Blockstream Markets Weekly — March 19, 2021
Deutsche Bank says Bitcoin is too big to ignore, BTC is already bigger than the Japanese Yen, Morgan Stanley shows Bitcoin to private wealth, Miners make bank, 18k coin transfer spooks the market, Countdown starts on VanEck ETF application and Ray Dalio warns of Gold and BTC prohibitions
By Jesse Knutson
What’s happening in the markets?
Bitcoin on pace to finish the week little changed, consolidating after a 15% gain last week.
Trading was pretty choppy this week with Bitcoin and global equities giving up gains earlier in the week as inflation concerns continued to push bond yields through more milestones and after the Federal Reserve raised its growth and inflation forecasts but appeared likely to stay the course on keeping short-term interest rates low for the foreseeable future.
Bitcoin’s mid-week wobble was exacerbated by conflicting interpretations of a large Bitcoin transfer by several popular blockchain analytic firms and a chunky $2.2B single-day long liquidation on futures markets.
The retracement this week to $53,000 was pretty short-lived and I think backstopped by a continuation of positive headlines this week.
Inflation good or bad for Bitcoin?
Given the low base, the recently passed $1.9T Biden stimulus bill (with more behind likely), upgrades to global economic growth, and the Fed’s plan to keep rates untouched for the foreseeable future, inflation is increasingly being seen as a key market risk. Bank of American’s monthly fund manager survey reported this week that inflation has now replaced COVID-19 as the biggest market risk.
Theoretically, higher inflation expectations and higher bond-yields should drive a rotation from equities into bonds. Given Bitcoin’s relatively high recent correlation with equities, this should also probably be negative Bitcoin.
But maybe that doesn’t happen. As Ray Dalio highlighted this week:
“The economics of investing in bonds (and most financial assets) has become stupid…Rather than get paid less than inflation, why not instead buy stuff — any stuff — that will equal inflation or better?”
Increasing inflation concerns will continue to put Bitcoin in the spotlight.
Too important to ignore
In a 19-page Bitcoin report out this week, Deutsche Bank said that with a market cap of $1T Bitcoin is probably too important to ignore. Measured by the value of currency in circulation, Deutsche says that Bitcoin is now bigger than the Japanese Yen and is already the third-largest currency globally.
In keeping with this, Morgan Stanley announced this week that they would begin providing private wealth clients with Bitcoin exposure. This is probably the tip of the spear and I think we can expect the bank’s competitors to follow suit.
A surge in Google searches shows that Americans are increasingly concerned about inflation. High net worth clients are certainly wondering how to tweak allocations given record-high equity valuations, a jittery bond market, and generally high real estate prices. The $30 trillion of assets in the U.S. retail wealth management industry is probably very under-allocated to Bitcoin. A 5% private wealth allocation would result in $1.5T trying to squeeze into Bitcoin.
Fund flows remain positive. Digital asset investment products ended last week at a record $55.8B total AUM (Bitcoin represents the bulk of that at ~$44B) after $242M of inflows last week. Demand doesn’t appear to be slowing. Canada’s largest Bitcoin ETF reported this week that they had achieved a total of $1B AUM just one month after listing. VanEck is also pushing forward with its third attempt at a US ETF after submitting its application with the SEC this week. The SEC now has 45 days to make a decision.
It’s a good time to mine
Hash rate growth has been largely constrained by a lack of capacity at TSMC and Samsung while the price outlook has probably never been more positive.
This time of year, we typically see a seasonal uptick in hash rate with the start of the Chinese rainy season and the migration of miners to low-cost hydro-powered facilities in the Sichuan area. Over the past three weeks, though, the 30-day average hash rate has been trending lower.
Taiwanese media reported this week that TSMC is reluctant to add capacity for mining applications because of the industry’s previous demand volatility. I think this is probably a veiled reference to Bitmain’s sudden cancellation of orders in 2018 that caused TSMC an embarrassing guidance miss.
