8DC F+F Fund Q3 2023 Update

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Welcome to the final quarter of 2023. In this Q3 Update we’ll be providing some updates, our views on the market, and some of the major headlines that we viewed as impactful during the last quarter.

Q3 Performance

BTC and crypto markets broadly sold off in a major way all quarter long. Ours is a long term thesis and we are investing for the duration of the cycle (2–3 years), as such we understand and expect not to be perfect every quarter. Some quarters will be up, others down, but as long-term, counter-consensus investors we relish the opportunity to build our position for the long term where we think many multiples are possible.

We continue to monitor our suite of onchain metrics, tools, TA, etc. and everything is still showing that probabilistically speaking we are at the lower end of the range where the focus should be on buying not selling. Here’s an update on one of our favorite charts, the Logarithmic Growth Curve, showing that despite the previous quarter’s selloff, we’re still sitting comfortably in the Buy Zone, and looking ahead to potential prices above $200K throughout this cycle.

Market Commentary

While price was in an overall downtrend during most of Q3, there were actually quite a lot of positive developments that will be impactful on the crypto space for years to come. We think it’s a telling sign of the current market that even good news tends to not move the market.

We added a few new content pieces to our blog during the last quarter. You can view them all here, but we wanted to provide some of the highlights in this email as well.

It’s All About the Macro

There’s a lot of uncertainty in the world right now. Our hearts go out to everyone who has been impacted in Israel, and we sincerely hope for peace. Markets hate uncertainty and with geopolitical chaos reigning abroad, and the most politically polarized election year we’ve probably ever seen coming into view, you can bet uncertainty is going to be Yuuge (see you in the debates Trump).

The Debt Spiral

We’ve written before about Ray Dalio’s views on the Long Term Debt Crisis and the accompanying debt spiral that plays out in the later stages of a fiat currency regime. Given many recent developments, it’s worth revisiting. At a high level, a debt spiral occurs when:

💸 more debt → higher interest rates → higher interest expense → higher deficits → more debt

Let’s just review that checklist with what’s happened recently…

• More Debt — US Treasuries have increased by $2T over the past 18 weeks ✅
• Higher Interest Rates — 2-year rates are the highest they’ve been in decades and long term treasury rates are spiking as investors demand higher premium ✅
• Higher Interest Expense — US Government interest expense has doubled over the last year and now surpasses GDP ✅

• More Debt (again) — The US Gov increased the size of their Treasury Auctions after already increasing by $500B over the last two weeks. 👀

Incoming Tidal Wave of Money Printing

All signs are pointing to us entering into a time of truly unprecedented money issuance. Arthur Hayes recently posted an article detailing why he believes, “the world’s major central banks will collectively print the most fiat in a 2–3-year window in human history in order to ‘save’ their government’s respective bond markets.”

This is a bold statement considering we just came off the largest money printing spike in history by G4 Central Banks during the COVID years in which collectively central bank balance sheets rose by roughly $15T.

Might that COVID spike just have been the warmup act? Hayes’ whole article is worth your time, but at a high level, he estimates the total amount of government debt from G4 Central Banks that must be rolled over and issued to cover deficits from 2023 to 2026 is over $33T.

Our eyes tend to gloss over at these massive numbers, so let’s break this down a bit. The effects of such large debt issuance really only impact money supply and inflation if there are no natural buyers. But the following chart shows these natural buyers are likely nowhere to be found in the quantities needed.

Our foreign trading partners are on a buying strike. Domestic banks are already maxed out from their buying spree during COVID, and with the spike in interest rates their portfolios are sitting on trillions of dollars-worth of unrealized losses. This puts a lot more pressure on central banks to buy their own government debt.

We can’t know ahead of time how much of the $33T debt issuance will be purchased by central banks, but let’s look at some different scenarios relative to the massive money printing that occurred during COVID.

Due to lack of natural buyers, as a base case let’s assume that central banks will be forced to buy at least 50% of the issued debt. This means that we’re looking at an increase in global fiat money supply of at least 1.2x of the increase during COVID. During that time, Debt-to-GDP increased by over 100% — how high will it get this time around?

While all of this is precarious for central banks and the fiat system at large, it bodes well for crypto assets. As a reminder, during the money printing frenzy of COVID the Total Crypto Market Cap increased nearly 29x from ~$100B to $3T at its peak, BTC rallied from $3K to $69K, and perhaps most importantly, BTC outperformed the global money printing by over 2x.

