To recollect that such a festive concept, one that evokes both sophistication and childlike wonder, could become so financially charged …
Finish finally week, Bank of America Securities chief investment strategist Michael Hartnett said in a note that bitcoin looks disposed to “the mother of all bubbles.”
Harnett seems to be using the strength and speed of bitcoin’s price rise as the base for his diagnosis, as if that is the pre-eminent feature of a financial bubble. It isn’t.
Continuing the misuse of the word, in a note quoted on Bloomberg this week, investment control firm Man Group said: “Every time a bitcoin bubble bursts, another grows back to replace it … This Dialect right frequency makes the bitcoin narrative somewhat atypical relative to the great bubbles of the past.”
This is less irritating in that Man Set apart recognizes that bitcoin is “atypical” – but it also seems to believe that bitcoin is a bubble. It’s not.
To see why, let’s pull out our financial dictionaries:
Investopedia: “During a bubble, assets typically trade at a price, or within a price line up, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset).”
Nasdaq: “A sell phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset.”
Wikipedia: “A employment in which asset prices appear to be based on implausible or inconsistent views about the future. It could also be labeled as [an asset that trades] at a price or price range that strongly exceeds the asset’s intrinsic value.”
Do you see the bourgeois thread? An asset is in a bubble when its price increase is unrelated to its intrinsic or fundamental value.
What is bitcoin’s essential value? Nobody yet knows. We’re looking at a still young technology that is evolving alongside the demand for it. The technology’s following use cases are still unclear, as is its place in the financial ecosystem. And bitcoin’s unique investment characteristics and unfamiliar metrics fetch it impossible to apply traditional valuation techniques. Many have opinions as to its fundamental value, but you only need to look at the sizeable range to realize they are based on unestablished theories and untested logic.
So, anyone saying that bitcoin is in a “foam” is making a judgement call on its intrinsic value. But they never (not that I’ve seen, anyway) share their answers or even reveal the number that they’re thinking of.
Maybe these analysts and commentators are using the relating to “bubble” in the social sense?
Economist Robert Schiller defines a speculative bubble as a “social epidemic whose contagion is mediated by cost out movements.” Those of us that spend time on Twitter or YouTube may be nodding in recognition. But Schiller specifies “epidemic” (an woebegone metaphor in 2020-21), which implies mainstream participation. The cacophony of bitcoin maximalists and altcoin enthusiasts is far from mainstream.
AQR Initial Management co-founder Cliff Asness gets it. In a 2014 paper written for the CFA Institute, he said: “The word ‘bubble,’ consistent if you are not an efficient market fan (if you are, it should never be uttered outside the tub), is very overused.”
Suds aside, he goes on to add: “Whether a discriminating instance is a bubble will never be objective; we will always have disagreement ex ante and even ex post. But to pull someones leg content, the term bubble should indicate a price that no reasonable future outcome can justify.” (my emphasis)
Most businesslike investors allocating part of their portfolios to bitcoin are doing so to hedge against the scenario of currency debasement, which appearance ofs less and less unreasonable. How do you put a price on that?
What is the “fundamental value” of a good that does not fall in value along with the underlying currency, that does not suffer the consequences of a muted economy, and that cannot be co-opted to provide profit for a select and powerful few? What is the “intrinsic value” of a technology that also grants for the auditable, immutable and censorship-resistant sharing of information? How do you assign a baseline price level to a cryptographic token that synthesizes all of this, and can also be used as a payment innovation as well as a seizure-resistant emergent store of value?
For bitcoin to be in a bubble, its charge movements need to be unrelated to its underlying value. Given the astonishing increase in the global supply of dollars at a time of rotting demand due to widespread pandemic-induced recessions, and the likely emergence of recovery-fueled inflation which will be difficult to control, it could be argued that bitcoin’s underlying value as a covert offset to the ensuing economic chaos is rapidly increasing. It could be argued that bitcoin’s price movements are fascinating up to its underlying value.
It could also be argued that bitcoin is the anti-bubble, that its price is going up because of seethes elsewhere in the economy. Many investors are buying bitcoin in response to what they see as a massive sovereign bond lather, which they believe the government will try to deflate by printing money.
