Bitcoin & The Macro Environment

When we published our FinTech: The 2020’s post in December we wrote about Bitcoin as one of the most impactful yet controversial FinTech innovations over the last decade. We highlighted the fact that ~$17.0 trillion or ~70% of sovereign credit was negative yielding, that there was another $1.2 trillion in negative yielding corporate debt, and that Central Bank (“CB”) balance sheets expanded by $12.0 trillion+ over the course of the decade. We said QE turned your checking account into cash, your savings account into your checking account, the bond market into your savings account, the equity market into the bond market, the venture market into the equity market, and gave birth to the crypto market as a replacement for venture market risk. Little did we know what the first 6 months of 2020 would have in store for the macro BTC story.

Below we outline the macro environment as it stands today (thru a US Centric viewpoint), potential implications for BTC, and BTC specific catalysts. To the extent the macro environment is not of interest jump down to the bottom.

Not Your Parent’s QE

We have seen unprecedented fiscal & monetary response on a global basis in an attempt to counteract the economic damage inflected from COVID-19. To be clear the acute liquidity crisis we saw in March has been dubbed the “Dollar Shortage” but warning signs occurred long before anyone ever uttered the words “Coronavirus.” Markets started showing pockets of weakness as early as April ’19 when the Fed Funds flipped IOER (Interest Rate on Excess Reserves); which shouldn’t happen. The alarm bells rang louder in Sept of ’19 as the repo market blew out, and ever louder into-year end. As we turned the calendar towards March, the Fed promised “unlimited” buying of Treasuries and MBS and Fed Chair Powell threw caution to the wind as it pertains to the market painstakingly going over every word of every statement as “Fed Speak” by appearing on 60 minutes and saying “We’re not out of ammunition by a long shot….there’s really no limit to what we can do with these lending programs that we have.” The Fed established a number of novel facilities including the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, The Primary Market Corporate Credit Facility, The Secondary Market Corporate Credit Facility, and The Term Asset-Backed Securities Loan Facility….The Fed increased the size of its repo operations to effectively infinity, while dropping interest rates on repo to zero and reducing reserve requirements to zero. They opened up FX swap lines to most CB’s around the world all to address the “Dollar Shortage.” Notably the Fed did not enter into a swap line with the PboC or Russia. Keep in mind during the depths of the GFC there was significant debate as to what QE meant, whether or not the Fed had the power to do so, with Congressional debate over the types of assets they can purchase. There was a lot of discussion about “how can we pay for this?” This time there wasn’t any real opposition from the left or the right. In March we crossed the rubicon and there is no going back; the “How Can We Pay For This?” question is not being asked and the US Gov’t & the Fed are both kicking the can down the road for future generations to deal with.

The Fed’s Balance sheet has expanded by ~$3.0 trillion YTD…to put that in perspective in the 30 years prior to the Global Financial Crisis (“GFC”) the Fed’s balance sheet expanded by $700 billion…that took 10 days in March. During the roughly ~6 years of QE1-QE3 (Dec ’08-October ’14) The Fed’s balance sheet expanded by ~$2.9 trillion or less than January-June of 2020. This doesn’t take into account the ~$3 trillion of fiscal stimulus we also saw in 2Q through the CARES Act, extended unemployment benefits at the Federal Level, PPP, EIDL, and countless other bells and whistles. Not only is the size & speed unprecedented but the breadth and “creativity” is as well.

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CB Balance Sheets

We had ~11+ years of QE which failed to manifest itself in inflation as it pertains to Headline Core CPI (we can argue whether or not this is appropriately calibrated). But the biggest difference between then and now was several fold. Prior to the GFC banks had limited excess reserves so when the Fed started to expand its balance sheet that went into the excess reserves held by the banks and they didn’t lend it out. This could clearly be seen in the difference between the Fed’s balance sheet expansion & M2 expansion (or lack thereof) in the initial 16 months from August ’08-Dec ’09 vs. the first 6 months of 2020. During round one of QE the Fed’s balance sheet expanded by $1.3 trillion which at the time was 147% while M2 only expanded by $693.6bn which marked an 8.9% increase. During 2020 YTD we’ve seen the Fed’s balance sheet expand by $2.9 trillion (~70%) and M2 expand by $3.0 trillion which is +19.6% YTD.

