The research team at Onramp recently put out an amazing statistical analysis on correlation, performance, volatility, and portfolio modeling. I’m biased but I think it’s well worth the time to read through. If you are interested in taking a look, feel free to click on the link below:
https://onramp.docsend.com/view/fwbkq9c6pdi5bmyu
With that, let’s jump right into it.
On Chain Analysis
Last newsletter I argued that based on the on-chain data we were still in the early innings of a bull run and the data suggested that a new floor might have been established around the $55k-$60k range. Since that time, bitcoin hit new all-time highs and then dropped down right smack into this range. As of writing this, BTC has traded between $55k and $60k for 7 straight days without ever dropping below $55k and we now appear to be in a consolidation period precisely where the on-chain data indicated the support level was likely to be. As much as I would love to claim that I’m some sort of mad genius for calling this one week before it came to fruition, the truth is I was simply following the on-chain data (though if you want to shower me with praise, I’m not opposed to it).
Because we know the last price at which every coin (or fraction of a coin) moved, we can measure and visualize the distribution at which every coin last traded. This is useful as it can help us quickly identify areas of support and resistance.
What is interesting about bitcoin consolidating around the $55-$60k range is that it’s just above the $1 trillion threshold for bitcoin’s market cap. Given the current supply of bitcoin, any price above $53,000 means bitcoin is a trillion-dollar asset. In fact, although bitcoin first achieved a $1 trillion market cap earlier this year, 20.4% of bitcoin’s money supply has now transacted above this trillion-dollar market cap threshold. This gives me confidence that we are unlikely to see a big drop in price from current levels (though anything is possible) as there are a significant number of investors willing to step in and buy before it drops below $53k.
Despite the dip down to as low as $55k over the past week, we are starting to see on-chain activity that usually is representative of the beginning stages of a bull run. Yes, you read that correctly. Despite bitcoin’s recent dip, I’m telling you we are in the early stages of a larger upward trend.
As we discussed in our last newsletter, during bear markets, the short-term market participants tend to get flushed out. However, during bull markets, we often see an increase in the number of these new investors (typically retail investors) re-enter the market. Using on-chain data, we can track the number of new entities on the blockchain, which provides us with a measurement of newcomers coming onto the network. Lo and behold, this metric has started to pick back up again.
Although we still have a long way to go until we reach anywhere close to peak activity, the number of new entities entering the market tends to be a good indication of retail investors joining, which historically has fueled a sharp rise in prices.
There is one last metric I’d like to highlight that seems to indicate that we are in the early stages of a bull run. The chart below is the net position change for long term holders. Red means this cohort is selling in aggregate, green means they are accumulating in aggregate. As I highlighted in my last newsletter, long term holders sold in Q1 of this year as price rose to new all-time highs and then began accumulating over the summer as prices fell. Well, this past week we have just started to see a reversal of that trend as long-term holders have once again just barely crossed back into the red. This is perfectly normal behavior and another good indication that we are in the early innings of a bull run. We are a long way from this cohort selling in any kind of significant quantity to indicate we are near a market top.
The takeaway from all of this is I remain extremely bullish on the prospects of bitcoin’s price (and of the larger crypto ecosystem) over the next several months. However, the short term is much less clear. We could see a sharp bounce back up to new all-time highs or we could be entering a period of sideways action as we consolidate around this new support level of $55k — $60k before we ultimately climb back up again. However, if we were to break below $53k (a key support level) and not immediately bounce back, that might change my view on the market. The key thing is not to get sucked into short term price movement but understand what is happening in the underlying fundamentals. Bitcoin’s history is littered with small pull backs right before much larger upward swings. Despite the recent dip in price, the underlying network activity is very encouraging for the rest of the year and into Q1.
As always, the on-chain data is provided by Glassnode. If you would like to have access to the data yourself, you can sign up here:
Bitcoin is Living Up to the Store of Value Narrative
On November 10, the U.S. Federal Reserve released October’s Consumer Price Index (CPI) which is the most widely used metric to measure inflation. CPI considers average prices of a basket of goods meant to represent primary consumer needs including food, transportation, medical care, etc. The CPI rose to 6.2% in October which meant that we now have the largest 12-month increase in inflation in over 30 years. And for anyone who was hoping that inflation was transitory, CPI has now topped 5% for five consecutive months and is increasing at the fastest rate since 1990.
