Blockstream Markets Weekly — December 25, 2020
Elon Musk asks about big Bitcoin transactions, Jefferies cuts gold allocation in favor of Bitcoin, $9.2B Skybridge Capital doubles down on BTC, Bitmain executes hard fork, on-exchange BTC evaporates, Stock-to-Flow model nails this year’s price prediction…and says we’ll top $106,000 on Christmas Day 2021
By Jesse Knutson
What’s happening in the markets?
SEC triggers flight to crypto quality
Bitcoin on pace to finish the week modestly higher, consolidating a bit after last week’s massive $4,000, +22% gain.
Traditional markets were mostly off for the Christmas holidays. Asian markets were higher, though, shrugging off Trump veto concerns as vaccine optimism, stimulus hopes and Brexit news drove gains.
SEC charges against Ripple and two of its executives triggered a rotation out of smaller, more speculative cryptocurrencies. Bitcoin and Tether looked to be modest beneficiaries with Bitcoin’s market cap gaining to $440B, Tether finishing the week with an AUM just shy of $21B, and Alt Coins down -10%.
JP Morgan, Goldman Sachs battle on Bitcoin
Over the last couple of weeks, we’ve seen a number of very constructive Bitcoin notes out of JPM. Earlier this month, the bank noted that gold could suffer for years as a possible $600B rotated into Bitcoin. This week JPM highlighted that ~ $1B of monthly inflows into GBTC indicated that this rotation may continue to drive price gains despite recent overbought signals.
According to a Goldman note this week, though, Bitcoin is no threat to gold. Goldman sees Bitcoin as the retail reflation trade while gold is a safe haven better suited to long-term capital preservation. Goldman thinks what appears to be a gold-to-Bitcoin rotation is really being driven primarily by vaccine optimism and a push into riskier assets.
I think they’re both probably right. We’re clearly in the middle of a risk-on rally, but there are definitely gold vs Bitcoin allocation decisions being made. This week Christopher Wood, global head of equity strategy at $51B financial services provider Jefferies, announced a 5% reduction in gold allocation in favor of Bitcoin with the intention to add on price dips.
Bitcoin on the balance sheet
Elon Musk sparked speculation that Tesla could add Bitcoin to its balance sheet during a public exchange with the CEO of MicroStrategy this week.
As of 3Q20, Tesla has $14.5B in cash and cash equivalents. MicroStrategy has shown that big-ticket Bitcoin trades can be executed through compliant, regulated venues. Over the past few months, MicroStrategy has executed $1.3B worth of Bitcoin acquisitions including a $425M Coinbase facilitated transaction and a $550M convertible bond issuance earlier in the month.
Globally, there are only a handful of publicly traded companies with Bitcoin on the balance sheet. The grand total of these positions sums to about US$2.4B. Of that, MicroStrategy and Square account for ~ 75%.
If 2020 was the year that mainstream institutional investors began to take note of Bitcoin, 2021 will probably be the year that CFOs and treasury departments get started.
This time next year Rodney…
The stock-to-flow model really nailed the end of year price prediction.
The stock-to-flow ratio is an attempt to quantify scarcity by comparing existing stockpiles to the annual flow of new production. In the Bitcoin Standard, Saifdean Ammouns used this metric to compare the current and future scarcity of Bitcoin to that of gold, predicting that by
“…around the year 2022, Bitcoin’s stock-to-flow ratio will overtake that of gold”
Pseudonymous Dutch quant, Plan B, later expanded on the idea with the stock-to-flow model. A model that generates a price prediction from Bitcoin’s increasing scarcity (as fewer new Bitcoin are produced).
It’s amazing how accurate that model has been this year, especially given that at this time last year Bitcoin was trading ~ $7,200. At the time of writing, Bitcoin is trading ~$24,100, just 3% shy of the predicted $24,732.
I think this highlights how important the supply side of the equation is in Bitcoin price forecasting and how Bitcoin’s four-year block reward halvings are really the primary driver behind price cycles.
Looking out to a 2021 price forecast, the model predicts a Christmas Day 2021 price of $106,393. While this sounds like a massive number, $24,000 felt like an equally massive number this time last year. It’s also worth noting that next year’s predicted price, at 4.5x current, is only slightly more aggressive than this year’s 3.3x gain. Given the decreasing supply of liquid, on exchange Bitcoin, macro tailwinds, the gold rotation, and increasing institutional adoption, $106,393 might even prove to be a conservative target.
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Bitcoin markets news
- Jefferies is a $51B global financial services firm based in New York
- Chris Wood, global head of equity strategy at Jefferies, said the firm would trim their multi-year 50% gold allocation by 5% in favor of Bitcoin
- Wood has been the top Equity Strategist in almost all major broker polls in Asia for the past two decades. His weekly newsletter ‘Greed and Fear’ is one of the most popular institutional notes on the street.
“The 50 percent weight in physical gold bullion in the portfolio will be reduced for the first time in several years by five percentage points with the money invested in Bitcoin. If there is a big drawdown in bitcoin from the current level, after the historic breakout above the $20,000 level, the intention will be to add to this position.”