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M2 Growth vs. Fed Balance Sheet Growth GFC vs. Today

To put this in perspective we are seeing truly unprecedented growth in M2. The last time M2 was expanding at this pace was WW2 when annual growth peaked at 27% YoY. During the totality of the GFC M2 never increased by more than 10.6%; yet 2020 is on track for +25–40%. If we look at M2 Growth over time it has more or less grown linearly until 2020 which is the first significant hockey stick growth we’ve seen. As of the 6/15/20 reading M2 was + 24% YoY (the top observation since WW2), +12.7% QoQ (a top 8 observation since 1980 all of which have occurred this quarter), +1.4% MoM, and +0.44% WoW all of which stand in the top 4% of 3.5% of observed periods back to 1980.

We can look at the same thing on the Fed’s Balance sheet where growth is in the top 3–6% YoY & QoQ dating back to 1980 on a % basis and at all-time highs on a notional dollar basis.

Despite the early data there is a loud contingent of macro investors & economists that highlight monetary expansion alone is not sufficient to generate inflation; and they have been the right camp for the past 10 years. Japan is the poster child of debt-deflation; where monetary financing of the deficit has been ineffective. The deflation camp makes the argument that high unemployment (a portion of which may be structural in a post-COVID-19 world) coupled with tepid demand will lead to deflation. We know technology is incredibly deflationary and those trends have only accelerated. While some fiscal programs like PPP & EIDL required banks to lend, outside of the Federal programs they have pulled back as they can’t tell who is credit-worthy and who isn’t. This has manifested itself in delinquency data where Americans deferred debt payments on more than 100 million accounts from 3/1–5/30. The velocity of M2 also doesn’t seem to be a problem yet which is another point the deflation proponents point to.

The outcome in part will be predicated upon what we think the economic recovery looks like post COVID-19 (“V” “W” “L” shaped, etc…). On the bullish side despite strained small business balance sheets (which could potentially be targeted through more fiscal policy) personal balance sheets look strong with the savings rate hitting an all-time high in April of 32.3% (prior to COVID-19 that number was never higher than 17.3% and had cleared 10% only once since 1995. It dropped a bit in May but still sits at a lofty 23.2%).

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US Personal Savings Rate

Brian Moynihan was on CNBC several weeks ago and noted that in May transactions were only down 5–10% vs. down 30% in April. However most notably he highlighted that balances of checking accounts <$5,000 had 30%-40% more money in them compared to 12 weeks ago. This wealth effect has happened nationwide as evident by the savings rate. You have industries such as Travel & Restaurants which are typically $1.5 trillion+ / year in the US that are a fraction of that YTD due to the restrictions in 2Q.

We tend to fall into the minority camp that the combination of fiscal & monetary stimulus will lead to that ever elusive inflation. In 2010 as we were recovering from the GFC there was a government austerity movement which led to the Tea Party’s prominence; that seems incredibly unlikely to happen again across either side of the aisle. In fact, we believe fiscal policy will continue to be more constructive with extension of Federal unemployment benefits ($600/week) until the election, coupled with likely round two of the $1,200 stimulus checks (depending upon polling), and perhaps a ~$1.5 trillion infrastructure bill. The process of de-globalization and domestication of supply chain should also have inflationary tailwinds and we believe this too will have bipartisan support.

Paul Tudor Jones wrote an excellent letter earlier in May called The Great Monetary Inflation where he outlined assets to own as inflation hedges in which, he identified Gold, The Yield Curve, NASDAQ 100, and Bitcoin as some of the assets most likely to outperform. He highlighted that the goal is to be invested in the “fastest horse” and in his opinion there’s a non-zero chance that’s Bitcoin which is why the fund made a ~2% allocation to BTC. We mentioned the tailwinds of this macro environment to NASDAQ 100 and more specifically best in class SaaS stocks in two separate posts last week & back in May. PTJ ranked these “Stores of Value” across four characteristics:

· Purchasing Power- How does this asset retain its value over time?