Furthermore, there is good reason to believe that the inflation rate might be much higher than the CPI numbers recently reported. Over the years, the methodology used to calculate the CPI has undergone numerous revisions. A growing number of critics view these changes, such as the switch from a cost of goods index (COGI) to a cost-of-living index (COLI), as a purposeful manipulation designed to report a lower inflation rate. It’s worth noting that actual rent increases are significantly higher than the “owners’ equivalent rent” that is used in the CPI calculation and housing price increases aren’t factored into the CPI calculation at all. Because of this, CPI very likely underestimates true inflation experienced by Americans. Despite that attempt to dampen the numbers, CPI is still over 6% (far above the 2% target).
Which brings us to bitcoin. One of the most popular narratives surrounding bitcoin is that it’s an ideal inflation hedge to our current macroeconomic environment. The reason for this belief is rooted in bitcoin’s monetary policy. Bitcoin has a capped supply of 21 million. This gives bitcoin scarcity which is in stark contrast to the “unlimited” supply of dollars the US government can print at any time. However, there is more to bitcoin’s monetary policy than the capped supply.
Bitcoin also has a consistent, predictable, and inelastic supply issuance schedule. On average, every ten minutes a new block is mined and a predetermined number of new bitcoin are released into the network. What really makes bitcoin unique is that the difficulty of mining bitcoin dynamically adjusts so that as more resources are invested into bitcoin mining operations, the supply issuance of bitcoin remains constant. Thus, we can accurately predict from now until the year 2140 (the year the last bitcoin will be mined) just how many bitcoin will be issued and when. That programmatic predictability creates a level of trust that no fiat currency can match.
Third, bitcoin’s supply issuance decreases over time. Roughly every four years, bitcoin’s issuance per block gets cut in half. As inflation is steadily rising for the dollar, bitcoin’s inflation rate is currently 1.78% and will continue to decrease as time goes on.
Finally, bitcoin’s monetary policy is not controlled by any central party and cannot be altered. Thus, bitcoin is not susceptible to political whims nor are decisions made by a small number of people behind closed doors. Everyone that holds or uses bitcoin is on a level playing field. Bitcoin’s open nature and transparency is in stark contrast to the dollar in which decisions are made by an exclusive few.
Simply put, bitcoin has the exact opposite monetary policy than the US dollar. What better hedge could there possibly be?
The day that it was announced that the inflation level was higher than expected, bitcoin immediately rose to an all-time high. But maybe that was just a coincidence. I mean, what evidence do we have that bitcoin really is acting as an inflation hedge?
Well, one way to test the thesis is to plot prices against bitcoin. Bloomberg recently did the math and discovered that “over the last decade, the headline consumer price index has risen roughly 28% and denominating that gauge in bitcoins shows deflation of 99.9%.” What cost one dollar ten years ago would now cost $1.28 according to the CPI whereas what cost 1 bitcoin ten years ago now only costs 0.004 bitcoin. In other words, your purchasing power has significantly decreased if you were holding dollars but drastically increased if you were holding bitcoin.
Or we can look at the behavior of the market since the Fed’s printing machine went into overdrive. Historically, the number of bitcoin available to be traded increased over time. This made sense as new bitcoin were mined and released into the network, the more supply there was to trade. However, we saw a stark reversal of that trend starting on March 15, 2020. Since then, coins have been coming off exchanges in aggregate meaning more and more people would rather hold their bitcoin than sell it. What happened on March 15, 2020? Yup, that was the day the Fed first announced it was launching a $700 billion quantitative easing program to help the economy recover from the effects of the virus. (Ah, the good ole days when we thought numbers in the billions were big).
Or we can compare the performance of bitcoin to gold. Gold has historically been considered the premiere inflation hedge and for good reason. However, when it comes to store of value, bitcoin’s properties are superior to gold in just about every way. Hence, it’s no surprise that bitcoin is now becoming the best performing inflation hedge asset.