And as for equities, the blistering market valuations of tech entourages are to a large degree dependent on low interest rates which could head up fast should the bond bubble rupture. This would make “alternatives” such as bitcoin even more attractive.
To get a feel for bitcoin’s anti-bubble kidney, try to imagine what its “fundamental value” would be if we had central banks that did not print money, governments that camouflage b confined balanced accounts and no fear at all of MMT, financial repression or any kind of populist uprisings. In this scenario, demand and price command be much lower than they are today.
So, before we accuse bitcoin of being in a bubble, before we imply that its in the know price in no way reflects its potential utility in a chaotic and increasingly uncertain world, let’s ask ourselves where we think the drivers of bitcoin’s utility are apex.
None of this means that bitcoin’s price won’t fall – it might, and if it does, it might do so quickly. The likelihood of that is for each investor to select.
It does mean, however, that we need to examine more than just recent price movements. A stalwart return does not automatically deserve “bubble” designation. Bubbles are not about prices – they’re about price attendant on to value.
Labels matter, and what’s coming is going to be confusing enough without charged words misrepresenting new concepts.
Macro au courants
When institutional investors praise the current macro environment as being “perfect” for bitcoin, we listen. After all, low grades, a declining dollar, and inflation fears cause investors to deploy low-yielding cash into higher-yielding assets such as gold and bitcoin.
But do these investors go upon someone to the drawing board when BTC plunges more than 20% just as the 10-year Treasury yield breaches 1%? I’m starting to insupportable if the macro narrative of ongoing Fed support suppressing yields and boosting market speculation still holds.
Just cognate with the Fed, investment managers care more about real yields (adjusted to remove the effects of inflation) rather than inconsiderable yields. The fact that real yields are still negative means the inflation outlook is muted. The Fed will take up monetary easing until it sees a meaningful pickup in growth and inflation, which supports the base case for bitcoin as a iffy asset.
And what about bitcoin as a hedge against inflation?
Some might say there’s no evidence of inflation game wild just yet. But market participants would disagree as they position ahead of economic data. We can see this in breakeven rates (a market-based method of inflation expectations) which exceeded 2% this week.
(The in the first place chart shows the US 10-year real yield struggling to chase inflation expectations higher, which should provide for the Fed active – supporting the macro case for bitcoin. )
To be fair, volatility metrics such as Treasury swaption premiums advertise no hedging bias for a significant move higher or lower in rates. This means volatility in the rates market oddments very low, suggesting that investors are not yet demanding greater reward for rising interest rate (or inflation) risk.
So, where can investors realize such a reward? Bitcoin. The cryptocurrency is attracting greater institutional flows because it yields high returns compared to established assets. Bitcoin’s high relative return compensates investors for volatility and inflation risk.
As long as the Fed keeps the punchbowl drift, the speculative quest for high returns will continue. It’s a goldilocks environment for bitcoin as an asset class.
· “We have been watching it for a longish time, and our judgement is that it is a unique beast as an emerging accumulation of value, blending some of the benefits of technology and gold. Yes, it is a seemingly non-sensical asset – but one that makes absolute discrimination for how we see the world.” – excerpt from a beautifully written and thoughtful investor letter from Jonathan Ruffer, chairman of Ruffer Investment Companionship
· “Every time a Bitcoin bubble bursts, another grows back to replace it … This very frequency settles the Bitcoin narrative somewhat atypical relative to the great bubbles of the past.” – Man Group investment note
· “In our view, prone their high volatility and the size of their past drawdowns, cryptocurrencies might be attractive to speculative investors, but they are neither a becoming alternative to safe-haven assets nor do they necessarily contribute to portfolio diversification.” – strategists at UBS Asset Management
· “I don’t honest know enough to say this with confidence, but I will still say that I’m somewhat cynical that someone is thriving to come up with a really good valuation model for what the right price.” – Cliff Asness, co-founder of AQR Principal Management, in a Bloomberg interview
· Speaking on CNBC’s The Coin Rush on Tuesday, Goldman Sachs’ global head of commodities inquiry, Jeff Currie, said the cryptocurrency market “is becoming more mature” but still has a way to go, and that he thought that nearly 1% of the current bitcoin market cap was attributable to institutional investors.
