Before we jump into the analysis and key developments of the last two weeks, I wanted to share this chart from Galaxy Digital Research. Despite the recent volatility in price, bitcoin’s usage continues to grow. Thus far in 2021, bitcoin has settled more than $12 trillion of value on the network. To put that in perspective, PayPal settled $936 billion in 2020. Price might be volatile, but adoption and usage continue to only go up. A good reminder that price is a lagging indicator.
Source: Galaxy Digital Research
On Chain Analysis
Last newsletter we covered the liquidation cascade in detail. Since then, bitcoin and the greater crypto markets have basically been range bound ever since that de-leveraging event. The good news is that the futures open interest has remained at these lower levels meaning that the leverage that was wiped out of the system has not returned.
Another key metric we are watching is SOPR. First introduced by Renato Shirakashi in 2019, Spent Output Profit Ratio (SOPR) compares bitcoin’s price at the time the user first received a specific bitcoin (or fraction of a bitcoin) to the price at which that same bitcoin was “spent” (transferred to another wallet or sold on an exchange). The SOPR ratio simply reveals if that bitcoin was spent at a profit or a loss. We can then aggregate this ratio across all transactions that occurred to understand the magnitude of the profit or loss the market is selling at.
The key number in the SOPR ratio is 1. Anything above 1 means the market in aggregate is realizing profits and vice versa for when SOPR drops below 1. When SOPR falls below 1 it also means that older coins, which have a lower cost of acquisition, have stopped selling. If they were still selling, those coins would still be sold for a profit thus SOPR would stay above 1. In other words, when SOPR drops below 1, there is a base of market participants that refuse to sell at current prices. This provides us a signal for when the market has established or is close to establishing a new price floor and we are likely to see another run up in price at some point in the future.
Because of this, SOPR is one of my favorite buying indicators. If we zoom in on the same graph from above, we can see that SOPR dipped below 1 this past week.
Lastly, I would like to cover a metric developed by Will Clemente and Willy Woo called Illiquid Supply Shock Ratio. This metric measures the ratio between illiquid supply and liquid supply. When addresses classified as illiquid accumulate coins, the numerator in the ratio increases thus the ratio increases. Typically, ISS and bitcoin’s price move in the same direction. This is because as illiquid supply increases, assuming all else equal, less supply should result in higher price. However, when there is a divergence (price falls and ISS rises or price rises and ISS falls) that’s historically been an indicator worth paying attention to. The reason I bring this divergence up is to highlight the difference between the crash we had in May versus now. As Will Clemente recently pointed out on twitter, bitcoin’s price started rising as ISS started falling right before the crash in May. In other words, ISS showed there was an increasing sell pressure just before the crash. Fast forward to today and we have the exact opposite occurring. The ISS ratio is rising as the price is falling. This is a bullish dynamic for bitcoin’s future price.
We are currently in a very interesting time in the market. Leverage has decreased, selling is showing signs of slowing down and more coins are continuing to be moved to entities which tend to HODL their coins for the long term. All these are healthy and suggest a strengthening of underlying network fundamentals. However, we may not be fully out of the woods quite yet. The short-term holder cost basis is right around $53k which means short term holders are still under water in aggregate. $53k is also right around the threshold for bitcoin to reclaim a $1 trillion market cap. It seems to be that $53k is a key marker for bitcoin to break out of and stay above before its ready to go on another run towards higher prices.
In summary, I remain cautious and patient in the short term until we cross and stay above the $53k mark. Long term, I continue to be incredibly bullish heading into 2022.
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:
Crypto Goes to DC
On Wednesday December 8th, top executives from Coinbase, Circle, FTX, Paxos, Bitfury and Stellar appeared before the House of Representatives Committee on Financial Services. This wasn’t the first time Congress has held hearings on crypto but this one did have a noticeably different tone. In past years, crypto advocates were typically greeted by congressional members with what can be described as skepticism at best and sometimes outright hostility. However, the congressmen in this most recent hearing seemed to be much more curious and dare I say, optimistic about the crypto industry.
