Bitcoin’s Biggest Year | 2020 Recap
This is part one of my series reviewing 2020. The other entries can be found here: Part 1, Part 2, Part 3, Part 4, Part 5.
Bitcoin had an absolutely incredibly 2020, receiving widespread recognition as a macro asset for the very first time, and of course surpassing its 2017 highs at the end of the year. Let’s take a look at how it all played out.
The Safe Haven Debate
Discussions about the nature and purpose of Bitcoin began in early January when Bitcoin appeared to act just like gold and oil following the killing of an Iranian General. In reality, the situation was more complicated than it seemed on the surface.
On January 3rd, a US drone strike killed Iranian Major General Soleimani. As this news broke, oil and gold futures jumped in price as traders rapidly priced in the increased probability of oil supply disruptions in the Middle East. Bitcoin also increased in price, not until about three hours after the news broke.
While many on Twitter were quick to use this as evidence of Bitcoin reacting to geopolitical events, the delay suggested otherwise. It’s far more likely that the sudden price rise was caused by forced liquidations on futures products — something that happened quite frequently at the time.
But then things got more interesting. Responding to the drone strike, Iran launched missiles at a US military base in Iraq, prompting another increase in the price of gold and oil. Not only did Bitcoin move with them this time, but it did so with far less ‘vertical’ motion than before — implying this price action wasn’t the result of sudden liquidations.
A day later, as Trump addressed the nation and de-escalated the situation, Bitcoin once again moved with gold and oil, this time to the downside.
So, what does all this mean? Is Bitcoin a safe-haven now?
Well, maybe, in the right circumstances. Really, though, this is an example of narratives willing themselves into existence. The initial, coincidental price movement generated significant conversation about Bitcoin as a safe-haven asset and convinced some traders that others viewed Bitcoin in that way. Knowing that, it made sense for them to make a similar trade on the next event, which only made Bitcoin look like more of a safe-haven. Eventually, after enough of these cycles, Bitcoin may stop being traded like a safe-haven asset because some people think it might be one and will instead simply be a safe-haven asset.
Black Thursday
These discussions came roaring back in late-February, though this time it was sceptics of the safe-haven narrative leading the charge. Bitcoin had sold off with just about every other market as the Coronavirus panic set in, leading some to say Bitcoin had failed to be the safe-haven many had claimed it to be.
However, as Messari’s Ryan Watkins explained in a great piece at the time, these critics had simply misunderstood what Bitcoin was a save haven from. He wrote: “Bitcoin’s case as a safe haven asset is not invalidated. Bitcoin is not a hedge against a recession… Bitcoin should not be expected to reliably hold value in times of severe market stress, and its performance last week should not come as a surprise. Gold did exactly this during the 2008 financial crisis. Instead, Bitcoin is a hedge against fiat currency. What Bitcoin provides protection against is not a slowdown in the economy, but the mismanagement of fiat monetary systems. What is a better dynamic to track is not how Bitcoin performs as markets sink due to Coronavirus fears, but how Bitcoin performs in response to central bank stimulus to mitigate the economic impacts of the virus” — we’ll take a look at how it performed there in a bit.
Of course, to provide any form of protection against inflation and currency mismanagement, Bitcoin had to survive the turbulence and difficulties of March. And, for a brief moment during the colossal selloff of March 12th, some might have doubted it would.
On the day that became known as ‘Black Thursday’, Bitcoin experienced its second-largest drop in history, falling more than 50%.
The worst of the drop was due to the derivatives exchange BitMEX, who liquidated something like $1.5 billion worth of leveraged long positions between the 12th and 13th of March. BitMEX does this using an automated system called the Liquidation Engine, which groups many liquidations and tries to sell them slowly and at a price that’s favourable to traders so they don’t lose more than they absolutely need to. On Black Thursday, this wasn’t possible. An already substantial selloff in the morning had convinced many miners, market markers, and traders to wait things out on the sidelines, forcing the Liquidation Engine to sell into an illiquid market, pushing prices ever lower. BitMEX was stuck in an endless and destructive loop that would have driven Bitcoin to 0… until they were conveniently hit with what they claimed to be a DDOS attack, taking the exchange offline and ending the cycle. With most of the sell-pressure removed, Bitcoin rapidly bounced back above $5000.
Black Thursday marked Bitcoin’s lowest point in 2020 but set it up to have a stellar rest of the year by pressing short-term traders and those unable to hold through substantial drawdowns to sell to those building stable longer-term positions.
It also forced so many miners offline that Bitcoin later experienced its second-largest decrease in mining difficulty ever, with the only drop more significant having occurred in 2011 — well before the introduction of ASICs and the true industrialisation of mining. While this decrease in difficulty would have made things easier for the miners that survived Black Thursday, it didn’t remove pressure from them completely. They’d have just two months to ensure everything was in order before their income was slashed once more in the Halving.
