Hi everyone,
I’m probably not the only person no longer sure what day of the week it is. When decades get crammed into a week and weeks get crammed into an hour, it’s unsurprising that we lose our natural connection to time.
Those of you who have been reading us for a while know that crypto markets are fascinating even when not much else is going on in the world. When there are fascinating structural shifts happening out there, our sector becomes more compelling than ever. In THE BRIEFING this week, I go into more detail on why the chaos and confusion around the world will broaden interest in bitcoin, and where this might lead. (No, it’s not a “bitcoin fixes this” moment, it’s more complex than that.)
There is also plenty of market comment, with some policy and development outlook thrown in. Because the turmoil is not yet over, I’m sticking to the new format of “OMG” and “Life goes on.” This categorization sort of applies to life generally these days, doesn’t it?
Get comfortable, and read on.
- Noelle Acheson
(The song in this week’s subline... not sure about the bright sunshiny day, though.)
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Why global interest in bitcoin is just getting started
After the market storms of the past couple of weeks, we could all use some (relatively) good news. And it’s this: Storms bring destruction, but also clarity.
As I write, bitcoin is bouncing, but who knows what wild swings it will have gone through by the time this is published. So, bitcoin’s price is not where to look for clarity now. It’s more existential than that.
Out of the chaos of the last couple of weeks, in which everything moved together, a clearer distinction has emerged between asset classes.
Greater clarity itself may be good news, but what we’re seeing is not.
Let’s walk through the new fundamentals.
Come rain or shine
First, equities: Expected earnings are down across the board, possibly by a whopping amount. A couple of weeks ago, in the U.S. and Europe, business was humming along, albeit with trepidation. Now, bars and restaurants are closed in many population centers, events have been cancelled, shops are shut, planes are grounded…. The list of sectors impacted by the necessary virus precautions is long and alarming.
Next, government bonds: If there’s one thing the bond market hates, it’s inflation. The unwinding of globalization as a result of constricting supply chains will push up manufacturing costs which will feed through to prices. Liberally sprinkle money around the system in the hopes of stimulating spending, in a supply crisis, and you add to the inflationary pressure. Nominal yields on public debt are at historically low levels; inflation will push even more real yields into negative territory.
As for corporate bonds, the sharp drop in earnings coupled with increasing costs could trigger a wave of defaults.
What about gold? The traditional safe haven will probably do well in the medium term as investors remember its anti-inflationary properties. Gold traditionally outperforms in low-rate environments – no shortage of those these days. Plus, its lack of income makes it less vulnerable to drops in economic activity.
And then there’s bitcoin. Its high volatility makes it unsuitable for many investors. But those that think gold makes sense in this world gone mad are most likely going to take a closer look, especially after the perspective-changing storm we’ve just weathered (with probably more to come). Even those skeptical of gold’s place in a diversified portfolio are bound to be curious about a digital alternative that solves for some of the metal’s weak points while revealing relationships with the broader economy that no other asset has.
Last week I wrote about how it’s not a safe haven. Here’s the thing: it doesn’t need to be.
For those worried about inflation, bitcoin is even more resistant than gold. Its hard cap and pre-programmed supply are immune to fluctuations in price. A sharp jump in the price of gold, however, is likely to bring more supply onto the market as production ramps up, and could even impact the estimated supply limit as alternative mining methods become profitable.
For those worried about a sharp economic slump, bitcoin is practically the only asset not directly impacted by macroeconomics. There’s no income to cut, and no supply chains to hinder access. External factors such as energy costs and supply chains can impact miner economics, but bitcoin itself adjusts for shifts in the maintenance of its network. When miners close down, bitcoin becomes cheaper to mine, which eventually makes the enterprise profitable again.
Save it for a rainy day
What makes bitcoin even more of a unique asset class is that it can be indirectly impacted by macroeconomics, in a big way. The impact will come from many vectors, but especially loose monetary policy, the currency markets, emerging economies and populist tendencies.
1) Loose monetary policy: With central banks around the world hitting the markets with whatever they can, money supply constraints have been thrown out the window. As this crisis unfolds, the amount of money that will enter the system to help out not only markets but also citizens and companies, will dwarf what we saw in 2008. Back then, the markets were threatening to drive the economy into a wall, so reassuring them was paramount. Now, the threat to the economy is driving markets into the wall. The usual tactics that assuage market panics aren’t going to stimulate demand that is reeling from mandated shutdowns, job losses and generalized fear.
Printing money could perhaps help if it actually gets into the hands of the consumers, but that will create inflationary pressure, in an economy with no tools left to fight it. The usual anti-inflation weapon is raising interest rates – but doing that in a heavily indebted environment could trigger waves of corporate and even sovereign defaults.
Growing inflationary pressures and steady currency debasement will most likely increase interest in disinflationary assets such as bitcoin and gold that can also be used for payment in some circumstances.
