OBTC - Bitcoin: 'Number Go Up'

2023-11-21 12:32:01 ET

Summary

• The Halving Event is the most important and predictable driver of Bitcoin.
• All sized Bitcoin owners are Hodling.
• The November 2022 Bitcoin-trough was probably the Bear Bottom.
• ETF approvals, while important, could be a “sell the news” event.
• The U.S. Money Printer will likely ramp-up in 2024. Global Liquidity is expected to rise next year.

Thesis

I think the time to argue whether or not we're in a Bear market is over. Bitcoin ( BTC-USD ) is rapidly approaching its April 2024 Halving Event. Despite a host of negatives, such as regulatory threats and frothy Sentiment, the long-term Bull Case is stronger than ever! As U.S. interest payments blow past $1 trillion , our gridlocked government is left with no choice but to use its money printer. A debased currency combined with quantitative easing in 2024, strongly favor higher prices. Bitcoin's halving plus lost coins results in excellent Tokenomics of a non-inflationary digital store of value. In this article, I will explain these bullish catalysts one Satoshi at a time.

Is Bitcoin a Ponzi Scheme?

It's been six years since I jumped head-first into the Bitcoin rabbit hole. While I'm a Crypto-Degen (i.e., irresponsibly long Altcoins) I appreciate the value of Bitcoin. However, to be honest, I'm not 100% all-in. Retail investors' " Number Go Up " meme isn't going to attract pedigreed, baby-step institutional investors. The US dollar isn't just the reserve currency because a bunch of people believe in it (as is partially the case for Bitcoin). While the US dollar is a fiat currency and not explicitly backed by anything (thanks Nixon !) it's implicitly backed by the world's mightiest military, taxing power and trade flows. The U.S. also owns federal lands, foreign currency reserves, treasuries and gold bars, (albeit, in aggregate they are financed by debt). (Characteristics that make "good money" are in the table below.)

Nonetheless, Bitcoin has its own set of positive attributes. It's public (i.e., open-source software), permanent (i.e., immutable) and decentralized (not controlled by one entity). Last week, a young lady said something so simple that everything just clicked for me. She said that "the U.S. government's irresponsible stewardship has broken its contract with its citizens -that's why Bitcoin exists."

Finding Risk in all the Wrong Places

As someone who spent most of his working life in Risk Management, I see risk round every corner and tend to overestimate the downside. This was the case for Bitcoin where all my indicators, including On-Chain Metrics said that November 2022's price of about $15.5k was "rock bottom." (For a long-term price-perspective, see the Rainbow Chart below.) Apparently two blowups (Terra-Luna, FTX) in five months did the trick! However, I thought that a still Hawkish Fed would suppress prices. With 20/20 hindsight, I will say that Nov'22 was Bitcoin's Bear Bottom though the riskier Altcoins probably won't get a bid until liquidity rises meaningfully. There's a saying "if liquidity's leaving, then Altcoins are bleeding."

My Bearishness in June

This summer I published an article on Seeking Alpha geared towards Bitcoin hodlers. It gave a laundry list of why Bitcoin could decline from ~ $31k, and it subsequently declined to $25k. That marked a major floor before the ETF craze started. The bear list included:

• Sell in May and go away (i.e., seasonal weakness)
• Regulatory Enforcement (Operation Chokepoint 2.0)
• Accumulation by "weak hands" (i.e., Retail) whiles Whales were selling
• Tightening Liquidity
• Greedy Sentiment
• Negative On-Chain Metrics

Several of these have turned supportive of higher prices. As we approach the Halving date, it will be difficult to fight the tape of rising price momentum. The weakest seasonal period (September) for Bitcoin has long passed and average historical monthly price gains suggests price support through July.

The improvement of the above factors hasn't surprised me, except for one - Accumulation/Distribution. During April'23, smaller bitcoin holders were accumulating while the largest were selling (not a good sign which is typical of local tops). As prices jumped in 3Q'23, I expected most cohorts, especially large "Whale" holders to be selling aggressively. But this is not happening - in fact nearly all cohorts are accumulating (blue squares) into a local top. Strange, no? (As a background, Glassnode tranches holders according to six cohorts with the largest being those holding greater than 10,000 Bitcoins.)

Long-Term vs. Short-Term Holders

Another way of showing accumulation and distribution is examining the long-term cumulative accumulation of hodlers, or those holders that removed their Bitcoins from centralized exchanges. Long-term holders tend to accumulate as Bitcoin hits bear market bottoms while Short-term holders accumulate during the FOMO craze at Bull Tops.

The chart below divides LT Holder supply by ST holder supply. It's at the highest level in history meaning long-term holders refuse to sell. Again, we're witnessing a historical bullish anomaly. Heavy LT accumulation has resulted in long-term supply of nearly 15 million Bitcoin that has effectively been taken-off the market. That 15 million also includes lost coins. James Mullarney ( InvestAnswers ) has estimated lost coins to be between 3-6 million bitcoin. For comparison, Bitcoin's Circulating Supply is 19.5 million, which leaves just 4.5 million available to trade. That "float" is so small that any demand could result in a sharp increase in price . (Note: Glassnode makes the assumption that beyond a certain time, it's more and more likely that those Bitcoin will never be sold.)