The Halving
Against a backdrop of unprecedented money printing and helicopter money, Bitcoin completed its algorithmically scheduled quantitative hardening on the 11th of May. To highlight this brilliant juxtaposition and pay homage to Bitcoin’s Genesis Block, f2pool included a headline in the 629,999th block — the last before the Halving — reading “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”
The 630,000th block was found by AntPool at 19:23 UTC. It cut the number of bitcoin issued in each block to 6.25 and reduced Bitcoin’s annual inflation rate to something comparable to gold’s.
Those details don’t really matter. What was important was that Bitcoin was continuing along its predetermined path, regardless of the chaos in the world around it. Unlike every other money, there’s no entity that can, through of fear or greed, increase the number of bitcoin that will exist or change when they’re created. It operates exactly as expected at all times. That’s why it’s such a great hedge against traditional currencies, which can be severely damaged by their human operators.
The Herd Arrives
As central banks all over the world cranked their money printers up to the highest setting, concern about the damage being done and an oncoming wave of inflation grew far beyond the goldbugs and Bitcoiners who typical discussed them. The ‘money printer goes brrr’ meme shows normal people were thinking about these things, and so too were major investors and CEOs, who naturally wanted to position themselves and their businesses to minimise disruption and potentially even benefit from the chaos that might come. That’s why the much talked about ‘herd’ finally turned their attention to Bitcoin in the latter half of 2020.
Just days before the Halving, billionaire hedge fund pioneer Paul Tudor Jones revealed he had allocated a ‘low single-digit percentage’ of his fund’s portfolio to Bitcoin. He also gave a thorough explanation of why he’d chosen to do that in an investor letter titled ‘The Great Monetary Inflation’. As the title suggests, PTJ was pushed to investigate store-of-value assets because of concerns about inflation caused by “an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”
Jones tried to score different store of value assets according to their purchasing power, trustworthiness, liquidity, and portability. While Bitcoin was placed fourth on his list with the lowest score, Jones was still surprised by how well it performed. He said: “Bitcoin had an overall score nearly 60% of that of financial assets but has a market cap that is 1/1200th of that. It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value. Something appears wrong here and my guess is it is the price of Bitcoin.” He also believes that Bitcoin will benefit from the coming digitisation of currencies, with projects like Libra or China’s DCEP set to make Bitcoin more understandable to a wider audience.
Months later, in October, Jones would reaffirm his belief in Bitcoin, saying he’d grown to like it even more by that point and that he thought Bitcoin was in its “first inning” with “a long way to go”.
In the months in between, Bitcoin picked up a number of other big-name backers, with by far the loudest being Michael Saylor and his company MicroStrategy.
MicroStrategy first announced plans to buy Bitcoin as a way to avoid inflation in late July. A few weeks later, they officially became the first publicly-traded company to buy bitcoin as part of a capital allocation strategy by scooping up 21,454 bitcoin (worth more than $250m at the time). In a statement at the time, MicroStrategy said investing in Bitcoin “would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments.”
Michael Saylor then went on a tour of seemingly every Bitcoin podcast to explain how he’d come to invest such a significant sum of money in the cryptoasset. After realising his company’s substantial stockpile of cash was earning virtually no interest and could potentially be devalued by incessant money printing, Saylor started learning about Bitcoin. After digesting every bit of information he could from “bitcoin luminaries” like Andreas Antonopoulos and convincing himself that buying in was the right move, he set about convincing MicroStrategy’s executives and directors of his idea. He says he set “a series of learning exercises to bring everyone up to speed.” In just three months, Saylor and his team went from having almost no knowledge of Bitcoin to buying a quarter of a billion dollars worth.
In September, MicroStrategy wrote in an SEC filing that Bitcoin served as the company’s “primary treasury reserve asset” and hinted they could buy even more. One day later, they did just that, adding another 16,796 BTC to their stash to bring their total holdings to 38,250 bitcoin.
And they weren’t done there. In early December, they announced not only another $50m purchase but a plan to issue convertible debt so they could buy even more bitcoin. Some were sceptical about this, with analysts at Citigroup downgrading MicroStrategy stock to ‘sell’, but there was clearly a lot of excitement too. What was initially announced as a $400 million offering quickly became a $550 million offering, which turned into $650 million when all was said and done. With that money, MicroStrategy purchased another 29,646 bitcoin, taking its total holdings to 70,470 BTC purchased at an average price just under $16,000. Over the year, the company had spent a total of $1.1 billion on Bitcoin, almost equivalent to the business’s market cap in August, before it made any purchases.
In October, Jack Dorsey’s Square joined MicroStrategy in adding Bitcoin as a treasury asset — though their investment was comparatively tepid at $50m. That equated to 4,709 BTC and represented around 1% of the company’s assets in Q2.
Square published a white paper alongside the news explaining their investment thesis, how they approached the buying process, and how they’re keeping their Bitcoin safe. They wrote: “We hope this outline of our decision to allocate a portion of Square’s assets into bitcoin provides useful information to others contemplating a similar strategy.” Jack Dorsey tweeted that sharing this information was more important than the investment itself — though it should be noted that a company as significant and respected as Square adding any amount of bitcoin to their treasury is a major validation for the asset, even more so than MicroStrategy’s larger play.