In his latest investor memo, Oak Tree Capital come to nothing Howard Marks reveals that his son “thankfully owns a meaningful amount for our family.” He goes on to say: “In the case of cryptocurrencies, I undoubtedly allowed my pattern recognition around financial innovation and speculative market behavior – along with my natural conservatism – to beget my skeptical position. … Thus, I’ve concluded (with Andrew’s help) that I’m not yet informed enough to form a enterprise view on cryptocurrencies. In the spirit of open-mindedness, I’m striving to learn.”
According to sources, Goldman Sachs is considering initiation a crypto custody service. TAKEAWAY: I remember back in the early days, we used to say that Goldman Sachs affect into the crypto business would be the tipping point for institutions. Years later, even with other impressive legacy institutions already offering digital asset services, it would still be a very big deal, as it would be the strongest signal yet that Try Street is interested. It would also trigger a scramble to catch up from other traditional financial institutions, and whim incentivize professional fund managers to at least get better informed.
This week, Reuters reported that the new Biden administration is expected to name Gary Gensler, a Washington and Wall Street veteran who has closely studied the cryptocurrency deal with, as chairman of the U.S. Securities and Exchange Commission. TAKEAWAY: This is very good news for the crypto industry. Gensler has skill in capital markets, academia and public administration. He served as chairman of the U.S. Commodity Futures Trading Commission (CFTC), as a key fiscal regulator for former President Obama, and in the Treasury Department during the Clinton administration. More recently, he taught a blockchain and crypto assets route at MIT, has spoken at several crypto conferences, and even penned an op-ed for us in 2019. Gensler sees blockchain as a “catalyst for substitution,” and seems to have a nuanced understanding of how crypto assets work and the impact they can have on capital markets. This nomination is able to rekindle the market’s expectation that a bitcoin ETF will get approved this year. (See former CFTC legal Jeff Bandman’s take on the reported nomination here.)
Crypto custodian Anchorage has secured conditional approval for a state trust charter from the U.S. Office of the Comptroller of the Currency (OCC), making it the first national “digital asset bank” in the U.S. TAKEAWAY: The U.S. now has three crypto-native banks, up from in every way zero just a few months ago (crypto exchange Kraken was awarded a special purpose depository institution – SPDI – compact by the state of Wyoming last September, and crypto bank Avanti got one a month later). There are notable differences between the three that are significance pointing out. As a national trust, Anchorage cannot accept deposits, which means that it does not automatically get access to the Fed allowance window and payment system. It does, however, make Anchorage a Qualified Custodian under U.S. Securities and Exchange Commission (SEC) rules, and combines another crypto piece to the regulated financial institution puzzle. The more “authorized” financial companies there are in the crypto hustle, the greater the level of institutional trust.
New York-based crypto exchange Bakkt, backed by NYSE parent ICE, will develop a publicly listed company via a merger with a special purpose acquisition company (SPAC) sponsored by Victory Estate Capital. TAKEAWAY: The expected valuation is $2.1 billion, for a pre-product, pre-revenue business. According to a presentation by the Bakkt duo to the SEC, the firm expects the size of the cryptocurrency market to reach $3 trillion in 2025 – in other words, it will more than triple in five years.
Gemini Care, the cryptocurrency exchange and custodian founded by twins Tyler and Cameron Winklevoss, could soon go public, according to a Bloomberg divulge. TAKEAWAY: It looks like 2020 will see a number of crypto market infrastructure companies go public. There’s Bakkt mentioned greater than, and other rumored possibilities are Coinbase, BlockFi, eToro, and I’m probably missing a couple. This is great news for us analysts, as we’re passionate about getting a look at detailed financials for some of the largest platforms in the industry. It’s also good news for the application, as these listings are likely to attract mainstream investor attention, as well as give investors an alternative path to cryptocurrency risk.
Over $3 billion flowed into the products of crypto asset manager Grayscale Investments in Q4 2020, according to its dilatory report (Grayscale is owned by DCG, also the parent of CoinDesk). Over 90% of this came from institutional investors, in the main asset managers. TAKEAWAY: The report also showed that the Q4 inflows accounted for almost 60% of the year’s sum up, in spite of most of its funds being closed to new investment for the last 10 days of the year, which highlights the acceleration of institutional concerned about in crypto assets. Furthermore, the weight of institutional inflow in the mix was notably higher in Q4 vs. the year as a whole. Almost 90% of inflows started into the firm’s bitcoin trust GBTC.