· Trustworthiness- How is it perceived through time and universally as a store of value/

· Liquidity- How quickly can the asset be monetized into a transactional currency?

· Portability- Can you geographically move this asset if you had to for an unforeseen reason?

One of the most quoted line in PTJ’s letter was the argument he made for owning BTC do its scarcity:

“I also made the case for owning Bitcoin, the quintessence of scarcity premium. It is literally the only large tradeable asset in the world that has a known fixed maximum supply. By its design, the total quantity of Bitcoins (including those not yet mined) cannot exceed 21 million. Approximately 18.5 million Bitcoins have already been mined, leaving about 10% remaining. On May 12th Bitcoin’s mining reward — the pace at which the supply of Bitcoin is increased — will for the third time be “halved” (falling from 12.5 to 6.25 Bitcoins per block of transactions added to the blockchain). Future halvings will likewise occur approximately every four years consistent with Bitcoin’s design, thus continuing to slow the rate of supply increase and causing some to estimate that the last available Bitcoin will not be mined for another 100+ years. This brilliant feature of Bitcoin was designed by the anonymous creator of Bitcoin to protect its integrity by making it increasingly near and dear, a concept alien to the current thinking of central banks and governments.”

We too want to own the fastest horse and believe there’s a number of BTC specific catalysts as to why that will be the case.

BTC Specific Catalysts

Incremental Access Points- With every year that goes by there continues to be incremental ways for both retail & institutional investors to access BTC. During the peak of the 2017 retail bubble the primary “fiat on-ramps” consisted of firms like Coinbase, Kraken, Bittrex, Bitstamp, ItBit, and Poloniex in the US. If you were more risk taking ex-US you could access exchanges like Bitfinex, or crypto-to-crypto exchanges like Binance (which itself was only launched in mid-2017) as well as Asian exchanges such as OKex and Huobi. Not exactly household names that give people comfort when deploying real investable dollars; particularly when there were long backlogs, and passport “selfies” required as part of onboarding.

Fast forward to 2020 and you can access BTC through apps like Square Cash (which has 40.0mn MAU), Robinhood (which has become the de facto brokerage account for American millennials with 13.0mn+ users and counting), eToro (one of the leading apps for millennial investors globally with 13.0mn+ users). There are rumors that PayPal is looking to roll out some BTC functionality (to its 325mn + users) given the success Square has had life-to-date. Grayscale’s GBTC product is still one of the few accessible via traditional brokerage accounts and continues to see an uptick in adoptions; as of 6/23/20 it had $3.6bn AUM up from $1.89bn at year-end last year (or +93% vs. BTC +33%).

Institutional investors can transact via CME futures which continue to trade at new record volumes; and they have also added options which is further institutionalization of the asset class. Fidelity is now offering a product for high net worth individuals as well as a custody option. NYSE incubated company Bakkt is now routinely trading $50mn+ days while “custodying” billions of BTC.

While the “herd” hasn’t quite come at the pace that some predicted in 4Q17 everyone from Fidelity, to the NYSE, to CME, to GS, BNY, State Street, and JPM are all either in the market or exploring ways to participate in the market once there is sufficient client demand.

Companies like TD Ameritrade & E*Trade with their 12.0mn & ~5.5mn accounts respectively have long been in talks to roll out BTC trading with ErisX (with pending acquisitions from Schwab / MS respectively TBD on timing). Fidelity & Galaxy both are reportedly looking to offer a “GBTC” equivalent to the long-tail of the RIA community which is a significant pool of capital. If Fidelity is able to tap into its traditional distribution channels; that may have the impact of the ever-elusive ETF (more on that below). There is ~$11.0 trillion of investable assets in the US at RIA’s with ~70% held at wirehouse banks and ~30% thru independent channels. FinTech companies such as Artivest, iCapital, & CAIS have built great businesses distributing LP interests to the RIA community which has been systematically underweight alternative assets. In June Galaxy & CAIS announced a partnership to streamline access to Galaxy funds which will include this BTC product. In order for a fund to be approved on the CAIS platform it needs to gain approval thru the consultant firm Mercer; and these consultants are often the gatekeepers to the institutional community. They are connected to thousands of RIA’s with trillions of investable assets all of which would have an approved way to access BTC run by a household macro manager in Mike Novogratz.

