Weekly Watch | Bitcoin
The State of Bitcoin
Bitcoin performed well last week at the onset of the initial public offering of the Cryptocurrency exchange Coinbase (COIN). This interest reinforces our sentiment surrounding the fundamental moat of Bitcoin. While Bitcoin did slide about 10% over this past weekend, the Fibonacci, cyclic wave patterns, and support /resistance levels suggest that Bitcoin is undergoing a healthy contraction. What is important to realize is that big waves of Bitcoin buying occur on Sundays and Mondays, when many retail investors have recurring buying set up for their accounts. While this process has been recognized before as it pertains to mutual funds, savings accounts, IRA's, and things alike, not one of these reoccurring investments is into a sole asset that has a relatively fixed supply. With Bitcoin being down this much in one week, -13% and month -1.4%, we’d be interested in which institution presents itself as the next institution to add Bitcoin to its balance sheet.
It is vital to take note of how the transitions of monetary exchanges have happened in the past. Throughout history, the means of exchange have changed rapidly. We are fortunate to have lived in a society where we used the U.S. Dollar for the entirety of our own lives. What is important to note is that this is not common. Think about the Eurodollar and how that transition engulfed all of Europe in the early 2000s. Nonetheless, with each transition of monetary exchange, it is usually started from the players who use the currency itself. Changes in Monetary systems come from within and begin to take moat when many people transact in the new currency, forcing those pigeon held to the prior currency to accept the new. This epitomizes what free markets are. Including, during these times of change, individuals who change to the new currency yet want to retain some securities of their wealth do so through backing the currency with another asset society deems to have value. The advent of nouveau technology and currency backed by digital assets that society deems valuable represents the same thematic events witnessed since the 15th century. Think about all the exchange of art between French, English, Italian Kings that are priceless today. A lot of semblances with Ethereum and NFTs, in our opinion, as they are both a hedged "potential currency" position with some asset to hold its underlying value.
Historical Context to Consider
In the 1700s in France, the primary monetary system of exchange was the livre, which means pounds in French. In 1794 France moved away from the currency livre and started to revitalize/ rebalance its currency, the Franc, in 1795. During this time of financial instability of France in which the monetary systems were changing ever so slightly, it is interesting to see what the Ultra High net worth individuals were doing at the time. King Francis decided to purchase the Mona Lisa in this transition period. Three years later, in 1797, he put it into the Louvre for safe-keeping and display while the monetary system shifted from livre to Franc, focused on rebalancing, along with addressing different currency manipulations by the United States. This type of art purchasing, coinciding with new advents of currency, is not a fluke, instead of a very identifiable pattern in the history of the transition of various monetary systems and currencies. France had changed their currency in some facet since then until now; they use the Euro to finance everyday transactions. And in those same periods of transition, collectible/art/painting sales and turnovers increase significantly. The parallels between economic shifts in society to physical assets first, and the advent of BTC and ETH, and the onset of NFT's are uncanny. We could not be more convinced this will be a significant currency in our lives within the next 3-7 years. It's difficult to put an exact timetable on it possibly sooner but given the advent of all this new technology and potential regulations.
Furthermore, just some quick stats to consider in light of how Monetary Systems have changed in the past:
1/5's worth of the U.S. population is a Daily Active User on Coinbase. (Recent direct listing)
More individuals in the United States hold $10 million dollars in a singular Bitcoin wallet relative to checking accounts.
Educational, automotive, and other institutions are transacting Bitcoin.
Issuance of Bitcoin Credit Cards.
Physical and Digital assets attached to new age monetary system to preserve value in a transitory period. (ABS in the olden days).
Financing via Bitcoin as collateral.
Interest earned on Bitcoin vs. US dollar.
Institutions are making sizable purchases of Bitcoin on their balance sheet/ treasuries.
Tesla makes more from Bitcoin investment Jan – Feb compared to vehicle sales and deliveries.
Timeline to consider:
Jamie Dimond (J.P. Morgan CEO) 2013- Crypto is a fiat currency that hold's no fundamental value.
2014- Tom Lee, head of macro research and emerging tech, leaves J.P. Morgan to start his research firm Fundstrat based on Macro Fundamentals and Crypto.
2020- Jamie Dimond sees value in long-term fundamentals of Bitcoin. Starts trading desk immediately on crypto assets.
This flip of opinion is indicative of changing sentiment in society both at the individual and institutional level.
Thomas Lee was right in 2013, and Jamie Dimond thought he was wrong. Thomas Lee is right today (Fundstrat inception), and Jamie Dimond failed to consider the possibility.
Municipalities are offering salaries in Bitcoin.