2) Currency markets: Investors around the world are fleeing into dollars, pushing up its value relative to other currencies. This could help the U.S. consumer by making imports cheaper, if imports weren’t disrupted by supply chain constrictions. But with a stronger dollar, U.S. manufacturing will become uncompetitive, and foreign holders of dollar-denominated debt could get pushed into default. Other countries' import and debt service costs will skyrocket, weakening their currencies and pushing up the dollar even further.
The ballooning demand for dollars could lead to a currency liquidity crunch – the swap lines extended to foreign central banks in last Sunday’s Fed intervention were expanded even further on Thursday, a worrying sign that the initial measure wasn’t enough to relieve the strain on the FX markets.
Calls are growing for concerted action, similar to the 1985 Plaza Accord – but getting economic powers to follow the lead of an “America First” government whose leader based much of his campaign on promises of a wall is going to be a much harder challenge than in the post-stagflation desperation of the late 20th century.
With fractures in the global currency order becoming increasingly apparent, economists and investors will be asking what the next monetary order will look like. Bitcoin may or may not be part of that solution, but it is a new tool in the box.
3) Emerging economies: The sharp escalation of dollar-based prices, combined with a demand crunch, could push non-dollar economies into recession, which is likely to lead to social unrest. In some parts of the world, this could be met with swift retaliation or even regime change. The confiscatory bias of political parties navigating a power struggle could intensify interest in a liquid and semi-private store of value.
4) Populist tendencies: While more established democracies will deal with recessions and social unrest through negotiations and trade-offs, even they could veer towards populist tendencies. These will most likely take the form of additional support for overwrought health systems, as well as for citizens and companies hit hard by mandated shutdowns and resulting slump in demand.
To keep up the pretence of balanced budgets, this support is likely to be paid for through fiscal policy, which means tax increases. While bitcoin should never be used to avoid taxes (never, ok?), investors in some jurisdictions may feel that the risk of stiff penalties when caught is worth it.
But more importantly, fiscal measures are generally more lenient on capital gains than on high incomes, in the spirit of encouraging investment - this could push high-net-worth individuals towards assets with a high risk-return profile.
Chasing rainbows
In a market where everything goes up, the resulting dust can blur big-picture vision. After a drenching storm, there is damage, but the dust is gone. Edges are sharper and colors are more vibrant. To stretch a metaphor even further, maybe the sun won’t be out for a while, but as we look anew at previously held assumptions, it is likely that investors around the world will see in bitcoin attributes that until now have not been so important.
This is not investment advice, obviously, and all investors work under different risk-return parameters. It is a reminder that we should all question assumptions, get informed, ask different questions and think things through. And now is a better time to do that than ever before.
Disclosure: Nothing in this newsletter should be taken as investment advice. The author is a long-term holder of a small amount of bitcoin and ether. Her opinions are her own and do not necessarily reflect those of CoinDesk.
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OMG
Experts discuss the impact of quantitative easing (QE) on bitcoin: some point out that as asset prices respond and move upwards, bitcoin’s value will become more apparent. Others cite the upcoming halving and remind us of how something like QE is just not possible with bitcoin. QE-induced inflation, however, will not be a factor in bitcoin’s reevaluation, as some bitcoin advocates are claiming. TAKEAWAY: QE is a very misunderstood concept, and while it is likely to support asset prices, that doesn’t mean they’ll be moving up in a sustained way any time soon. Also, QE is not inflationary, but nor will it be enough to get us through what’s coming – that will probably take direct handouts, which is inflationary, and that is positive for bitcoin.
Chainalysis published a detailed report on the wild moves in the crypto market of a couple of weeks ago – well worth a look, even if only for the compelling charts. TAKEAWAY: A reminder that other assets don’t leave breadcrumb trails like crypto assets do – their blockchain movements reveal much about investor behavior. For instance, professional traders were responsible for the bulk of the strong inflows of bitcoin onto exchanges, with transfers between 10 and 1,000 BTC responsible for 70% of the flows. Most of that has been sold by now.
Let's stick with unusual metrics for a bit. According to crypto analytics firm Coin Metrics, most of bitcoin’s recent sellers were short-term holders. TAKEAWAY: The “revived supply” metric tracks how many coins are moved on-chain after being untouched for a specific period of time. On March 11th, just over 281,000 BTC that had been untouched for at least 30 days were moved, but only just over 4,100 BTC that had been untouched for at least one year. This implies that long-term holders are sticking it out.
As an extension of the above, a net unrealized profit/loss analysis shows that more investors are holding bitcoin at a loss now than at a profit, according to analysts at Glassnode. TAKEAWAY: This tends to introduce support to the price as most investors prefer to wait until prices recover before selling. It could also dampen any rally as spooked holders decide to offload as soon as profitably possible.