Source: Yahoo Finance, CoinMarketCap
And a bunch of awfully smart investors have publicly stated the reason they invested in bitcoin was as an inflation hedge. In May 2020, legendary hedge fund manager Paul Tudor Jones announced he had personally invested in bitcoin specifically as a hedge against inflation. PTJ was quoted as saying “The best profit-maximizing strategy is to own the fastest horse… If I am forced to forecast, my bet is it will be bitcoin.” In November 2020, Stanley Druckenmiller revealed he had invested in bitcoin as a store of value and called it “better than gold.” In January 2021, Ray Dalio jumped on the bitcoin train saying that he believed that “bitcoin has succeeded in crossing the line from being a highly speculative idea to probably being around and probably having some value in the future.” More recently, Jeffries, a $450 billion asset manager, sold a portion of its gold allocation to purchase bitcoin. They now hold 10% of their portfolio in BTC.
The truth is I could spend the next 10 paragraphs listing prominent individuals and organizations who have publicly endorsed bitcoin as an inflation hedge, but the point is the market’s belief in bitcoin as a store of value is growing.
I can hear the counter arguments coming already. “Bitcoin just dropped 15% last week, how can an asset that volatile possibly be a viable store of value?”
Now I’ll grant you bitcoin can be volatile in the short run. Believe me after investing in this asset class for nearly 8 years, I know that better than most. But a store of value isn’t about protecting your value over a day or a week or even a month. A good store of value maintains its value and ideally grows it over a long period of time. Bitcoin is still up over 100% year to date. It’s still the best performing asset class over a 1-year, 3-year, 5-year and 10-year time horizon. I’m still extremely confident that it will outperform every other asset class over the next decade.
Bitcoin’s price one year ago: $18,400
Bitcoin’s price at time of writing: $58,200
Short-term volatility can make bitcoin a risky asset for day traders but long term price appreciation has always rewarded a buy and hold strategy.
Taproot Activated
Back in June, the Bitcoin network ratified the first major upgrade to the system since 2017. On Saturday November 13th, at approximately 9:15pm, that upgrade went live. Known as “Taproot”, this upgrade improves bitcoin’s privacy and programmability while making transactions faster and less expensive.
The first thing Taproot accomplishes is it increases bitcoin’s programmability. While still far more limited than Ethereum or Solana’s smart contract functionality, increasing the programmability on the Bitcoin network enables more possible use cases for bitcoin without the need for middlemen. Providing programmers with more tools could result in bitcoin becoming more of a player in the world of Decentralized Finance (DeFi). We already have a decentralized currency, now there will be greater ability to build decentralized services through which we can use that currency.
The second objective is to increase overall transaction privacy and efficiency. Prior to Taproot, when a transaction occurred on the network, every bit of info about that transaction surfaced regardless whether the transaction required that info or not. This had two main downsides. First, it’s data intensive, especially if there are many conditions to the transaction and second, it’s bad for privacy.
An easy analogy that might help explain what Taproot accomplishes is as follows: imagine handing your driver’s license to a bouncer to enter a bar. Your driver’s license has a lot of personal info about you that the bouncer does not need. The only information the bouncer truly needs to see is your birthdate and a photo to verify it’s you. The bouncer does not need your driver’s license number, your home address or even your name. None of that info is relevant for determining whether you are old enough to enter. But you give the bouncer all that info anyways. That’s how Bitcoin’s blockchain has operated prior to this upgrade.
What Taproot enables is to surface only the relevant info required to complete the transaction. It would be as if you handed over your driver’s license but the only thing the bouncer could see is your birthdate and your photo. Limiting the data also has another positive impact in that it reduces the size for a transaction signature by about 12%. This reduction in data size benefits users by allowing for more transactions to be included in every block thus increasing throughput and reducing transaction fees. In other words, Bitcoin’s blockchain became more efficient.
Between the increased functionality and transaction efficiency, the Taproot upgrade means that developers will be able to create more extensive Bitcoin applications, while end-users will be able to benefit from cheaper, more private transactions.
Although Taproot isn’t revolutionary it does significantly improve the Bitcoin network and that’s the most important takeaway from this recent upgrade. Bitcoin is code and anything that is code can be upgraded and improved upon over time. For the first time ever, we have a global, digital monetary asset that gets better and stronger over time and that is a revolutionary concept.