That same month, $10 billion asset management firm Stone Ridge Holdings Group announced they had purchased 10,000 bitcoin (worth more than $100 million at the time) to serve as its primary treasury reserve asset. Again, they cited “unchecked — and unbacked — global paper money printing” and “increasingly negative” yields as the driver behind this decision.
From there on in, things only got bigger for Bitcoin.
Towards the end of October, PayPal announced they would soon allow their 346 million customers to buy and hold cryptocurrencies, potentially making Bitcoin more accessible and trustable to a larger audience of retail investors than ever before.
In November, billionaire investor Stanley Druckenmiller admitted to owning a “tiny bit” of Bitcoin, predicting it would outperform gold and that it had “a lot of attraction as a store of value to both millennials and the new West Coast money.” Shortly before making those comments, Bloomberg had reported Druckenmiller was expecting to see slightly higher inflation in the years to come and that he was shorting the US dollar.
In December, the multi-billion dollar investment firm Ruffer said they had gained exposure to around £550m worth of bitcoin, equivalent to around 2.7% of the firm’s total assets under management. They described the investment as “primarily a protective move” that “diversifies Ruffer portfolios’ investments in gold and inflation-linked bonds, and it acts as a hedge to some of the risks that we see in a fragile monetary system and distorted financial markets.”
Perhaps more significantly, that same month insurance firm MassMutual purchased $100m worth of bitcoin for its general insurance account. While this only represents a tiny fraction of the company’s total assets — something like 0.04% — it’s still a huge story. It shows Bitcoin is being considered by and appealing to another demographic of institutional investors — one that is typically highly conservative in its investments.
As all these companies were buying bitcoin, major commenters and analysts were showing their support too. JPMorgan analysts said institutional investors appeared to prefer bitcoin to gold, and that “even a modest crowding out of gold as an alternative currency over the longer term would imply doubling or tripling of the bitcoin price.” The research arm of AllianceBernstein, a global investment manager who ruled bitcoin out as an investment asset in 2018, tentatively admitted that bitcoin does have a place in some portfolios. Guggenheim Partners’ Chief Investment Officer told Bloomberg TV that he believed Bitcoin could go to $400,000. And, a Bank of America survey revealed that “long bitcoin, short the dollar” was a highly popular trade in December.
All the excitement naturally impacted Bitcoin’s price. In mid-November, Bitcoin’s market cap broke its 2017 high of just over $329 billion, with bitcoin’s price hovered around $18,000. In December, bitcoin finally ploughed through its previous highpoint of $20,000 on its way to end the year at $27,000.
Of course, it’s already gone much higher than that in 2021, and I’m sure we’ll see even more dramatic price action in the months ahead. As Ruffer Investment’s said in a portfolio update late last year: “The current macroeconomic environment is set up perfectly for an asset that blends the benefits of technology and gold. Negative interest rates, extreme monetary policy, ballooning public debt, dissatisfaction with governments — all provide powerful tailwinds for bitcoin.”
What’s important from all of this is that the ideas of bitcoin as a credible monetary asset and as a hedge against inflation have received firm support and are well on their way to being properly validated. 2020 will likely be looked back upon as the year that bitcoin started to go mainstream. But, although it’s undeniably exciting to see bitcoin taking these great strides on the world stage and entering a new era that few early supporters would realistically have expected, there are some downsides to it. While the support of major companies and powerful individuals provides a degree of protection from significant government overreach like attempts to ban bitcoin, those parties are unlikely to defend essential Bitcoin features like censorship resistance and pseudonymity. For example, how many of Bitcoin’s new supporters wrote to FinCEN to argue against the proposed wallet rule that could significantly harm privacy? In fact, major banks and investment firms may even advocate for greater restrictions and burdensome requirements as a way to kill off smaller bitcoin companies that could compete against them. And, though wealthy white men and multi-billion dollar companies are certainly welcome to own bitcoin, they’re hardly the audience that will receive the biggest benefit or understand Bitcoin’s full importance.
So, as we enter a world where Bitcoin is increasingly significant and widely held, we may have to fight ever harder to ensure its cypherpunk origins endure.
Disclaimer
Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Any projects mentioned are not recommendations and may be highly experimental and therefore risky. Please evaluate your own risk tolerance before trying them out.
I may own some of the cryptoassets mentioned.
At the time of upload (February 2021), I own:
- Long Term Holdings: Bitcoin (BTC), Ether (ETH)
- Short-Medium Term Holdings: Aave (AAVE), Alpha Finance (ALPHA), Terra (LUNA), THORChain (RUNE), SushiSwap (SUSHI), Uniswap (UNI), Nexus Mutual (NXM), Yearn.Finance (YFI)
- Stablecoins: USDC
