Quick Substack Update:
As some of my older Substack subs may remember, I built it originally as a means to display my equity research ideas and eventually shifted to crypto when I went full time in late 2020. Although I tried to transition over to crypto research I noticed
My investment strategy is much less conducive to long term models. As an investor in equities, I’d be fine holding a position for 5 years. I feel uncomfortable holding a position for more than a year in crypto.
The investment merits and tech progression in the space are too quick for any of my research to stay relevant for very long.
I enjoy sharing my opinions but need a fresh format for my writing, so I’ve decided to do what all investors do when they gain a bit of success… become a pseudo philosopher (just kidding). My plan is to write my thoughts on crypto themes with <1 year time horizons and also try to communicate important lessons I’ve learned from trading crypto for over 5 years. The plan is for this to be somewhat informal, but I’m hoping that it will provide more value for my followers than my prior writing.
The Great Q4 BTC Long of 2021
Recently there have been rumblings of a potential BTC pump that may also increase BTC dominance. The general logic behind this is
People in the industry are underallocated to Bitcoin because of the assumption that alts outperform
There’s reason to believe a BTC ETF will be approved in Q4. This likely will allow tradfi players to increase holdings and cause a self reinforcing cycle that makes alt holders move into Bitcoin
People in the traditional investment management industry have a need for an inflation hedge and are underexposed to Bitcoin due to regulatory hurdles
As a trader, my goal is to make the most money I can while taking the least risk possible. When I think about cryptocurrency risks, the general assumption is that Bitcoin holds the least risk because it's the largest and most established in the space. In the event that bitcoin dominance is going up, traders aren’t going to be happy because they’re taking more risk and not being compensated for it. This is the self reinforcement of bitcoin specific idiosyncratic news.
Those that haven’t been around for a while haven’t witnessed these dynamics as much because the crypto market is getting mature enough so that crypto news doesn’t affect . This is likely one of the reasons why there’s always an alt sector outperforming. The problem with the logic of “alts are higher risk and therefore provide better returns” is that in a short time frame that’s false (and historically not true in any timeframe).
The two things that are currently on crypto investors’ minds for determining potential large BTC pumps with increasing BTC dominance is inflation news or etf news.
The assumed odds of a Bitcoin ETF being approved in October are around 50% (Bloomberg). SEC Chair Gensler has also made comments about accepting a futures based Bitcoin ETF recently. These two bits of information took about a week to start being factored into market pricing.
We saw the futures curve flatten as the short end started to move up to an 11% annualized basis this week. We also saw CME futures hit all time high open interest while the basis shifted up aggressively. Similarly, options premiums and perpetual premiums have also risen. Clearly people want leverage to this event, and tradfi market players are watching.
Given the ProShares ETF is first for potential approval and has the best odds, the market will likely continue to adjust its positioning up until that date. The general way I think the market will approach this is to say “if ETF approval BTC=ATHs, if no approval BTC=mean reversion+range”.
Based purely on that optionality, Bitcoin should slowly head towards $51,140 over the next two weeks. The problem with this math is that there are many more ETF approval dates after that. So in the event that ProShares gets denied, the downside is actually much less due to optionality of other ETF approvals. If I had to guess, I’d ballpark the price movement due to everyone realizing that ETF approval is likely over the next few months puts us somewhere around 58k around October 18th without taking into account any new info that affects BTC since Oct 1st.
Although this trade is primarily ETF optionality initially, it's worth considering the macroeconomic backdrop and how that’s been changing over the past few months to see how that may affect the trade.
We’ve partially recovered from covid enough for the Fed to taper and raise rates. 2 Year treasuries are shifting up to factor this in and we’ve been given forward looking statements by Powell of a Q4 taper announcement.
(Tradingview: 2 Year Treasury Yields)
My general assumptions are that people think increased yields will be a headwind for equities and therefore a headwind for crypto. I think people also are likely looking at tapering as “stopping money printing”. I think both of these viewpoints are more nuanced and likely fall towards the overtly pessimistic side.
The U.S. has been printing money ever since the great recession of 2008. That sometimes comes from Fed asset purchases and sometimes comes from fiscal stimulus like infrastructure bills. The U.S. has also had trouble raising interest rates meaningfully over the past 10 years due to low inflation. This backdrop encourages companies to increase leverage to stay at the optimal cost of capital and leads to lower marginal returns on capital as the large capital base crowds out returns.
With this in mind, the U.S. has backed themselves against a wall. They’re in a position where if they stop printing, GDP growth will lower and they may be forced to become dovish again. If they continue to print, they can increase inflation to offset real yields and pay off the debt, but that will likely shift up interest rates and slaughter the equities markets.
At this point, I lean towards inflating our debt away is the only possible option and I think money printing will continue to increase in pace. This is due to increased tendencies of the U.S. to finance more public goods funding and also the effect of high debt to GDP on money printing.
High levels of debt crowd out the benefit of the marginal dollar. In order to maintain a specific debt funded GDP level, the debt funding has to increase. Frankly, it seems quite obvious that this can’t possibly end well.
As allocators look to find hedges against inflation they’re presented with the option of having sophisticated knowledge of interest rate options that may or may not be investable given their mandate, or they have bitcoin and gold.
The Case for Bitcoin over Gold
I’ve spent a while investing in the commodities sector (or as much as a 22 year old could spend) and feel that the best way to distill the argument for gold vs. Bitcoin is to look at the mining side of the equation, given the demand is the same for both to some degree.
Gold and Bitcoin both have finite amounts, but different inflation schedules. All the gold in the world has varying degrees of cost to mine depending on a variety of factors. As the price of gold moves up, the profitability of mining the marginal piece of gold increases. This forces more miners to come online rapidly as price remains elevated.
Bitcoin on the other hand has a fixed inflation schedule that isn’t price deterministic. Gold also happens to have a larger market cap, is trading significantly above average production costs, and has historically barely kept up with CPI.
-The actual ETF decision is always neutral at worst because we will just move our expectations onwards to the next one.
-BTC Dom up + BTC up = self reinforcing cycle due to not wanting to lose sats
-The trade is still early and probably plays out through Q1
-we’re going to fulfill the 2017 prophecy and dump on institutions
Disclosure: We own Bitcoin and have long exposure on our derivatives book
Nothing contained herein constitutes financial, legal, tax, or other advice. Noah makes no representation that the information and opinions expressed herein are accurate, complete, or current. The information contained herein is current as of the date hereof, but may become outdated or subsequently may change.
The mention of or reference to specific strategies or instruments in this presentation should not be interpreted as a recommendation or opinion that you should make any purchase or sale or participate in any transaction.