The 2024 Halving Event

The most important catalyst on the Bitcoin Calendar is the four-year Halving . Ironically, it isn't a set date but an estimate as the halving occurs when block number 840,000 is produced. This "date" was originally estimated for March/April 2024; however, I believe it will be pushed back a bit to end of April depending on mining difficulty and the network hash-rate. Nonetheless, it will result in block rewards being halved to 3.125 BTC-USD. This effectively reduces Miner returns and reduces the number of coins coming onto the market. Inflation will decline 50%, from 1.8% to 0.9%.

Even though the Halving is the most important catalyst, I placed it below the Accumulation and LT supply bullet-points to stress that this will be the first time that there's a Halving occurring in period of already reduced circulating supply. The period after the halving has historically been associated with very large price gains. While I believe the halving is behind Bitcoin's large price moves, note that the four-year halving seems to be highly correlated with the global liquidity cycle. I particularly like this chart below as the " You are here " dot shows that we're just in the beginning of what could be a large up-move over the next 2-3 years.

Global Liquidity is Edging Up

When I last wrote about the Debt Ceiling, I said that the Treasury General Account (TGA) which is basically its wallet, had to be refilled, which could drain nearly $0.7 trillion of liquidity. In fact, that's exactly what's been added so far. Now that it's filled, the only large drain is the Fed's ongoing Quantitative Tightening, which is removing a more palatable $0.1 trillion per month. Also supporting liquidity are Chinese and Japanese efforts to support their economies via liquidity injections. So long that U.S. inflation keeps edging lower, I believe liquidity will increase in 2024, especially if the Fed suddenly realizes it's dealing with a recession. My view is supported by Mike Howell ( Crossborder Capital ) who's a leading authority on the subject. Remember, 2024 is also an election year and the Biden Administration will likely pressure Jay Powell to reduce rates.

One method of measuring liquidity is summing Central Bank balance sheets plus adjustments such as the TGA, Reverse Repos, etc. Another way is conducted by measuring changes in Global Money Supply (M2) of which Bitcoin is highly correlated (chart below).

Debasement of the U.S. Dollar

Actually all major currencies are being debased as sovereign governments believe a little inflation is a good recipe to avoid depression. The fear is that deflation would cause a vicious circle of lower prices, lower wages and a shrinking economy. Whether it's true is irrelevant - the result is that the Dollar's value declines against real assets. Bitcoin's Tokenomics make it resistant to such debasement.

When the U.S. economy entered recession during the 2008 Global Financial Crises and Covid-lockdown, the Federal Reserve's knee-jerk reaction was to print trillions of dollars (this can be seen by its higher balance sheet ). I also expect the U.S. to "monetize" its interest payments, which recently blew past $1 trillion. This is because the level of U.S. Debt/GDP has soared beyond a tipping point and so the ONLY way to pay interest costs will be by cranking the money-printer ("more cowbell"). Bitcoin, in comparison, doesn't care how the U.S. or ANY economy is doing as its monetary system is set in code. (The chart below shows U.S. CPI based inflation over the last 60 years.)

Prospects for a Spot Bitcoin ETF

There are one dozen Exchange Traded Funds waiting to get approved by the Securities and Exchange Commission (SEC). I have little to add to this well publicized rumor with the exception that it could be a "sell the news" event short-term. The listing of Bitcoin futures on the Chicago Mercantile Exchange and listing of the Bitcoin Futures ETF both marked local tops. However, spot ETF listings could have legs longer term. I think we're getting sooner to an approval ( probably early 2024 ) given that the SEC's now asking questions to the applicants, Grayscale's court ruling victory and given Gary Gensler's in the hot seat with several congressmen.

So Why Am I More Bullish Longer Term?

One word- BlackRock, but not because it has zillions of dollars in custody. BlackRock's secret sauce is Aladdin - a tech-based portfolio management system, not only used by asset managers and BlackRock's competitors (e.g., Vanguard) but by the largest corporate treasuries (think Apple, Google). Portfolios have been shown to be optimized on the efficient frontier by adding a small amount of Bitcoin. I expect BlackRock to "sell its book" meaning it'll recommend its spot Bitcoin ETF to clients. For perspective, Aladdin advised $ 21.6 trillion of assets (global AUM: $131 trillion in 2021, Chart below ) while Bitcoin's market cap is still around $0.7 trillion. Lots of potential here.

Conclusion:

As I was completing this article, Bitcoin ran-up to another local top on more Bitcoin ETF rumors. Fear & Greed Indices are hovering at exuberant levels, with the biggest risk being "do we have enough champagne?" Otherwise, I think triple catalysts of the Halving Event, higher Liquidity and ETF approvals will propel Bitcoin higher over the next year.

There are other important developments I'll dig into in future articles including attempts by the BRICS countries to destabilize the US Dollar, a Debt Jubilee and prospects for adding Bitcoin into the U.S. treasury reserve.

Well, that's my two Satoshis!

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