NYDIG Research Weekly: The Catalysts for Bitcoin
by Greg?Cipolaro, Global Head of Research?and Ethan Kochav, Research Analyst
A weekly digest of Bitcoin news and insights.
IN TODAY'S ISSUE:
No News Is Good News
Surprisingly, bitcoin markets have been quiet the past few weeks. This comes amidst volatility in the geopolitical backdrop, rising interest rates, and an evolving regulatory landscape in Washington and Brussels. The price of bitcoin has been rangebound, generally in the upper-$30k to the lower-$40k range, which has been unexciting, especially when juxtaposed against what has happened in traditional equity, bond, and commodity markets. Equity markets, such as the S&P 500 and Nasdaq Composite are down -7.1% and -12.8% respectively on a year-to-date basis and have seen elevated volatility levels. Bond markets have had a tough go of it as well, with the market pricing in six 25bps rate hikes over the next 12 months. On a year-to-date basis, long-term treasuries (TLT ETF) are down -10.8%, investment-grade bonds (LQD ETF) are down -7.9%, and high-yield bonds (HYG ETF) are down -4.8%. Commodities have been on the wildest ride of all, with oil prices up 36.9% and the price of metals like nickel up 107.7%. And while crypto trading infrastructure is often criticized for not yet being fully baked, the issues with the LME, which cancelled $3.9B worth of mutually agreed-upon nickel trades, highlights the fact that structural issues can even occur in traditional markets.
Against this backdrop, we think it is impressive that bitcoin has been flat. This is especially true given that correlations with risk-on assets like the stock market have been near the highs. We think a couple of things are at play here. First, the volatility in the macro and geopolitical backdrop has commanded investor attention, especially for those who also invest primarily in traditional asset classes. Bitcoin typically represents a small allocation for those investors and given the volatility in the rest of their portfolios, it should come as no surprise that their attention has been focused elsewhere. Second, the industry has been searching for new narratives and a catalyst to drive prices. While many of the existing narratives of Bitcoin remain true, such as growing institutional adoption, investors holding more coins for longer time frames, and growing payment uses, investors are always on the lookout for the incremental. Perhaps that new storyline emerges relatively soon. The spring conference season is set to begin, with Bitcoin 2022 in Miami on April 6th. While it is difficult to predict what will come out of this year’s conference, the 2021 conference was where El Salvador announced it would make bitcoin legal tender. Other potential catalysts include a less hawkish rate environment, a cooling of geopolitical turmoil and a cessation of the conflict in Ukraine. It also won’t hurt that after April 15th any tax-related selling by retail investors should be in the rearview mirror.
The March Towards Regulatory Clarity Continues
On Monday, the EU Parliament adopted a bill, “Markets in Crypto-Assets” (MiCa), that aims to establish a framework for regulating crypto activity in the EU. The crypto community had a scare over the weekend as a line was added to the proposed bill that would set minimum environmental standards for tokens to be traded in the region, which was viewed as a potential de-facto ban on proof-of-work cryptocurrencies like Bitcoin. Fortunately, the Parliament voted against including the provision. This does not yet mean the bill is law; the final language still needs to be negotiated between the Parliament and two other EU government bodies, the European Commission and the Council of the EU.
Despite the scare, the advancement of this bill, as well as the executive order issued last week by the White House, illustrates that governments are becoming serious about establishing rules and regulations. As the industry and its use cases have rapidly grown, it has become impossible for decisionmakers to continue to ignore it. We welcome the increase in regulatory clarity.
Digital Scarcity in the Age of Technical Abundance
Over the past 74 years, since the creation of the transistor in 1947, humanity has undergone one of the greatest technological revolutions in its history. The “Information Age” transitioned humanity from an analog world to a digital one. PCs, cell phones, television, the internet, digital imaging, telecommunication networks – these inventions were all outgrowths from the Information Age. The backdrop that enabled these advancements was the result of one of the greatest deflationary, if not the greatest deflationary pressures, over the past century and perhaps human history – the decline in the cost of compute and storage. The dollar cost of a GFLOPS (billions of floating point operations per second), a measure of compute performance, has declined in real terms by 4.7x1016?times since 1945.
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Bitcoin, however, is all about creating digital scarcity amidst a world of technical abundance. Bitcoin is not the only way nor was it the first way to ensure digital scarcity. Those were solved long before the advent of Bitcoin with Digital Rights Management (DRM) practices, techniques put in place by central entities to manage and adjudicate ownership of digital content. Bitcoin, however, is a novel approach to creating digital scarcity without the need for a trusted third party.
Why do bitcoins, the native asset of the Bitcoin network, need to be scarce? Simply put, to imbue value and provide strong proof of control. Only one user has ownership over a bitcoin, a proof of control created by a chain of digital signatures, and miners are economically motivated to expend real-world resources to secure and expand the blockchain.?
Why do bitcoins have value? One could answer this with objective measures alone, but there are subjective factors as well. Objectively, bitcoins are globally transmissible 24/7/365 at usually low fees. They are highly divisible, down to fractions of a penny. Finally, they are easy to transport, with your entire worth being able to live in your head by memorizing a 12–24-word seed phrase. Subjectively, things have value that society agrees have value, often a difficult concept for some to appreciate. These tend to be a function of the size of universal appeal. Using art as an extreme example of subjective value, most would agree the Mona Lisa is priceless, but few other than a child’s parent would agree that their art is priceless.?
Bitcoin itself, its entire codebase, is freely copyable and editable by anyone on the internet. What imbues it with value, despite the thousands of other digital assets that exist today and the ability for anyone to replicate its code, is the societal recognition this unique version is Bitcoin, a technology that pioneered the industry. Bitcoin’s community, its open-source developers, miners, merchants, trading markets, brand recognition, and investors, even in an age of digital abundance, is not something that can be replicated.
Bitcoin?increased by 3.2% on the week. Equities also rose, with the?S&P 500?up 3.6% and the?Nasdaq Composite?up 3.7%.?Goldfell by -2.6%. Bonds were mixed on the week, as?Investment Grade Corporate?Bonds increased by 1.1%,?High Yield Corporate Bonds?rose?by 0.9%, and?Long-Term U.S. Treasuries?fell by -2.0%. Real yields and inflation expectations increased.
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