Grayscale has reopened some of the funds it came to new investment in December of last year, including the bitcoin trust (GBTC) and the digital large cap fund (GDLC). TAKEAWAY: Since Grayscale was principal for much of the bitcoin purchases in the fourth quarter last year, the reopening could be taken as good news for the shop – a buyer that had temporarily left is coming back in.
A prospectus for a new bitcoin exchange-traded fund (ETF) has been filed by Arxnovum Investments Inc. with the Ontario Sureties Commission (OSC) in Canada. TAKEAWAY: With renewed attention on a potential bitcoin ETF approval in the U.S., the OSC’s actions here could set a yardstick – a bitcoin ETF trading on a neighbouring stock exchange could kindle the competitive spirit and help the SEC realize that other ranges are leading the way in financial innovation; on the other hand, a rejection by the OSC could send a signal to the SEC that there’s no hurry.
3iq Corp’s bitcoin grant, listed as QBTC.U on the Toronto Stock Exchange, has reached over CA$1 billion (US$785 million) in market capitalization. TAKEAWAY: This au courant with of growth in an exchange-trade fund that was originally listed in Toronto in April of last year, and on the Gibraltar Stock Change in September, underscores the demand for listed bitcoin vehicles.
The bitcoin exchange-traded product BTCE, which started swop on Deutsche Börse’s Xetra exchange in June 2020, now also trades on Swiss stock exchange SIX. TAKEAWAY: The Monetary Times reported this week that, BTCE’s daily trading volumes on Xetra averaged €57 million in the beginning 11 days of January, up from a daily average in December of €15.5 million, which points to surging customer acceptance wanted in Europe for listed bitcoin products. The SIX listing takes the number of ETPs trading on the Swiss exchange up to 34, and, according to the Stock Exchange, turnover in cryptocurrency products reached CHF 1.1 billion ($1.24 billion) in 2020. This is still tiny in the blanket picture (the exchange reported 2020 turnover of over CHF 1.7 trillion, or almost $2 trillion), but if BTCE’s mode on Xetra is anything to go by, that figure is likely to substantially higher in 2021.
The number of financial advisers allocating crypto to patron portfolios reached almost 10% in 2020, an increase of almost 50% compared to 2019. TAKEAWAY: This is according to a brand-new survey carried out by crypto fund manager Bitwise and financial media site ETF Trends (you can see the full report on our Research Hub), which got input from hardly 1,000 registered financial advisers. 81% of whom reported that they had received a question from a patron about crypto in the past 12 months. This highlights the imperative for financial advisers to at least be able to fulfil questions about crypto assets – they are doing a disservice to their clients if they can’t, and dismissing something because it’s not cosy to understand goes against the ethics of the profession.
Crypto trading platform CrossTower is launching a capital markets desk for institutional shoppers. TAKEAWAY: This encapsulates two trends we’ve been seeing build up over the past year: 1) the emergence of institutional-grade crypto hawk services, which widens choice and deepens the comfort level of institutional investors in the crypto markets, and 2) the bundling of crypto-related uses and the gradual consolidation of the industry into a few firms that do many things, prime broker-style. Expanding from its boils exchange and over-the-counter (OTC) trading desk, CrossTower now offers digital asset lending, trade financing, structured goods and trade execution across multiple venues.
Digital asset manager NYDIG – which earlier this week suggested the acquisition of crypto data firm Digital Assets Data – is partnering with banking technology provider Moven to sell plugins for banks that want to launch bitcoin products. TAKEAWAY: This is yet another indication that old financial institutions are gearing up to enter the crypto asset market, either through custody services, trading tenets, payments or a combination thereof. In an online survey of more than 2,000 U.S. consumers shared exclusively with CoinDesk, NYDIG develop that 80% of bitcoin holders would move their crypto to a bank if it had secure storage. Of those uniform holders, 71% would switch their primary bank account if a bank offered bitcoin-related products and 81% at ones desire be interested in buying bitcoin through their bank.