A Bernstein research note said this week that mining applications will only contribute about 1% of TSMC’s revenue this year, versus around 10% in the first half of 2018. TSMC seems unlikely to increase allocations to miners while demand from other industries remains so strong.
30-day average mining revenues this week gained to a new all-time high of $53M (chart below). Straight lining that out, miners are likely to see total revenue of ~ $20B this year.
If only there was a way for Non-US accredited investors to gain exposure to the space…😉
Stay tuned for details (or email firstname.lastname@example.org)
Supply and demand
Bitcoin is on pace to significantly outperform normal March seasonality and is tracking the sixth consecutive monthly gain.
In the near-term, we don’t look particularly overbought. The current price is only 1.26 standard deviations above the 50-day moving average, RSI is at 60, and funding rates have again been reset.
Other than being weighed down by a correction in equities, I don’t see any reason why Bitcoin can’t continue to move higher. News flow this week was characterized by better Bitcoin coverage and improving access to capital. Inflation is going to be an increasingly important topic in markets and I think that will drive more eyes and more wallets to Bitcoin. Especially now that Bitcoin has passed the $1 trillion market cap hurdle. Bitcoin is evolving into a macro asset class of its own and most investors are under-allocated.
The supply side of the equation also remains constructive. On-exchange Bitcoin balances continue to drift lower (chart below). Bitcoin is being bought, taken off-exchange, and put into cold storage. This is something structurally different from the 2017 bull market.
Stronger demand and tighter supply are price positive. As Pantera highlighted (again) this month, the Stock-to-Flow model has been amazingly accurate. Stock-to-flow predicts a > $100,000 price by the end of the year.
Long-term, I think the path of least resistance remains up.
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Bitcoin markets news
- The report concludes that Bitcoin is here to stay, but its relatively low trading volume means that it will also continue to be very volatile.
“Bitcoin’s market cap of $1 trillion makes it too important to ignore. Big players who buy and sell bitcoins have considerable market-moving power. As long as asset managers and companies continue to enter the market, Bitcoin prices could continue to rise.”
- For Bitcoin to reach its true potential it has to see an increase in transactional volume. DB likens this to Tesla which has moved from a ‘soon-to-die fad’ to a company able to deliver cars at scale. DB sees Bitcoin’s challenge as evolving to play a major role in cross border digital transactions
- The report also mentions that Bitcoin is now too important for central banks and regulators to ignore as well.
“Central banks and governments understand that cryptocurrencies are here to stay, so they are expected to start regulating crypto-assets late this year or early next year. They are also speeding up research on their own Central Bank Digital Currencies (CBDCs) and launching pilots”
- Plans to offer clients access to three funds. Two of the funds will be managed by Galaxy Digital and the third by NYDIG
- To gain exposure clients will have to have $2M of assets with Morgan Stanley and “an aggressive risk tolerance”
- Earlier this week the VanEck Bitcoin (BTC) exchange-traded fund filing was officially published on the SEC’s website
- The unregulated nature of the Bitcoin spot market has been a popular refrain attached to each rejection
- Earlier in March, New York-based asset management firm WisdonTree submitted a Bitcoin ETF filing with the SEC as well
- Meanwhile, North of the border, Purpose Investments reported that their Canadian listed ETF has grown to $1B AUM in under one month
- Similar to 1930–45 when the Fed outlawed gold and increased capital controls…
“Policymakers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected”
- Up significantly from their last October 2018~ $8B valuation, but well below recent whispers of $100B
- Puts in just south of the CME Group’s valuation and ahead of NYSE’s parent company (ICE) and the London Stocke Exchange
- As highlighted above, Coinbase is expected to set the bar for exchange listings with its imminent direct listing
- EToro also recently announced that it is merging with a Special Acquisition Company earlier this week (valuation at $9.6B)
- Kraken is said to have sought a $10 billion valuation in recent private equity deals. Article says that Kraken’s CEO, Jesse Powell, wants a valuation above $10B for a public listing