Private companies are offering Bitcoin-based compensation/bonus-based compensation.
Fed Buying 78bn on the balance sheet, rising inflation concerns.
Again, one of the critical things many hesitant investors is cryptocurrency's utility in our economy. The people are the ones that deem which currencies have value and which ones do not, as depicted by history. Today, 1/5 of the US populous can be evidenced to support the use of Cryptocurrency. The question is when it will become ½ or ¾ of American's. The shift is happening; institutions are following suit.
What it all boils down to is that in all the different bets we can make regarding the economy, we will never bet against Bitcoin. We’re not saying we will bet the house on them; by no means are we making that gesture. We are making it unequivocally clear that it would be a grave mistake to bet against Bitcoin. Bet on ETH, BTC, whatever, just do not bet against them. It's not worth it. Society chooses the currency, not an individual.
A note on Dogecoin
Many will have noticed over the past week we experienced a massive run-up in the price of the Crypto asset- Dogecoin. For the uninitiated: Doge was started by an IBM executive and Adobe executive who were friends and wanted to make a cryptocurrency of one of the memes that had gripped society for a large part of 2013.
- "A meme is an idea, behavior, or style that spreads by means of imitation from person to person within a culture and often carries symbolic meaning representing a particular phenomenon or theme."
This cryptocurrency was not even a passion project, just something to provoke some fun among friends. Some people in the crypto community had initially taken offense to the icon of Dogecoin, but later were in large support because of how society evolved to recognize this cryptocurrency. To many investors that hold Dogecoin, it is purchasing a ticket in history to show that cryptocurrency is here to stay and will be a part of everyday society. Most people who buy Dogecoin are not doing it in abundance like people like to report. Yes, you have some people YOLO-ing their crypto assets. Still, a large portion of investors view it as partaking in a moment of financial history. DogeCoin's market cap exceeds that of Credit Suisse and Deutsche Bank. If that is not an epic win for crypto investors, indicative of sweeping changes in our financial systems, we do not know what is. Just think about all the ultra-high net worth individuals' wealth at these global bulge bracket banks and think about how people in the crypto community were able to garner a higher market cap than these established and reputable businesses via a currency that merely started as a joke. When the market cap of the joke is bigger than those banks, is it a joke anymore? We’re not concerned with the fundamentals of Dogecoin, and we think you would have a hard time finding the fundamentals from investors themselves. This is their mark on digital history, something they cannot and will not ascribe a price to.
It’s like your parents buying bricks at the hospital you were born at with your name engraved on it and staying there for the duration of the hospital. This is kind of like that for Dogecoin. Sure, it may be expensive to spend $100 on a fiat currency made as a joke. Still, the same argument could be made for the parents that buy some sentimental piece of society, whether it be an auditorium named after a family member, a brick in a wall, a name engraved onto something special. In both cases, Doge and the brick example, both parties are "investing" a marginal piece of their wealth to represent something greater in society. In this analogy, each brick in the hospital is a Dogecoin. And everyone wants to get their name on that hospital by buying Dogecoin so that they can have a piece of this history. Just because it is a new form of how people utilize assets to make a footprint on society and the world does not mean we should write it off but rather peek closer into what it means on a larger scale.
It is a form of civil protest in the financial world with retail investors at the helm; we could not love this dynamic enough. Thus, it's of paramount importance to consider the money flows of these different altcoins. While XRP (ripple) ETH(Ethereum) all have distinct fundamental moats/ concrete differences in crypto function and utilization of the asset as depicted by their offering documents, it is imperative to watch the money flows and to see which Crypto Asset society is choosing to migrate towards. As of now, it seems Bitcoin, but with all of the different litigation and lawsuits from the IRS to capture unreported tax gains, something else seems apparent. The IRS and the government were not prepared for this and are backtracking steps pertinent to regulation and restriction. They have missed their window and are now primarily concerned with not deriving revenue from this asset class. This shows regulators on their heels and a sweeping momentum shift regarding Cryptocurrency in the future.
That is right, the Fed and IRS have shifted from an Offensive position in the battle against Crypto to a defensive position in seeking out how they can best mitigate the transition of currencies so that the government can capture these transactions to their balance sheet and GDP. Once they went to Defense, Crypto Exchanges started lending, financing, going public, and offering APY on assets. The fed is clearly on defense; it's just a matter of what cryptocurrency society indeed chooses.
Based on the analysis and assumptions made prior, the price levels of Cryptocurrencies primarily point to two defining catalysts:
The adoption of Crypto by individuals is increasing at an alarming rate.
The investors who participate in Crypto are much more significant players than people realize.