Another pool of untapped capital with virtually 0% allocation to BTC at present are retirement assets. In the US these assets comprise ~1/3 of household assets equating to ~$29 trillion; of that $15.0 trillion resides in 401Ks and IRA’s for ~79 million Americans. Kingdom Trust, a provider of self-directed IRAs has released a feature under a new brand Choice, to allow individuals to access BTC within a self-directed IRA alongside stocks, bonds, and ETFs. The Choice team estimates there are ~7.1mn Americans who own bitcoin, have a retirement account, but don’t have the option to hold BTC in their retirement account.

Institutional Adoption

While the infrastructure investments alluded to above were made in anticipation of institutional adoption; the public facing institutional adoption has been slower to emerge. We think that starts to change as “career risk” is now being mitigated on two fronts. The first and most important being having the appropriate safe guards, institutional access points, and custodial requirements needed. The second part being reputational risk, which is mitigated when you have investing legends like Paul Tudor Jones publicly disclose a 2% stake and David Swenson at Yale has made his first allocation. This follows a long line of prominent investors with publicly disclosed BTC positions such as Alan Howard, Mike Novogratz, Pete Briger, Bill Miller, Abigail Johnson, Dan Morehead, etc… and countless more who have yet to disclose this position. Jim Simons and the Renaissance team have put up the single most impressive returns of any hedge fund over the past 30 years and in April they updated their Form ADV to include Bitcoin Futures for the first time. There are rumors that Kevin Warsh has influenced Stanley Druckenmiller who also owns a BTC position.

Cambridge Associates, one of the preeminent consulting firms wrote a paper in early 2019 stating that they believe, “it is worthwhile for investors to begin exploring the cryptoasset area today, with an eye toward the long term.” As mentioned above these consultants serve as gatekeepers to the trillions of capital in the pension / endowment / foundation industry. We have seen some early movers such as Yale, Harvard, and Princeton make allocations to funds in the space. Coupled with the PTJ & Renaissance news, alongside the Cambridge report, and the new access options alluded to above we’d expect to start to see fast followers as these firms look to identify optimal portfolio allocation to protect against inflation risks.

Fidelity has leaned into the industry in a big way and published The Institutional Investor Digital Asset Survey 2020 Review. They highlighted that digital assets are gaining in both favorability & appeal amongst institutional investors, with ~80% of investors surveyed finding something appealing about the asset class. This survey was conducted amongst 800+ investors across the U.S., and Europe with 36% (27% in the US / 45% in Europe) saying they are currently invested in digital assets, and ~60% saying they believe they have a place in the investment portfolio. Looking out five years, 91% of respondents who are open to exposure expect to have at least 0.5% of their portfolio allocated; which would be a significant tailwind to the asset class.

At the Real Vision Crypto Gathering Conference Mark Yusko highlighted that Commodities only received a true “stamp of approval” from the endowment community as an investable “asset class” post the advent of the GSCI, once Bankers Trust created a principal protected note. If there is one thing Wall Street is still top notch at, it’s creating structured products. Even with the volatility associated with BTC given the robustness of the futures market, and fledgling options market you have to imagine these types of structured products are not far behind.

Short A Call Option: At the same RV Conference Raoul Pal mentioned those individual and institutional investors that did not have a position in BTC were effectively “short a call option” given the asymmetric risk / return profile. He noted his belief that these firms will be forced to cover the higher BTC is which is analogous to trading gamma in the options market. The higher BTC goes the more net demand there will likely to be to buy from institutional investors who have stayed on the sideline. This is why the industry reports, the infrastructure providers, the access points, the mitigation of career risk, etc.. are so critical so these institutional investors can be on the “leading edge” and turn that short call option into a long call option. Given the existing funding gaps for pensions coupled with the outlook for bonds in the intermediate to long term they need to find new ways to make up those deficits; an uncorrelated asset that has led to outperformance, while mitigating volatility, should screen attractive.