Whereas hearings in the past typically focused on the criminal use of cryptoassets or the potential downsides of speculating on an emerging asset class, this most recent five hour long hearing featured questions about the security advantages of blockchain technology and the potential for crypto to provide greater financial inclusion.
At one point during the hearing Ohio Representative Anthony Gonzalez said that “Web3 can empower anyone.” I just about fell out of my chair.
But it wasn’t just Gonzalez. Several members brought up the prospect of the U.S. losing out on crypto-related innovation because of cumbersome regulation, praised the potential for crypto to provide lower-cost alternatives to the existing banking system and suggested the industry would benefit from a more cohesive policy from the U.S. government. At one point Congresswoman Ann Wagner not only agreed with the need for regulatory clarity but took a shot at Gary Gensler saying she “wished that he would listen to his commissioners and the feedback he has been given.” That sound you hear is the entire crypto industry nodding and cheering in agreement.
But the drop-the-mic moment came from Congressman Ted Budd’s exchange with Bitfury’s CEO Brian Brooks. When Brian Brooks pointed out that spot ETFs safely exist in Canada, Germany, Brazil, and Singapore but not in the US, Ted asked why that is. Brian calmly pointed out that the SEC has refused to approve a spot ETF, a product that other G20 nations have approved which prompted this exchange:
Ted Budd: So, the US is behind the curve?
Brian Brooks: Unquestionably.
Ted Budd: …
You could just see the lightbulb going off in the minds of the committee. And while all the crypto executives were very good, Brian Brooks was exceptionally so.
It wasn’t all sunshine and roses though. Some members did raise concerns about bitcoin mining’s carbon footprint (clearly there is much more educating that needs to be done on this front) and a lack of diversity in the industry (fair critique). That being said, the hearing was by far the most positive, constructive, & bipartisan discussion the US government has ever publicly had on crypto. In fact, several members of the Committee declared they would be working on bills to streamline crypto regulation and support the industry.
I have no clue if it was all just posturing and empty rhetoric or if this will actually amount to something. The cynical view would be that because 2022 is an election year and everyone has seen what supporting the crypto industry can do for fundraising and raising a candidate’s national prominence (see Cynthia Lummis and Francis Suarez below), politicians are merely jumping on the bandwagon out of self-interest. The optimistic view is that policymakers have actually started doing their homework (as evidenced by the level of crypto knowledge inherent in many of the questions the committee asked) and are realizing the positive impact this industry can have. Regardless which is true, it appears that this past hearing marked a shift in Washington’s outlook on crypto.
Crypto’s political power is growing
One of the biggest stories in crypto this past year has to be the rapid growth in the crypto industry’s political clout. The tone and questions received during the hearing discussed above is a testament to the increased efforts, donations and engagement in DC over the last several months.
What is so impressive about the entire crypto industry’s lobbying efforts is how it went from 0 to 60 seemingly overnight and caught the attention of every policy maker in Washington. In the first 3 quarters of 2021, the crypto industry spent 4x what they did in all of 2020 on lobbying efforts. Then in August of this year, the $1.2 trillion infrastructure bill that had been in the works for many years, was suddenly ground to a halt because of concerns about its impact on the crypto industry. Although the push back ultimately wasn’t successful, the effort highlighted the 50+ million pro-crypto US citizens, on both sides of the isle, who organized swiftly and were not afraid to call out bad DC policy. It’s clear that many politicians took notice and have since expressed a desire to learn more about digital assets.
The bottom line is there are a growing number of incentives for politicians to embrace crypto. As the industry has become an increasingly viable force in Washington, its role in political funding has been on the rise and no one has benefitted more from this than Cynthia Lummis. The Senate’s most outspoken crypto advocate and first US Senator to publicly hold bitcoin, has had a significant portion of her campaign donations come from the crypto industry. Furthermore, you can expect future announcements about the crypto industry’s efforts to create pools of capital to back crypto-friendly politicians regardless of what political party they belong to. If you are a politician with a pro crypto stance, it will be very easy to raise money for your campaign in 2022.