While City Street Strategies' view that the adoption of Crypto by individuals is increasing at an alarming rate relative to what is reported in the news, we fully acknowledge the latter point in the possibility of there just being a very concentrated group of crypto investors who are controlling the Market. However, it's difficult for us to take this at face value when more Crypto Brokers file on the S-1's showing they have a substantial amount of Daily Active Users on their exchanges similar to COIN. Furthermore, regardless of that point, what is apparent as aforementioned is that society dictates the monetary systems we use. And if the presentation is given to the American populous that Bitcoin and Crypto continue to rise, it will be inevitable for them to become users of the currency eventually. They will be priced out of the market/ unable to transact in their daily lives. While this looks pretty audacious in terms of timeliness, the step towards a crypto economy is moving at lightning speed towards a new financial system. The fact that individuals will be able to finance transactions on a Bitcoin credit card, along with finance mortgages, is just another step towards widespread adoption. However, it should be interesting to see the competitive rates between traditional financial institutions and crypto exchanges.
If Bitcoin is supposed to be the next primary currency: Why can't we spend it?
This is an entirely valid and essential claim to make regarding how the current environment accommodates the usage of this newfound currency. Per IRS stipulations, each time one spends Bitcoin directly through varying partners that accept BTC as remittance for payment, it is treated as a taxable event for each sale. In other words, with the current capital gains tax, you would have to be making at least 25-40% on your Bitcoin investment to break even in making a purchase relative to the US dollar. This is a legitimate concern as it pertains for people to utilize Bitcoin in everyday purchases, but as it works out, the free Market can find a solution to everything; seriously, just let it.
If someone were to finance a purchase in Bitcoin, it's to save on fees; they are not holding the currency long enough to realize gains or losses on the currency. For educational institutions and automakers like Tesla accepting Bitcoin makes some sense considering the similarity in price levels, lower transaction speeds by a large margin, lower costs by a large margin, and overall, more secure payment systems. However, with the advent of different lending mechanisms that have been born of the wide adoption of Bitcoin, there are viable, cost-effective measures to finance day-to-day transactions through Bitcoin. With the offering of APY on Bitcoin held at certain exchanges, users can earn up to 8% APY on the Bitcoin they hold so they can issue loans in USD using the Bitcoin assets as collateral for the loan. This mechanism disseminates on the lower end of financing as well with the wave of Bitcoin credit cards coming to Market. The same idea applies here, just another form of Secured Credit.
People can leverage their Bitcoin balances and receive a revolving credit line in US dollars. This eliminates the cap-gains tax risk and allows you to start financing/transacting in Bitcoin without ever selling your Bitcoin holdings. The early adopters of these credit cards will be the prime beneficiaries of another benefit of crypto lending as it pertains to the current appreciation of the asset. Assuming a continual appreciation of the asset, the collateral of your loan is greater, reflecting a higher revolving credit.
Imagine a world in which your credit utilization rate is lowered not because of a change in your spending habits or more payments to your credit card but because the asset that backs it increases in value. This world is coming. This is revolutionary, and we view it as a threat to the utility of the US Dollar and some financial institutions in the forthcoming years.
Bitcoin Price Targets
Bitcoin is unequivocally in an excellent moat for it to continue to rise in price and appreciate. Concerns of inflation, uncertain fed policy, increasing monetary supply, and the fed's balance sheet grow. Bitcoin has become an inflationary hedge haven for some investors. This is not based on fundamentals but what society has chosen, which has a relatively fixed supply and demand. Some in society choose this as a vehicle to hedge against inflation; each new entrant into this theory validates it, institutional and retail.
This past weekend Bitcoin slid approximately 10% after making all new time highs. The reasoning for this decline in price has been attributed publicly to two different causes. Either the power outages that were intentional acts of the Chinese government to mitigate miners from upholding hash networks, something vital for Bitcoin to function, or the unsubstantiated rumors that circulated Twitter concerning legitimate concerns that the crypto network Bitcoin had been used to mitigate money laundering/drug trafficking. We believe both of them to be farse portrayals of what the problem is, or missing the point completely. It’s laughable that it was circulated the treasury would shut bitcoin down for money laundering because you would think that with all of the manpower they have at will they’d at least get the cryptocurrency correct. Because of Bitcoin being decentralized and a public ledger, it would be foolish to use Bitcoin to launder money or traffic jobs, that’s the last cryptocurrency we would use. And for the hacking of the electrical grid system increasing the cost of the hash networks. To our knowledge, 95%ish of the supply of Bitcoin has been mined onto the network with only 5% remaining or so left. Also, for each Bitcoin that is mined, it takes double the amount of energy, time, power, code, to mine the next one. Yet it does not need the same intensity of energy to maintain the network once the algorithm has indeed identified the hash within the linked chain of Bitcoins, it found the Bitcoin it just recognizes it. However, that is not to say parts of this story are true, they of course could be, but it does not impose enough of a risk for me, or for what we feel the market’s tolerance is, to take any money off the table. That’s where we stand with the current volatility concerning Bitcoin’s price action.
