in 1946, so is nearly 80 years old and obviously not fit for purpose.
It's also worth noting that Trump plans to stick all of the 208,109 BTC held by the Federal Government into a strategic reserve.
If that doesn’t set an international precedent, it’s hard to know what does.
UK inflation “surprises” to the upside
We’ve written in the past about our belief that this would be an era of inflation “volatility”. This is an important concept and central to the idea that we are not out of the woods.
This is a massive issue for politicians, who don’t want high inflation, but don’t want high interest rates either. Yet they’re going to have to stomach one or the other. If history is any guide, they’ll probably plump for the former, because it’s less immediately painful for the average citizen and one way to reduce a debt mountain is to inflate it away.
The feckless new UK government is probably going to deliver both, as they wield their Marxist wrecking ball on private property.
It’s depressing that inflation is already “surprising” to the upside (see below), although perhaps unsurprising given the pay rises dished out to private sector workers. Still, expect more of the same.
Rachel Reeves - what do you think?
Can I point readers in the direction of this brilliant piece by Michael Taylor.
As well as being a fine, honest piece of writing, it’s a witheringly analysis of Rachel Reeves, and perhaps reflective of standards in wider society.
I remember people being fired from their jobs after years of work because they were discovered to have lied on their CV. It was a sign of utmost untrustworthiness. Now it seems merely worthy of a shrug.
We have a Chancellor of the Exchequer who has done the same. She has fabricated her past.
She has lied to the nation about her credentials and it has landed her with second most important job in the land. It is a disgrace.
Why isn’t this a bigger story?
Michael finishes:
“That one of the most senior posts in the British government is occupied by a liar is also an indictment of the rest of the establishment who were either strategically incurious about her, or who knew she is a liar, and simply thought it didn’t matter. During Watergate, the killer question was: ‘What did the President know, and when did he know it?’ The same question should be asked of Sir Kier Starmer.”
Quite.