- A large grain of salt is recommended here. Morgan Stanley may be involved in helping Bithumb investors place shares of the company, but it’s extremely unlikely they are taking an equity position themselves
- The Korean exchange business is notoriously insular. It doesn’t seem immediately clear why an American investment bank would acquire a business that doesn’t really serve non-Korean clients
- Follows up on an earlier investment of ~ $18M worth of Bitcoin
- The company’s total Bitcoin position is now just shy of $40M
- Reuters reported the government had plans to impose banning cryptocurrencies and fining those that use, trade, or hold them
- Later in the day, though, India’s Minister of Finance said the country will still have a “window” for bitcoin
- India’s back and forth on Bitcoin has been going on for years. Looks like authorities are trying to spook the market to keep it from getting overly frothy. Probably a non-event
- Report (in Chinese) says that TSMC and chipmakers are reluctant to add capacity for mining applications because of the volatility of demand
- Global chip demand is very strong and mining applications are a very small business for major foundry players
- The article cites a Bernstein note expecting mining applications to only contribute about 1% of TSMC’s revenue this year, versus around 10% in the first half of 2018
- It’s also worth noting that TSMC missed its 2018 earnings guidance because mining rig makers canceled orders and that Taiwanese authorities are investigating claims that Bitmain has been attempting to poach TSMC employees
- I’m not exactly sure what is going on here, two popular analytics firms have different takes on the nature of the transfer. One is claiming it was a transfer from BlockFi to Gemini and another that it was a Gemini internal transfer
- Regardless, nobody with a $1T sell order on the pad is just going to blast it over to an exchange and start working it when they know that is completely transparent to the entire market
Bitcoin is bigger than JPY?!
“In terms of total currency in circulation, Bitcoin is the third-largest in the world, after the US dollar and the euro. This is mainly due to the vast increase in Bitcoin’s value recently. In early 2019, Bitcoin represented “only” 3% of the US dollars in circulation, but in February 2021 it surged beyond 40% of the US dollars in circulation.”
Chart credit Deutsche Bank
The demographic argument
- Millennials and post-millennials are already > 50% of the population in the US. Their financial preferences will become increasingly important as they age and build wealth
- Especially as the great wealth transfer plays out over the coming years as younger generations inherit ~ $30T from Boomers
Chart credit Deutsche Bank
Market scale — Bitcoin is still small
- Bitcoin’s trading volume is also much more fractured than other major assets, it’s split across hundreds or thousands of platforms globally
- Many of those platforms are also off-limits to mainstream institutional investors. So the actual liquidity situation is probably much worse for large, institutional investors than most realize
Chart credit Deutsche Bank
Google Trends — Inflation
- US Google searches for ‘inflation’ are at the highest level on record
- Most terrifyingly, the top subregion by interest is Washington DC
Chart credit Google Trends
Supply and demand
- A lot of headlines this week were demand-side focused, but it is also important to note the continued outflow from exchanges
- I think this is something structurally different to the market now versus the 2017 bull market
Chart credit Glassnode
Long liquidations deleverage the market
- Over $2B worth of long liquidations earlier in the week
- One of the largest single days of liquidations this year
- I think I read somewhere this week that the average leverage used by liquidated accounts this week was 20x, but I can’t find the source.
Chart credit bybt (in case you can’t tell from Bybt’s super subtle watermark)
BTC mining revenues hit an all-time high
- 30-day average Bitcoin mining revenues gained to above $54M this week
- At that rate, miners are on pace to take in ~ $20B over the next 12 months
Chart credit Blockchain.com
Bitcoin is tracking Stock-to-Flow
- Pantera’s Monthly newsletter highlighted this week (again) how well Bitcoin price is tracking the Stock-to-Flow fair value price
- Note that Pantera’s S2F projection is different from Digitalik’s. I suspect this is the difference between a 365 and 463-day model.
Chart credit Pantera