Nonetheless, regarding the price action of Bitcoin, it appears it has not approached the peak in Elliot wave cycles at all. Its Fibonacci sequence suggests a price of 70k by perhaps May or June. The technical charting analysis used in identifying subchannels in larger waves forming rising wedge patterns forecast a price target of Bitcoin of 100k in august and 129k in December. We will continue to purchase Bitcoin at the rate we currently do and may accelerate when we see fit. See the detailed graphic analysis of Bitcoin via the following link: https://www.tradingview.com/x/srdXrGXo/
Geopolitical Risk & Fed
Tensions are heating up in the geopolitical sphere, and it feels as if no one is paying attention to the risks that pose grave threats to our economy. This past Wednesday, the United States expelled 10 Russian Diplomats for accusations of election interference and mal intent. This Thursday, the United States Fed, bought 78 bn back onto their balance sheet. This past Friday, Russia retaliated by expelling 10 US diplomats from Russia. See the trend here? With a topsy market that appears to be stretched at these levels, it is inextricably difficult to assess all the events that happened in the week. The fed issued a no-change policy, but one must expect that they discuss inflationary risks at some point. When we do get to that point, it will be a violent change in Fed Scripture of what we have been experiencing in the past weeks. The Fed buying 78 bn to their balance sheet this week just supports the inevitable melt-up in markets, thus making it more difficult to perceive their stance.
In conjunction with Fed Risk, the Russian risk has remained completely ignored. However, if oil prices continue to flail in the public eye, it will be impossible to ignore the geopolitical risk in the markets. Given the current price levels paired with fundamentals over the past few weeks, we don’t believe the market has fully reflected these catalysts. Thus, we feel there is room for the market to fall lower. Per our previous Weekly Watches, we expected the year of 2021 to model very close to the markets we experienced in 2016-17 as it pertained to Tech and the Macroeconomy. As such, we expect it to continue and believe the current price action of the market could last for the next few days to weeks to months depending on how policy and fed action change in the interim, a true shake-up.
Biden has been in office for almost three months now and increased global tensions are forcing his administration to decide whether to take a more active role in policing the world. In the past few weeks, Russia has been building up a massive military presence along the Ukrainian border that is going unnoticed by many. Ukraine estimates over 100,000 Russian soldiers, as well as tanks, armored personnel carriers, and fighting vehicles, as well as field hospitals, long-range artillery, and communications systems along the border. It is the largest military buildup in the area since the onset of fighting seven years ago between Ukraine and Russian-backed separatists in the Donetsk and Luhansk regions. Yes, the buildup is meant to be seen, but the intention of such a military presence remains unknown as the CIA reported to Congress recently. How will Biden respond to this aggression? Two US destroyers were planned to sail for the Black Sea, but those plans were scrapped over fears of further escalation. Biden also stated that the sanctions put in place were not the hardest available for the same reason as well, choices far from the playbook of the previous administration. This situation is crucial to the Biden administration and Europe to show off their cooperation against an increasingly aggressive Russia. Russia has also been expanding its military presence in the Arctic in search of new sources of oil and other natural resources yet to be discovered in the region. Putin, who could remain President of Russia into 2036, is trying to cement Russia as a global power for the indefinite future. Their army and navy are far lacking in comparison to NATO and Putin knows this and wants to change it. Although the situation with Russia does not appear to be too worrisome, it must be paid attention to because the implications of escalated aggression, which can easily happen as seen in Georgia in 2008, would be devasting to financial and bond markets let alone human life. Iran has also grown increasingly noncooperative as they continue to enrich their uranium, reaching 60%, the highest they have ever reached. The Biden administration has a lot on its plate, and it will be very interesting to see how they handle the situation not only in Ukraine but more importantly with Iran. The world is emerging from the Covid-19 pandemic in a chaotic fashion. Fighting and tensions across the world in the Middle East, Caucuses, Burma, Kashmir, and Ukraine show how volatile our world remains. In order to preserve peace and economic stability, the Biden administration must ensure that these flareups do not grow into full-blown conflict. However, a more cautious approach with Russia might just be what Putin wants in order to expand his sphere of influence.