Blockstream Markets Weekly — Nov 12, 2021
CPI pumps to a 30 year high, Bitcoin resets ATH, Taproot upgrade incoming, Blockstream Mining Note launches tranche 7, Russia moves to legalize mining, Kazakhstan becomes the second-largest BTC miner, and Samson Mow and Michael Saylor agree…Bitcoin is going up forever
By Jesse Knutson
Bitcoin looks set to end the week on the bottom end of its seven-day range, down off a near touch of the $70,000 mark earlier in the week, but probably good enough to squeak out the third weekly win in a row.
Gains this week were helped by accelerating inflationary concerns after data out of the US pointed to a 6.2% YoY jump in the CPI, the highest reading in three decades, and up 0.9% from the previous month.
The red hot CPI report also fueled gains in gold which was up six of the previous seven days and looks on pace to post its best weekly gain in close to seven months.
Inflation, mining, and Taproot
News flow was a bit slower this week but remained generally positive. Inflation was the dominant theme with commentary from Pantera Capital and Bloomberg Economics highlighting Bitcoin as the inflation trade.
Mining news was led by reports that Russian lawmakers were moving forward on a plan to legalize Bitcoin mining, Kazakhstan growing to become the second-largest global mining region, the Blockstream Mining Note launching its seventh tranche, and indications that the Global semiconductor shortage would persist into 2022 (constraining hashrate growth).
Bitcoin’s Taproot upgrade is also expected to kick in over the weekend, allowing Bitcoin to better optimize scalability, privacy, and smart contract functionality.
Liquidated for the greater good
Volatility increased sharply this week, in line with my expectations of mean reversion after the extreme low volatility over the previous week.
That mean reversion was helped in part by one of the biggest liquidations in months with more than 174,000 traders and around $200M of positions cleared out within a 24 hour period.
With the estimated exchange leverage ratio and the aggregate funding rate both at the extreme top end of their recent ranges, this kind of deleveraging at this point in the rally — while painful for those liquidated — is healthy for the market as a whole and sets us up to potentially move higher in the coming weeks.
Just getting warm
I think the uptick in volatility we flagged last week is probably just getting started.
If you look at the Google trends chart, retail interest is only just beginning to accelerate. US-based searches for Bitcoin are only 25% of the 2017 high, while global searches are only slightly higher.
Deleveraging and a bit of price consolidation will help firm up the base above $60,000 and put us in a better position to punch above $70,000 in the coming weeks.
As Pantera Capital notes in its recent newsletter, Sound Money, history suggests that there is a lot of room for this rally to run yet. The last time Bitcoin retook an all-time high after a significant correction, it went on to rally another 3.2x. The average increase over the previous three occurrences is an 8.8x jump over 166 days.
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Bitcoin markets news
- Tranche seven totals €2,600,000 (~ $3,000,000) bringing the grand total issued to date to just shy of $40,000,000
- Priced at €320,000 (~ $366,000) which includes ~ 1.95 BTC mined in previous tranches
- While this sounds hyperbolic, I think it’s also in line with the charts below and commentary this week from Pantera Capital and Bloomberg Economics
“a strong asset is going to go up against a weak asset forever, and since we know that nobody in the universe can create more Bitcoin and we know that every nation-state is going to create more currency, it isn’t really that much of a stretch to say that measured in the currencies of nation-states Bitcoin is going to go up forever”
- I think the biggest difference in their views is whether Bitcoin integrates into the legacy system or just simply absorbs it. This was a great conversation and I think definitely worth a watch. They agreed to revisit the conversation at $100k (so probably around Christmas)
- Over the past 10 years, CPI has risen ~28%. Denominating CPI in Bitcoin shows deflation of 99.996%
“In other words, what cost one Bitcoin 10 years ago would now cost 0.004 satoshis”
- Economists at Bloomberg Economics estimate that about half of Bitcoin’s recent price gains can be explained by inflation fears, with the rest coming from ‘market exuberance’ and momentum trading. Good chart below
- Leave it to the corporate media to spin the story with this title
- The buried lead is that according to the Cambridge Centre for Alternative Finance Kazakhstan is now the world’s second-largest mining region
- Kazakhstan has been pretty supportive of the broader Bitcoin ecosystem for several years and has made efforts to attract investment. It looks like that is starting to pay off (geographic proximity to China and an influx of miners post the ban probably also helping a bit as well :P )
- Kazakhstan also has abundant hydropower, maybe an influx in mining demand will be beneficial in building out further hydro capacity
- I think the Bitcoin mining space is going to change significantly in the coming years. Not only are we seeing much broader institutional interest from traditional financial players with massive balance sheets, but also a sharp uptick in sovereign investment
- Last week there was news that Laos expects to bring in ~ $200M from BTC mining next year. El Salvador is famously also using geothermal energy to mine
- Would expect this to pick up significantly in the coming years, especially for countries with hydro resources
- Earlier this month the mayor tweeted that he would take his paycheck 100% in Bitcoin (paid in dollars and converted into Bitcoin)
- Bitcoin dividends will be paid out to citizens based on returns from the city’s MiamiCoin which has apparently generated $21M so far (and has already contributed 1/5 of the city’s total annual tax revenue)
- In a CNBC interview, Cook said that he thinks it’s reasonable to own it as part of a diversified portfolio
- He also said that while he has invested in cryptocurrency personally, Apple currently has no plans to do so. But I think the fact that he has personal experience with Bitcoin, significantly increases the likelihood that Apple will eventually also support or invest in it
- This is maybe the best layman’s explanation of why Taproot matters. In short, The Taproot soft fork will optimize scalability, privacy, and smart contract functionality
- It will bring about a new address type, making all spending look similar whether its a normal payment, multisig, or executed on the Lightning Network
- It will also allow users to save on transaction fees by reducing transaction size and by making nearly any transaction appear like a simple, single-signature one, and will also enable larger and more complex operations to be deployed on Bitcoin that were previously unfeasible or almost impossible
- Digital asset manager Grayscale has topped $60 billion in assets under management (AUM), surpassing the AUM of SPDR Gold Shares, the largest and most liquid gold exchange-traded fund (ETF) in the world
- Of Grayscale’s $60B, 73% is contributed by the GBTC
- This obviously has more to do with Bitcoin price appreciation than new GBTC inflows
- This will likely continue to be a major constraint on hashrate growth in 2022 and will probably mean that Bitcoin mining profitability will remain above historic levels for the next several quarters at the very least
- Follows similar channel checks with networking device makers that also expect the chip shortage to persist in 2022
USD at an all-time low against most hard assets
- As Pantera notes in their recent newsletter Sound Money, gold’s underperformance relative to everything else is maybe one of the most surprising aspects of the chart below
- Bitcoin is really stealing a lot of gold’s thunder
Chart credit: Pantera
Bitcoin price action after retaking all-time high
“The last time bitcoin retook its all-time high after falling over 50%, it went 3.2x above that shortly thereafter. The average increase of the past three instances of making a new all-time high — 8.8x over a 166-day period.”
Chart credit: Pantera
Retail interest is only just starting to heat up
- I think the chart above and the chart below are probably linked
- The chart above and headlines of new highs, tend to accelerate Bitcoin interest amongst retail traders. There’s typically a bit of lag after the initial break above the previous all-time high before retail interest really starts to accelerate
Chart credit: Google Trends
Inflation drives Bitcoin gains
- Economists with Bloomberg Economics estimate that roughly half of Bitcoin’s recent returns can be explained by inflation fears
- The rest they attribute to market exuberance and momentum trading
Chart credit: Bloomberg