BTC as “Digital Gold”- The Digital Gold Narrative has clearly won the day for BTC; and gone are the days when people complain about transaction fees for buying a theoretical cup of coffee (which would still be largely de minimums and cheaper than a credit card most of the time). Starting next year BTC will have a higher “stock to flow” (the current amount fo supply available against the amount mined in a specific year) than gold for the first time ever. As PTJ mentioned in his letter if you analyze the properties that gave Gold monetary value it was scarce, durable, relatively easy to make into coins, bars, etc… which made it transferable. BTC is better at all of the above but has the drawback of only being around for ~11 years versus thousands of years. If we look at Gold’s market cap of ~$8.0 trillion; $3.0-$3.2 trillion is not tied to industrial or precious metal use cases; which implicitly results in “money” / “SOV” properties. There’s an argument to be had about how much the jewelry component (particularly in countries like India) accrue to SoV as well. If we look at BTC as a % of all the gold outstanding right now it’s at ~2.1%; if we look at it from an “SoV” / “Money Properties” it’s at 4.8%; both of which have material upside from here as BTC is treated as an asset class.

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BTC vs. Gold Stock to Flow

BTC vs. Gold Positioning- To own the “fastest horse” you have to be cognizant of market positioning. If a thesis is consensus and everyone is already “in the trade” it’s tough to have material upside. As everyone is waiting for Gold to breakout to new highs AUM in gold ETF’s such as GLD, IAU, and GC_F are already at all-time highs approaching ~$100.0bn. The totality of BTC sits at ~$168bn which pales in comparison to the $3.5 trillion invested in gold. What is more likely to go up 2–5–10x? BTC to $340bn-$1.6 trillion or Gold to $16.0-$35.0 trillion?

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BTC Halving- On May 12th BTC underwent the third ever “halving” where the block reward was cut in half from 12.5 BTC to 6.25 BTC; which occurs every 10 minutes. This means on a daily basis the number of newly minted BTC is now on average ~900 vs. 1,800 over the previous 4 years. To put that in perspective in June with BTC hovering between $9K-$10K the average daily inflation has been~$9.2mn which is the lowest level since April of ’19 and a level where BTC has been consistently above largely since 4Q17 (from January 2017 to present the average daily inflation has been $13.0mn). This is significantly less supply that needs to be absorbed by the market on a daily basis.

Supply / Demand Normalization Around Halving- While some were calling for an immediate rally post-halving that hasn’t typically been the case. There’s often a transition of hash power that needs to come off-line as well as miners that were long inventory ultimately have to sell. Markets are not entirely inefficient and these halving dates can be predicted +/- several weeks 4 years in advance, that said this was the first halving most the “institutionalization” of mining. We have seen strong performance in Year 0 (the year of the halving) with an average year of +148.9%, with top performance in year 1 post halving (e.g., 2013/2017) with average performance +2345.3%, with significantly weaker performance in Year 2 Post Halving (-64.6%), followed by more measured performance in Year 3 post (or year -1 prior) of +86.8%. Now this is an incredibly limited data set but if you think headline Core CPI can creep up to the 2.5–3.5% range coupled with these BTC specific supply / demand imbalances its tough to see a scenario where BTC isn’t at new ATH in 2021 if the macro environment plays out as predicted.

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Increased Ownership- Ownership of BTC has increased in breadth which continues to bode well given the network effects associated with it; and the fact that any money or “SoV” has some component of a belief system associated with it. There are now >827,000 active BTC addresses with a balance >1 per Glassnode.