And then there is Miami Mayor Francis Suarez who has attracted national attention over the past year due to his embrace of the crypto industry. Buoyed by the support of crypto twitter, Suarez has been the subject of glowing magazine profiles rarely reserved for mayors. This rise has begun fueling speculation that the youthful Republican could be a future presidential candidate.
Every time a politician tweets something positive about crypto, it tends to go viral. The amount of money coming into crypto lobbying groups and into pro-crypto political campaigns is accelerating. Politicians are now issuing NFTs to raise money. Crypto companies are increasingly getting more involved in Washington. The number of consumers who use crypto and advocate for it is growing. The fact is, being pro crypto is good for one’s political career and that is not going unnoticed by an increasing number of politicians.
At the end of the day, there are good reasons for both conservatives and liberals to embrace crypto. I fully expect that in coming years we will see politicians run for office with an explicit crypto mandate and have previously argued that we will have a bitcoiner as president in the future. This is all becoming more likely by the day.
Tick Tock, Next Block
On December 12th , bitcoin reached an interesting milestone. Of the 21 million bitcoin that will ever be created, 18.9 million have now been released into the network meaning 90% of the total supply has been mined. Although this is largely a superficial milestone, it does highlight the stark contrast between bitcoin and fiat currencies.
The first is just how scarce bitcoin is compared to fiat. There isn’t that much bitcoin left to be mined and the supply that has been mined is increasingly being locked away in cold storage. Meanwhile the US Senate just passed an increase to the debt limit by $2.5 trillion and I doubt anyone believes it will not be increased again in the future. While the amount of fiat currency available is essentially unlimited, bitcoin will only become harder and more expensive to accumulate in the years to come.
Second, reaching the 90% threshold took just under 13 years. However, the last bitcoin will not be mined until the year 2140 due to the fact that bitcoin’s supply issuance gets cut in half roughly every four years. This means the next 9% will take roughly the same amount of time as the first 90%. It also means that by 2035, 99% of bitcoins will be in circulation, but it will take another 100 years to mine that last 1%. The number of bitcoin created is decreasing at an exponential rate. Conversely, the supply of dollars appears to be increasing at an exponential rate as evidenced by the fact that 40% of all dollars ever created have been printed in the last 12 months.
In Other News
A growing number of financial advisors are recommending everyone have cryptocurrency in their portfolio, no matter their age.
Most millennial millionaires have the bulk of their wealth in crypto, and they’re planning to add more in 2022 despite the recent price declines.
40% of crypto owners surveyed report they would be likely or very likely to switch their primary bank to one that offers crypto-related products in the next 12 months.
A bipartisan group of U.S. senators requested that Treasury Secretary Janet Yellen specify how the finance ministry will define a “broker” for crypto tax reporting purposes and stated that they “are also prepared to offer legislation to further clarify that intent.”
The OCC published its Semiannual Risk Perspective report for the fall of 2021 which has the most in-depth analysis of how digital assets might interact with the banking sector.
Nike has agreed to buy RTFKT, a virtual collectibles company that creates digital products like sneakers and uses blockchain technology to ensure authenticity.
Michael Jordan jumps into Web3 via Solana app for athletes.
The 2021 NFT market explained by Chainalysis.
NFTs and Cryptocurrencies replace cash as a new holiday gift.
Adidas’s first NFT drop nets $23M and shoots to top of the charts.
Gaming giant Ubisoft becomes the first major gaming company to launch in-game NFTs.
Payments giant Visa has formed a global crypto advisory practice to help financial institutions develop cryptocurrency business lines as demand grows.
Chainalysis to integrate Lightning Network to enable clients to make deposits and withdrawals on the Lightning Network while complying with regulations.
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.
BACK TO INSIGHTS