We expect crypto and Bitcoin to continue to outperform the wave of money supply increase that’s descending upon us. We’ll see you at a $10T total crypto market cap. 🫡

The ETF Broken Record

We started off Q3 with a whole slew of ETF applications from the likes of Blackrock, Fidelity, VanEck, Ark Invest, and more. Since then, ETF drama has been at the center of virtually every conversation. While Gary Gensler (SEC Chairperson) and his posse made fast work of taking these applications behind the woodshed and denying them, their eventual approval has become an inevitability. Bloomberg analysts are projecting greater than 95% probability that we see ALL Bitcoin ETFs approved in 2024. An interesting analog here is what happened when the first Gold ETF launched in 2003:

ETFs bring greater liquidity and access to crypto markets and this is a good thing. However, we’re not expecting BTC price to skyrocket higher the day after any ETF approvals. But we do believe a wall of institutional money will begin to make its way into crypto markets over the coming years. As one analyst is forecasting, the digital assets industry will balloon from managing $50 billion of assets to as much as $650 billion over the next five years.

Just as important as the liquidity and assets that the ETFs will bring, are the other factors that an ETF approval signifies, namely that banks will now be using their massive marketing budgets to push crypto products to their clients, and that banks, like dutiful sheep, will follow each other into the green pastures of crypto. 55% of the world’s top 100 banks are investing in the crypto and blockchain space. Over the past 12 months, 90% of financial advisers have received client questions about crypto according to a Bitwise study.

Paul Tudor Jones

This week we also saw one of the world’s best investors in Paul Tudor Jones lay out his case for Bitcoin as a safe haven asset. Commenting on the events in Israel he noted that “this might be the most threatening and challenging geopolitical environment that [he’s] ever seen.” Adding that the US is “probably in its weakest fiscal position since World War II.”

His strategy during such uncertainty?

I would love gold and bitcoin together. I think they probably take on a larger percentage of your portfolio than they would [historically] because we’re going to go through both a challenging political time here in the United States and we’ve obviously got a geopolitical situation.

When Paul Tudor Jones speaks, you can be sure investors across the globe will listen.

Regulatory Clarity

These ETF applications from Wall Street also indicate another factor: institutions are finally getting regulatory clarity around crypto.

We started off Q3 with the SEC launching attacks on Binance and Coinbase. We covered some of those details here and did a deeper dive into regulation here. While the beginning of the quarter might have appeared somewhat bleak, we’ve actually seen some key wins throughout the quarter and some embarrassing losses for the SEC and SEC Chairperson, Gary Gensler who have been openly hostile to crypto.

1. Grayscale wins case against the SEC regarding their BTC Spot ETF

Not only does this court win improve the probability of ALL Bitcoin Spot ETFs getting approved within the next year, but it shows that the courts are pushing back against some regulatory overreach of Gensler and the SEC. The war on crypto is becoming increasingly unpopular politically.

2. Court rules XRP sold to public are NOT securities

Another loss in court for the SEC. The SEC has continued to favor regulation by enforcement over actual litigation (which we agree is sorely needed), and this case again shows that the judicial system is rejecting this regulation by enforcement approach. This was a big moment not just for the patiently waiting XRP holders, but for crypto and altcoins more broadly. Since this court win we’ve seen other crypto projects start pushing back against the regulators. This also made the SEC’s case against Coinbase much more untenable.

3. FASB approves accounting rule change for crypto holdings

Yes, accounting is boring. But this is actually a massive win for companies looking to hold crypto on their balance sheets. The main reason for their inactivity, according to Michael Saylor, had to do with the accounting treatment.

With this #1 roadblock out of the way the path for the long-awaited institutions seems to be as clear as ever.

New Report Shows Bitcoin Enhances Portfolio Returns

Bitwise recently published a detailed analysis of adding Bitcoin to a traditional 60/40 portfolio. We provided a summary of the report here, but the key finding from the report is that over ANY 3 year rolling period (not cherry picking dates) since 2014, adding BTC improves returns without increasing volatility. The below graph highlights the details:

There are 3 important takeaways from this report we want to highlight.

1. Have exposure to Bitcoin — It is a must-have asset in the portfolio, and this data backs it up.
2. Long-term expectation — Data shows 100% positive impact on the portfolio when holding over 3 years. Don’t get swayed by media headlines, or daily volatility.
3. Rebalancing — Taking an active approach to managing crypto is important. This minimizes drawdowns and volatility while maintaining positive returns to the portfolio.

Wrapping Up

In summary, we remain in the part of the cycle where patience and perspective are imperative. This recent headline and snippet give a concise summary of where things stand at the moment:

Think of everything thrown at Bitcoin over the last couple of years, starting with China’s ban in April 2021. Then there were Western regulators, frauds and hype cycles. If you went back to April 2021, when Bitcoin was trading above $60,000, and told them what was coming, including the continued institutional absence from the space, few would guess a price above $10,000 today. Perhaps even $1,000. Yet it trades above $27,000 and is beating the stock market in a crisis. This remarkable asset is the real thing.

We think around $25K, comfortably in the LGC Buy Zone, is a great place to continue establishing our long term position, and we remain as bullish as ever for what the next few years have in store.

~ 8DC Team