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# of Addresses with >1 BTC

Length of Ownership: The group at Unchained Capital has an interactive “HODL Wave” chart which shows Bitcoins UTXO Age Distribution. This shows the last time a certain number of BTC were moved. As you can see in 2020 ~21.6% of BTC haven’t moved in the last 5 years with nearly ~47% having not moved in the last 24 months. While all money in part if a “belief system” the BTC belief system continues to be notable per the data:

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Unchained Capital “HODL Wave”

Theoretical Cost Basis- In addition to tracking the length of ownership by analyzing UTXO’s you can arrive at a “theoretical cost basis” of BTC or as CoinMetrics refers to it as the “Realized Cap.” This currently stands near the all-time high at ~$5800/BTC. BTC is trending upward against that at a ~57% premium which is in the 50 percentile of observed periods. The chart below shows the cost basis vs. spot vs. that delta over time. As this trends higher it also helps to lessen the “floor” on a risk-adjusted basis and historically has been a very strong entry-point.

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Central Bank Digital Currency (CBDC)- The PBOC has been working on a CBDC since 2017 which will look to be a digital RMB, which has gained steam in recent months. Other countries have begun exploring their own “CBDC” equivalents including Australia (‘19), Bahamas (‘18), Cambodia (‘17), Canada (Oct ‘19), Denmark (‘16), Eastern Caribbean Central Bank (‘17), ECB (May ‘20), Ecuador (‘14), Egypt (first revealed Dec ‘18), Estonia (Aug ‘17), Finland (May ‘17), France (Oct ‘19), Ghana (Nov ’19), Hong Kong (’17), Iceland (Oct ‘18), Indonesia (Jan ’18), Israel (Nov ‘17), Japan (‘17), Lithuania (Dec ‘19), Mauritius (Nov ‘19), Netherlands (‘19), Norway (May ‘18), Republic of Marshall Islands (‘18), Russia (June ‘19), Rwanda (August ‘19), Senegal (‘16), Singapore (‘16), South Africa (’16), South Korea (April ‘20), Sweden (Nov ‘16), Switzerland (Oct ‘19), Thailand (August ‘18), Tunisia (‘19), Turkey (July ‘19), UAE (Jan ‘19), Ukraine (‘16), United Kingdom (March ‘20), Uruguay (‘17), and the USA (Feb ‘18). It’s not just Central Banks, with the largest non-government / government in the world Facebook still looking to launch their own digital currency initiative Libra at some point in 2020.While FB has scaled down aspirations for Libra it will be pegged to the USD. These are completely apples to oranges vs. Bitcoin as they are subject to the same monetary & fiscal policy decisions of Central Banks, just in a natively digital form. What they will do however is normalize the concept of “digital” currency and in Libra’s case provide yet another on-ramp for accessing BTC.

Volatility- Much has been made about BTC’s volatility as an impediment to institutional ownership. If you look at the data that has started to become more normalized. Even given the macro market volatility where we had 20+ bottom or top 1% moves in the S&P 500 dating back to the 1950s, Bitcoin has been a ~90 vol asset on an annualized basis. That’s not exactly a Dow Jones Component but it’s not too far off from a high beta tech stock which institutional investors own in size.

ETF- If it feels like the BTC community has been clamoring for an ETF for an eternity; it’s because it has. The Winklevoss first proposed an ETF in mid-2013 that was shut down by the SEC and since that point in time they have tried again with countless other groups; all of which have been shut down. SEC Chairman Clayton has made it clear not under his watch; the good news for BTC is his watch may soon be ending. Clayton was thrown in the middle of a political firestorm when AG Barr & President Trump pushed to make him the top prosecutor for the Southern District of New York. This would involve him stepping down from his SEC post which would temporarily elevate Hester Pierce (the longest serving Republic of the Commission) as interim Chair. Hester is decidedly bullish crypto in her public comments & even dissented against a rejection of a BTC ETF. She is very much plugged into the industry and would immediate bring to light the flaws that a CEF such as GBTC is able to trade OTC and available for retail accounts at a 20–50% premium to NAV but there is no mechanism of accessibility for retail investors to a spot product. If we look at Gold the Gold ETF’s raised $10.0bn in their first 3 years; and given the electronification of fund distribution coupled with the headline buzz around BTC we would envision a BTC ETF if approved outpacing that over a comparable time period. Clayton’s time at the SEC is still TBD but whomever replaces can only be more open-minded when it comes to BTC. Not to mention we have a CFTC regulated futures market that will have 2+ years of data with some of the largest players in institutional finance participating in the ecosystem; it’s no longer a cypher punk fringe asset that the SEC fears.

