Blockstream Markets Weekly—December 11, 2020
Risk-on rally falters, Mass Mutual buys $100M BTC, MSTR issues CB to top up BTC coffers, DBS bank announces crypto exchange, MSIM Strategist says BTC could challenge USD, JPM says BTC will make gold suffer
By Jesse Knutson
What’s happening in the markets?
BTC takes a breather as risk-on rally falters
Bitcoin is on pace for its worst 7 day drop in 3.5 months. The pullback this week looks directionally in line with declines in risk assets like global equities but has probably also been exacerbated by profit-taking into November’s 43% MoM gain.
JPM continued to highlight this week how BTC gains could be part of a multi-year portfolio reallocation from gold into Bitcoin. I think that’s probably correct, but to be just part of a broader rotation from safe havens (USD and gold) to risk-on assets (BTC and equities). That rotation took a bit of pause this week, but with more stimulus on the horizon, it is likely to continue in the coming weeks. Longer-term, JPM thinks this rotation could drive billions of dollars into Bitcoin.
Past the tipping point
After another week of almost surreal institutional endorsements, Bitcoin is clearly gaining legitimacy as an asset class.
Headlines this week included Mass Mutual investing $100M into BTC, MicroStrategy issuing a convertible bond (CB) to fund further BTC acquisitions, Singapore’s DBS bank announcing its digital asset exchange launch, Fidelity Digital accepting BTC as collateral for loans, and Morgan Stanley Investment Management’s Chief Global Strategist writing in the Financial Times that BTC could challenge USD dominance.
I think Bitcoin has probably already achieved escape velocity at this point and we’re going to see a real acceleration of institutional adoption over the course of 2021.
OGs take some cash off the table
I think this makes sense. In total it took 1,081 days for Bitcoin to set a new all-time high. Despite generally upbeat 2021 target prices, I’m sure there are a lot of investors looking to take some cash off the table. All in all, this is very reminiscent of price action going into the end of 4Q16 when price broke above $1,000 for the first time since 4Q13 and then retreated before eventually moving higher.
Glassnode’s analysis concludes that these long-term holders are the ones that typically buy dips and take profit on the way up. Historically, profit-taking from long-term holders looks to have marked the beginning of market uptrends and not tops so this shouldn’t be seen as a necessarily bearish signal.
BTC continues to move off exchange
One of the key themes of November was an outflow of Bitcoin from exchanges. This is important because it reduces the total supply of coins that can be quickly brought to market and shows an overall low near-term propensity to sell. Data from Glassnode showed a continuation of that trend this week with aggregated exchange net flow falling to a 16 month low (chart below).
So far, so good
All in all, I think price is reacting roughly as you would expect it to after a very long streak of weekly gains. Not to mention a new all-time high. Bitcoin was up 43% in November so it makes sense to let some steam out. That said, December has typically been a good month for Bitcoin. Bitcoin has been up three of the previous five Decembers.
As highlighted previously, it typically takes a few weeks for the market to digest a strong streak of wins, for enough steam to be let out, and for the market to again start moving higher. This is only our second down week out of the past ten. Again, December tends to be good to BTC so we could be retesting recent highs by the end of the month.
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Bitcoin markets news
- The investment represents 0.04% of the general investment account which totals almost US$235B. It sounds like this is a toe-dip that could grow over time.
“We see this initial investment as a first step, and like any investment, may explore future opportunities”
- Mass Mutual also took a $5M stake in Stone Ridge subsidiary NYDIG, an institutional digital assets service provider. The article states that NYDIG has $2.3B in crypto assets under management and will provide custodial services for Mass Mutual.
- Will reportedly be the first crypto exchange backed by a bank
- Trading hours will be Monday to Friday 9 am — 4 pm (watch that Monday morning gap!). The exchange will support trading in SGD, HKD, and JPY.
- I think there’s a high probability we’ll see some fast followers in Singapore from DBS competitors like UOB and OCBC
- The bank has already received in-principle approval from MAS, Singapore’s central bank, to operate organized markets for assets such as shares, bonds, and private equity funds (an STO exchange)
- The new service will target institutional investors with significant Bitcoin holdings, including funds, miners, and OTC trading desks
- The loans will be issued by BlockFi
- Cash will be offered at a loan-to-value ratio of ~ 60%
- Says that Bitcoin has positioned itself as a serious competitor to end the dominance of the dollar. Step back and think about how surreal it is to see a $1.2T money manager talking seriously about the prospect of hyperbitcoinization.
“The recent boom of cryptocurrencies should serve as a warning to government money printers around the world, particularly in the US. Authorities must not assume that the traditional currencies like US Dollar or Euro are the only stores of value or mediums of exchange that people will trust forever”
- Bitcoin’s rise with mainstream investors is coming at the expense of gold
- JPM thinks the rotation from gold funds into Bitcoin will continue for years and will likely mean inflows worth several billion dollars
- At the moment, family office allocation to Bitcoin is only about 0.18% while gold ETF allocation is 3.3%
- I wonder how this plays out over time. Gold back stablecoins like XAUT and PAXG offer some improvements in terms of ease of use and custody, but are still centralized and have been relatively slow to build AUM (combined AUM < $200M)
- Aims to raise as much as US$550M, significantly higher than the $400M guided at the beginning of the week
- The issuance triggered a downgrade from Citi (neutral to sell) who criticized the company’s focus on Bitcoin versus its original, core business
“So it could serve as a diversifier to gold and other such store hold of wealth assets. The main thing is to have some of these type of assets (with limited supply, that are mobile, and that are storeholds of wealth), including stocks, in one’s portfolio and to diversify among them. Not enough people do that.”
- Expects these inflows to push SPX up by about 25%
- Given Bitcoin’s recent correlation with risk assets, this is probably very positive Bitcoin
- This week members of the Congressional Blockchain Caucus wrote to Treasury Secretary Mnuchin asking for clarity on reports of a rumored rule that would restrict self-hosted wallet usage in the U.S.
- Congressman Warren Davidson (R-Ohio):
“…the ability to move a token without an intermediary is an essential element of true blockchain. If you look at a frictionless system, part of the Bitcoin whitepaper that made blockchain famous and growing as a technology is the ability to do something peer-to-peer. It’s a core tenet of the technology…”
- Paxos is seeking to create the Paxos National Trust
- The firm’s crypto brokerage was also selected by PayPal earlier this year to facilitate crypto trading and execution
- Paxos also operates tokenized USD (PAX) and gold products (PAXG)
Bitcoin will make gold suffer…more
- JPM note suggests recent BTC gains could be part of a multi-year portfolio reallocation from gold into Bitcoin and could mean billions worth of inflows
Chart credit: Bloomberg
Money supply continues to drive asset prices higher
- Chart shows M2 (green) increase since 2007 and how gold (orange) and the S&P (red) have tracked it higher over time
- Note that Bitcoin won’t fit on this chart due to outperformance
Inflation expectations crept higher this week
- Market-implied inflation expectations hit a 19 month high on the back of US fiscal stimulus outlook and hopes of a vaccine driven global economic recovery
Chart credit: Holger Zschaepitz
Exchanges are seeing an outflow of BTC
- Data from Glassnode showed a continuation BTC exchange outflows this week with aggregated exchange net flow falling to a 16 month low
- This implies investors are taking BTC off exchange, putting it in cold storage and have a low near-term propensity to sell