Investor and analyst Willy Woo shared some relatively bullish charts that show that bitcoin’s fundamentals and market sentiment might have turned a corner. TAKEAWAY: Of the charts, only one uses traditional market metrics – bitcoin and gold prices seem to be decoupling from the S&P 500. The others use crypto-specific measures such as “difficulty,” “bitcoin miners energy” and “spent output profit ratio.” This is one of the most fascinating aspects of this sector: watching new metrics and valuation methods emerge.
 This is unusual: the search volume for “bitcoin” on Google shot up during one of the asset’s worst weeks ever – usually down weeks have muted search impact, if any. TAKEAWAY: This may be influenced by curiosity about the upcoming halving – or it may be due to an uptick in interest in alternative assets in the face of a macro meltdown.
My colleagues Wolfie Zhao and Anna Baydakova talked to mining operators in several jurisdictions, and report that most are buying new machines in the run-up to the halving, many are paying for them with loans on crypto collateral, and some, but not many, hedge their income in the crypto derivatives market. TAKEAWAY: One worry is that many machines will be unprofitable after the halving if the bitcoin price doesn’t rally. This doesn’t necessarily mean that mining operators will switch off the equipment, though – most of the big operators today seem to be in the business for the long haul. A bigger worry is the likelihood that those that took out crypto-backed loans end up defaulting, leaving the lenders exposed.
Kyle Samani of Multicoin Capital gives a gripping account of the movements of March 12 and 13, and proposes a solution: consolidate exchanges, disallow extreme leverage, set up clearing houses and prime brokers, and install circuit breakers. TAKEAWAY: This is controversial, even by crypto standards. Those strongly against the ideas object to the implied centralization of crypto markets. Those for the ideas argue that it will bring much-needed maturity and confidence to the sector. Yet even if circuit breakers were unanimously agreed to be a good idea, how would they be implemented?
Demand for structured derivative products is increasing, according to digital assets firm GSR. Bitcoin options volume has dried up, however, on the CME and Bakkt. TAKEAWAY: Open interest for bitcoin options has also fallen sharply over the past month – down 25% on Deribit, over 30% on OKEx, 45% on the CME. Yet Deribit open interest is 10% greater than three months ago (the other two exchanges were not fully operational then). Traditionally, options trading volume goes up in line with expected volatility – so we are likely to see an uptick in the coming weeks.
The crypto markets’ high volatility is opening up arbitrage opportunities for bitcoin traders. TAKEAWAY: While arbitrage opportunities normally dwindle in traditional markets in a sell-off, they seem to have opened up in crypto markets – perhaps part of the intrinsic frictions (multiple exchanges, blockchain latency) or perhaps due to the unique structure of some crypto-specific instruments.
U.S.-based crypto exchange Coinbase saw record site traffic and a massive surge in 24-hour trading volume during last week’s coronavirus-driven market swings, processing as much as $2 billion in trading volume last Thursday-Friday. TAKEAWAY: Exchanges make money whether markets go up or down, and in crazy markets they make even more money than usual. But many investors are likely to get spooked and withdraw, at least temporarily – this could push smaller exchanges towards bankruptcy, while larger exchanges gain more market share. We are likely to see some consolidation ahead.
LIFE GOES ON
Digital asset manager Wave Financial is tokenizing between 10,000 and 20,000 barrels of bourbon from Kentucky-based Wilderness Trail Distillery, worth up to $20 million, to enable global investors can gain exposure to the growing U.S. whiskey market. TAKEAWAY: Personally, I can think of other uses for bourbon in these trying times, but it’s possible that I’m missing the point.
Customers of digital asset security specialist BitGo can now boost their insurance limit beyond $100 million to cover the loss or destruction of crypto stored in special vaults. TAKEAWAY: It’s not every day you see a service provider offer greater coverage after a market rout like the one we had last week. And broader insurance options are a sign of the continued maturation of the sector.
Binance, the largest crypto exchange in the world in terms of volume (and the fastest growing in terms of geographical spread), has set up Blockchain for India, a $50 million (Rs 370 crore) blockchain technology fund which hopes to support crypto application and use case development. TAKEAWAY: This fund could help to develop a potentially massive crypto market, and not just for asset trading, which is just as well – the Indian regulators are relatively strict when it comes to retail FX trading, it’s reasonable to assume they will also be strict with retail crypto trading. That’s not the same as crypto asset adoption, however.
Dollar-backed stablecoin tether is now available on bitcoin cash, bringing the number of different versions up to seven. TAKEAWAY: Okay, make it easier for people to use, improve liquidity, offer more options, I get that… but do they not know how hard this makes it for us analysts to keep track of total supply?
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| February's CoinDesk Monthly Review is out! It covers the topics of cash onramps, DeFi growth and the upcoming halving, and distills them into a narrative that speaks to evolving use-cases. You can download it here.
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