Crisis- One of the knocks on BTC had been the fact that it had only existed during a bull market for risk assets without any notable period of acute volatility, particularly when it was of any notable size (with the lone exception being Dec ’18). BTC has emerged through the crisis thus far in 1H20 and while it had its own periods of volatility (more of a result of market microstructure as opposed to anything else) it is still one of the top performing macro assets YTD surpassing gold and any of the broader market indices. If we see continued volatility over the balance of the year and BTC can remain both uncorrelated with a positive return drift it will have passed the “crisis” test in what can only be described as the most profound liquidity crisis the market has seen in decades.

Market Microstructure- While BTC is positioned as a SoV on short time horizons like any other asset it acts as a risk asset. The difference with BTC is the fact that the market is still so nascent and the incremental buyer / seller is largely determined by leveraged futures exchanges such as Bitmex, FTX, OkEX, Huobi, or more recently Binance. BTC had its own “Black Thursday” on 3/12 when it sold off as much as 50% intra-day and “closed” down 37.1%; the second worst day ever (this was the day the S&P sold off 9.5% and all risk assets had a correlation of 1). This was caused by issues on Bitmex the largest futures exchange which offers 0–100x leverage for institutional & retail investors. At its peak the Bitmex swap was trading ~$1,000 below Coinbase spot prices (where it typically trades in line). This resulted in several fund liquidations. BTC has shown the ability to quickly unwind the leverage in the system and course correct which is was able to do here. Notably Coinbase disclosed their metrics from Black Thursday and said they saw record numbers in cash & crypto deposits totally $1.3bn, a 2.0x increase in new-user sign ups, a 3.0x increase in trading users and 6.0x increase in total traded volume. Their customers bought 67% more than they sold during that crash. I think this is a good proxy for the “retail market.” This behavior is what we’re also witnessing in public equity markets as retail investors have exhibited no fear buying dips.

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Coinbase “Black Thursday” Metrics

Everything Else- The above catalysts refer to BTC solely as a “Digital Gold” / “SoV” and fails to give any credit or credence to payment potential, scaling solutions, Lighting Network or other “Layer 2” solutions that will look to “settle” vs. the BTC blockchain. It doesn’t address the generational wealth transition and the fact that many younger Millennials and the totality of Gen Z grew up digitally native; and as they have to deal with problems left to them by boomers, will likely look for digitally native solutions a la BTC. The point of this is to articulate BTC needs to do little else but continue to “work” as is for it to be an attractive asset in the context of the broader economic backdrop. To the extent there is any meaningful traction outside of that it should all be viewed as upside.

BTC as “AltaVista” or “MySpace”- There are a lot of technologists that look at BTC and believe that Generation 1.0 of any nascent technology is rarely the ultimate winner and as a result there will be a new digital currency that will usurp BTC. In our view the biggest TAM for blockchain is “money” and the only thing that needs to be sovereign-grade censorship resistant is money. No other cryptocurrency will be able to emulate BTC’s origin story with a fair launch, no capital raised from VC’s, or nation states, and an anonymous founder that has yet to be identified so as to not have a centralized figure from which to guide the forward path. Anyone had the ability to buy it regardless of geographic location or net worth. These factors are critical for something to be a “pricing currency” and attempts to emulate it have been chased by VC dollars with founders trying to remain anonymous but still biting. We don’t believe the next global “SoV” will be funded by A16z, Bain, Sequoia or any of the other VC funds in the space as that’s the antithesis of creating a new form of “hard money.”

Bottom Line: In the context of QE Infinity & Beyond, coupled with unprecedented fiscal policy responses individual & institutional investors need to find a way to hedge against “inflation risks.” Our favorite assets for that trade are BTC & Critical “infrastructure” technology stocks; both of which can also work well in a deflationary environment; heads I win, tails you lose.

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