Asset management firm Arca has closed a $10 million Series A orb-shaped of funding led by RRE Ventures. TAKEAWAY: Arca is one of the more innovative crypto fund managers in the industry. Not only does it oversee its crypto fund, but it is also pushing the envelope in terms of financial products and fund management. In 2019, it filed a conspectus with the Securities and Exchange Commission (SEC) Friday for a bond fund whose shares would be tokenized on the ethereum blockchain. In 2020, it supported the concept of “tokenholder activism,” pushing decentralized exchange and prediction market platform Gnosis to stick to its original commission or return funds to investors. It will be interesting to see what it does with the funds raised in the latest round.
This turn up by Bloomberg on the Arctic’s first bitcoin mining facility not only has gorgeous photos; it also reminds us that bitcoin does not perfectly exist in cyberspace, and it is not a pure technology play. It has an industrial side, too. TAKEAWAY: The report also reminds us that the downcast power consumption of bitcoin mining is not an industry-killer, as many early critics insisted it would be.
Speaking of mining, Minnesota-based Reckon North and New York-based Foundry Digital (owned by DCG, also the parent of CoinDesk) have partnered to provide a “turnkey” hosted mining unravelling which allows investors to purchase hosted machines through either company. TAKEAWAY: This is a step in the direction of turning bitcoin mining into an investment option with fewer barriers (such as finding a location, obtaining the machines, etc.). It could also serve as the basis for other types of financial products, such as mining-based collateral and hedging derivatives. Crypto put ining is not just about buying an asset and watching the price move.
Babel Finance is letting bitcoin mining compacts put up their machines as loan collateral in exchange for significantly better lending terms than those offered for crypto asset collateral. TAKEAWAY: This extends a glimpse at the growing sophistication of the mining industry in China, and the emergence of leveraged operations. On the one hand, more leverage means sundry risk. On the other hand, leverage will allow for faster industry growth, which leads to even myriad secure blockchain networks, which leads to more financial inflows, and so on in a virtuous circle.
The venture arm of U.S. cryptocurrency market Coinbase participated in the seed round of mining software and services company Titan, which in December announced what determination reportedly be the first enterprise-grade bitcoin mining pool in North America. TAKEAWAY: This echoes the trend mentioned essentially of crypto mining facilities being packaged as investment opportunities, and Coinbase’s endorsement of the potential makes it an even uncountable intriguing area to watch.
Las Vegas-based bitcoin mining company Marathon Patent Group (MARA) has entered into a protections purchase agreement with institutional investors for the registered offering of 12.5 million shares of common stock at $20 per serving, to raise $250 million. TAKEAWAY: CEO Merrick Okamoto told CoinDesk in an email he intends to use the funds to, among other manias, purchase more mining machines and expand facilities amid the ongoing “arms race” as manufacturers struggle to care for pace with demand. The increased activity in “mining as a business” is largely attributable to the rising bitcoin price, which at once affects mining profitability. It also has to do with the growing sophistication we mentioned above, with advances in mining technology that are bumping the economics, and with the growing global competition, which is good for the industry as a whole.
Panama-based crypto derivatives reciprocity Deribit, the largest options exchange in the industry, has already recorded approximately 25% of last year’s entire bitcoin selections trading volume. TAKEAWAY: This is astonishing growth that underlines the market’s growing maturity. The growth is not restricted to Deribit, although it is consolidating its position as segment leader. Open interest (OI) across all crypto options exchanges has exploded from only over $520 million a year ago (16% of the OI of bitcoin futures) to over $8.3 billion (66% of the OI of bitcoin futures!) today.
Bitcoin miners selling their holdings is often used to explain market dips, and this week was no distinct – but the data doesn’t support that theory. TAKEAWAY: The transparency of on-chain data allows us to track outflows from discerned bitcoin miner addresses to known exchange addresses. This shows that miner outflows to exchanges sire been trending down. True, this doesn’t catch off-exchange activity, and the overall balance at mining locations is down to early 2020 levels, according to the data. But accounts from mining pools support the conclusion that miners are varied likely to be selling fewer BTC into the rally, rather than dumping and causing the price to fall.