- In a public Twitter exchange, Musk asked MicroStrategy CEO, Michael Saylor, whether it was possible to convert billions of Tesla’s dollars to bitcoin. MicroStrategy has purchased more than US$1.3B worth of Bitcoin in recent months
- Strategist says Bitcoin looks overbought but notes that GBTC now has a total of US$13.1B under management and fund inflows are running at about $1B / month
- Article cites growing corporate and institutional interests in Bitcoin as an inflationary hedge with recent investments by Mass Mutual, MicroStrategy, Paul Tudor Jones, and Stan Druckenmiller
“We’re seeing unprecedented interest from institutional investors as a result of the pandemic’s economic impact, as well as Bitcoin’s extraordinary performance”
- Skybridge Capital is a $9.2B fund-of-funds founded by former White House Director of Communications and Goldman Sachs alumni, Anthony Scaramucci
- Skybridge will invest $25M and will be opening the fund to investors Jan 4 with a minimum buy-in of $50,000
- Skybridge’s fund will charge 0.75% in fees vs the Grayscale Bitcoin Investment Trust’s (GBTC) 2% and is expected to trade much closer to NAV than the 20–30% premiums typically seen with GBTC
“…we think there’s a very large move for Bitcoin over the next five to ten years. We think it’s a product that people will have in their portfolios, and we wanted to get out there with something that could be available to RIAs, the mass affluent, and people who have an interest in owning some digital assets.”
- A very different view to JPM’s “Bitcoin will make gold suffer” headline from earlier in the month
“Gold’s recent underperformance versus real rates and the dollar has left some investors concerned that Bitcoin is replacing gold as the inflation hedge of choice…While there is some substitution occurring, we do not see Bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort.”
- The bank has a pretty weak record on Bitcoin analysis. In May, they hosted a call “US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin” that featured some of the most inaccurate and shallow analysis published this year. The report concluded, on May 27 2020 when Bitcoin was at $9,200, that
“We do not recommend bitcoin on a strategic or tactical basis for clients’ investment portfolios”
- Despite Goldman’s lack of Bitcoin conviction, early reports suggest that they’ve been tapped as lead on Coinbase’s upcoming IPO
- SEC on Tuesday charged Ripple with conducting a $1.3B unregistered securities offering
- The SEC has also charged two executives for personal gains they received from the offering. Ripple’s former chief executive, Christian Larsen, and its current CEO, Bradley Garlinghouse, are said to have personally profited by approximately $600 million from their unregistered sales of XRP.
- This news weighed heavily on the non Bitcoin crypto space this week which ended the week -10% vs BTC finishing modestly higher
- After months of very public battles for control of the company and demonstrations of some of the worst corporate governance in the space, Bitmain co-founders Jihan Wu and Micree Zhan have reportedly reached a settlement
- Micree Zhan will reportedly buy out Jihan Wu for $600M and cede control of the BTC.com mining pool as well as Bitmain’s overseas mining centers. Micree Zhan will retain control of the Antpool mining pool, Bitmain’s China-based mining farms, AI business, and probably most importantly, the hardware manufacturing business
- Bitmain’s internal struggles have seen them bungle what was once thought to be an $18B IPO, lose significant market share to mining hardware manufacturers rivals like MicroBT, and reportedly post a $60M loss in 2019
- Many provinces in China are reportedly suffering their worst power shortages in decades
- The power outages come on the back of a coal shortage (trade tensions with Australia), higher than expected winter power demand and post virus resurgence in domestic manufacturing
- Hash rate has shown relatively little growth over the previous 2 months, despite a sharp increase in price. Tight capacity at semiconductor fabs and a bottleneck for 7NM and 8NM chips is probably the main factor constraining hash rate growth at the moment, but might also be exacerbated by China’s ongoing power shortages
Wallets ≥ 1 BTC on Christmas Eve hits record high
- Points to continued growth in users as well as an improving overall dispersion of wealth. Most importantly, though, the fact that this number is only just above 800,000 suggests we are still very, very early in terms of broad Bitcoin adoption.
Chart credit Glassnode
Christmas Cheer: The Stock-to-Flow model was right
- The Stock-to-Flow model looks to have really nailed the 2020 year-end price forecast. As of the time of writing, Bitcoin is trading ~$24,100 vs the predicted $24,732
- The accuracy is pretty impressive given we started 2020 in the $7,000 range and hit a $3,800 low in March
- The model predicts a Christmas Day 2021 price of $106,393. While that sounds like a big number, it’s only 4.4x from current. Only slightly better than the 3.3x gain we saw this year from Christmas Day 2019’s close of ~ $7,200.
Is a Bitcoin supply crunch coming?
- Since January of this year, the total Bitcoin supply on exchanges has fallen by 20% as users remove assets to long-term storage and custodian wallets. I wonder if this trend could actually mean that the Stock-to-Flow model is actually conservative and that the long term supply dynamic could actually become much tighter than originally forecast.
Chart credit Glassnode via Rafael Schultze-Kraft
Bloomberg: Bitcoin is here to stay
- Article details author’s realization that Bitcoin is the Honey Badger of Money
“Demand has proven impervious to wild price swings….like Monty Python’s Black Knight, Bitcion believers treat near-fatal volatility as mere flesh wounds. Drops of 80% are welcomed as fortuitous buying opportunities. But far from being a weakness, this is evidence of the asset class’ longevity.”
Chart credit Bloomberg
Alt Coin rotation helps support BTC and Tether
- Reports of SEC charges against Ripple and two of the company’s executives drove a steep drop in non-Bitcoin cryptocurrency this week
- Looks like a modest rotation into Bitcoin and Tether
Bitcoin on pace to outperform everything…again
- Year-to-date Bitcoin is +229% outperforming everything…except Tesla (!)