The Power of NFTs
I have argued in the past that although simple jpegs of pixelated punks or bored apes may seem silly, the fact that we have provable ownership of digitally scarce items was an incredibly important breakthrough that will unlock future use cases that we cannot imagine today. Well, one of those future use cases that I never would have thought of on my own just happened the other week.
Universal Music Group announced that it is forming a virtual band called Kingship using four Bored Ape Yacht Club NFT avatars that are owned by a single collector named Jimmy McNelis. The label will develop music for the band to “perform” in animated and virtual world settings as the online metaverse grows and evolves.
Let me reframe that for you. This NFT collector, who has no musical skills, just signed a record deal because he owns the IP that Universal covets.
This is one example of the benefits of digital private property. Because anyone can now own the IP of a scarce asset, any brand or organization that wants to use that likeness would need to license that IP from the owner. And it seems that Universal is looking to take this much further than just producing music. According to the company, “you’re going to see the personalities, the characters, they’re going to come to life…it’ll be almost like the way Marvel looks at its vault and IP and starts to tell a story.” And if you own a BAYC NFT and are part of the community, you’ll get early access to everything Kingship does. That could include songs, but also potential NFT drops and metaverse concert experiences.
Then a few days later, multiple Grammy award winning producer Timbaland bought a Bored Ape NFT and partnered with several members of the BAYC community to build a new entertainment company called Ape-In Productions. According to Timbaland, the goal of Ape-In is to “discover and amplify music artists while unlocking creative content through premium NFTs.”
So yes, you can buy and sell JPGs on the internet. But what NFTs are starting to unlock are digital asset commercial rights as well. In fact, we are starting to see BAYC craft beer brands and coffee companies emerge. These new retail brands come with a built-in dedicated community more than happy to support these commercial endeavors. As a recent Harvard Business Review article put it, “owning an NFT effectively makes you an investor, a member of a club, a brand shareholder, and a participant in a loyalty program all at once. At the same time, NFTs’ programmability supports new business and profit models.” We are still very early but it’s really cool to watch the emergence of a whole new digital economy come to life.
If you are interested in learning more about the bored ape yacht club, how it’s generated over $100m in revenue and what the brand plans to do next, there is a great podcast recently released by Patrick O’Shaughnessy that I highly recommend listening to.
Web3 Breakdowns: Episode 1 — BAYC
In Other News
The City of Miami will soon give out a “bitcoin yield” to its citizens that comes from the staking of the city’s own cryptocurrency. MiamiCoin has generated over $21 Million in revenue for the city already and should encourage many Miami residents to get digital wallets and access to the emerging asset class.
Inspired by Miami, the city of Philadelphia announced they will be rolling out their own blockchain initiative for city government.
El Salvador intends to take this even further by issuing the world’s first sovereign Bitcoin bonds and using the revenue to build Bitcoin City, which will be free of income, property and capital gains taxes. The city will be financed by the yield generated by the bitcoin rather than taxes.
A bipartisan group of U.S. lawmakers have introduced a bill to amend the crypto-related provisions in the bipartisan infrastructure bill signed into law last week.
Blockchain Association raises $4M to grow its presence on Capitol Hill.
Former Citigroup CEO Vikram Pandit said in the coming years “every large bank and/or securities firm” is going to consider enabling crypto trading.
NFT’s are bringing in a whole new group of mainstream consumers to crypto.
NFL launches league-wide NFT tickets with Ticketmaster.
Twitter is launching a dedicated cryptocurrency team. The social giant has already integrated BTC Lightning tips, plans to integrate NFT functionality and is working on a decentralized social protocol called Blue Sky.
Latin American real estate leader La Haus announced on Wednesday that they will begin accepting BTC for home purchases.
A new study finds that 86% of U.S. adults have heard about cryptocurrencies and 16% of Americans have invested in, traded or used cryptocurrency.
Magnum Real Estate Group is selling three retail condos in Manhattan for $29 Million, and they are only accepting Bitcoin as payment.
Square released a white paper for a decentralized bitcoin exchange.
The NBA Houston Rockets will provide Bitcoin education programs for the community and bitcoin rewards and payment options for fans.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
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