DAIM Issue 36
Welcome to DAIM's Newsletter. DAIM is a licensed Registered Investment Advisor and asset manager for digital assets and bitcoin 401(k)s. Please enjoy our thoughts below. #Bitcoin #Ethereum #Solana
Forecast
Summertime Sadness?
Mt Gox
Dollars makes sense?
MVRV
Forecast - As of this writing, BTC & ETH are down around 9% during the month, and Solana is faring even worse, down 16%. As we mentioned, it takes a while for the post-halving rally to commence fully. Right now, miners are adjusting to the reduction in the reward by selling more bitcoin. Once this normalizes, an uptick in demand should push prices higher. We think the next month will be relatively muted, but August could see some strong price action, a little earlier than history has shown. See this video for more on cycle timing. One thing to look out for is the ETH spot ETF, which should begin trading in early July. There will be multiple issuers just like the BTC spot ETF, but Grayscale's uplisted ETHE shares might be priced competitively this time around. This could alleviate some initial sell pressure and result in net inflows for all ETFs from the start. It will be interesting to see what happens now that traditional retail has access to two crypto spot ETFs.
Summertime Sadness? - Summer has generally been uninspiring for crypto prices. They say that history doesn’t repeat, but it often rhymes. So why could prices go down this summer? One main reason for a sell-off is coincidentally one of the reasons many are bullish on crypto. That’s right, spot ETFs. Spot ETFs can bring a lot of capital and liquidity but also tie crypto more closely to traditional markets. In the past, crypto correlation with traditional markets has been low, which helped bitcoin move organically according to its distinct cycles as sell-offs and rallies. But now that traditional investors can “own” BTC & ETH without stepping into crypto land, they can add buying and selling pressure using traditional securities. When the US market sells off, people tend to throw the baby out with the bathwater and sell all their assets in a panic. When that happens, correlations tend to go to 1, and all asset prices fall together. We feel that crypto will still be dominated by holders and native investors so, absent a severe recession, we don’t think the risk to crypto is high. However, it will be tied more closely to the general business cycle than in the past.
Another development to monitor is the strengthening US dollar. Crypto and other risk assets have tended to benefit from a weak dollar. The rationale behind this is that a weak dollar encourages people to look elsewhere to protect their purchasing power. Over the last decade, bitcoin has done a great job of protecting wealth and purchasing power, and therefore, money flows into crypto when dollars aren’t an attractive, safe haven. Right now, other currencies are weakening relative to the US dollar, making greenbacks more attractive. Also, keep in mind that the US dollar is the global reserve currency so its preference to be used for international trade will help it maintain a high level of demand. Over the last month, the US dollar has been strengthening. If this lasts into the summer, we will see continued weakness for crypto in the short term. More on this below in section 4.
Mt Gox - The wait appears to be over for investors who lost bitcoin in the Mt Gox collapse. For those unaware, Mt Gox was the first major bitcoin exchange, operating from 2010-2014. It collapsed in 2014 with reports that it had lost almost 750,000 of its customer’s bitcoins and 100,000 of its own. The trust overseeing the bankruptcy moved 140,000 BTC from a cold wallet to unknown addresses in May. If we use this number as a proxy, it appears that about 19% of assets will be returned to clients. This may seem like a paltry amount but remember that bitcoin was trading around $700 when Mt Gox halted withdrawals. It’s up about 100x since then. So if you lost 10 bitcoin to the halt/hack ($7,000) you will only get 2 BTC back. However, those bitcoin will be valued at around $120k-$140k. This forced holding probably benefited most customers by preventing them from trading their coins and self-impairing their units. If claims begin processing in the next month, it could put more downward pressure on bitcoin. Claimants will have hefty profits that they can take at favorable tax rates. Some claims will be paid in Bitcoin Cash, which will have minimal market impact, but for those paid out in BTC, it could take a couple of months for selling pressure to subside. On a positive note, Mt Gox adds to a list of fraud cases resolved this year. Celsius, Blockfi, FTX, and Genesis either paid out or formalized payment plans. As was the case with Mt Gox, the percentage of assets returned was small, but given the price performance in the interim, customer losses were more palatable. Going forward, we think the space will learn from its mistakes and embrace regulations so participants can build their wealth in safer and more predictable ways.
Dollars make sense - We highlighted the strengthening dollar earlier to show one possible reason bitcoin could face some near-term headwinds. But how long will this strengthening last? While we don’t think the dollar will lose its Global Reserve Currency status soon, some major structural issues could lead to significant devaluation in the future.
The biggest issue going forward could be related to debt servicing. Federal interest payments on debt eclipsed $1T in Q3 last year and are rising. With interest rates in higher for longer territory, new government debt will need higher coupon payments to attract bids, causing this problem to compound. One obvious way this could reverse is if the Fed cuts interest rates. However, inflation has been sticky and will likely remain structurally higher for some time. Unless the Fed commits to a higher long-term inflation target of 3-4% (instead of 2%), it must keep the fed funds rate high to bring inflation down. The fed funds rate (FFR) is a benchmark influencing rates on US-based debt. Therefore, if FFR stays high, then newly issued government bonds and bills will have higher coupons, and the country could end up in a debt spiral as new debt is issued to pay interest on old debt.
One way to get out of the debt spiral would be to print more money to pay off the debt. That would then lead to a devaluing/weakening of the US dollar and an inflationary environment, which would lead to more Americans looking to protect their wealth and beat inflation, which plays right into the core tenets of Bitcoin.
We’ll see how this plays out, but the dollar can’t continue to strengthen for long, given the mounting debt this country has to service. When the dollar eventually weakens, and monetary conditions loosen, bitcoin holders should benefit immensely.
MVRV - We talked about addresses in profit last month and will introduce another valuable on-chain metric we like to track, MVRV. Market Value to Realized Value (MVRV) builds on Addresses in Profit and provides more insight into on-chain data. The data seeks to offer more depth by showing what addresses are in profit and to what extent. It takes the current market value of all bitcoins held and divides it by the realized value, which is the value of those bitcoins the last time they were transacted. The formula is below:
Market cap is self-explanatory. You can go to any source that tracks current crypto prices, and they will have the current market value for every project. Here is coinmarketcap. Realized value, or cap, is essentially the price of bitcoin the last time it was sent from one address to another.
The metric is important because it shows how much bitcoin is in profit and makes it a little easier to anticipate corrections. For example, near the peak of a bull run, more than 99% of addresses will be in profit. This would be the result of bitcoin reaching new all-time highs. As prices during the bull run rise rapidly, the market value rises faster than the realized value, and MVRV increases. Generally, we have seen MV/RV reach a peak before the bitcoin price peaks. Most bitcoin belongs to long-term holders and because the price tends to rise dramatically in a relatively short period, the realized price is much lower than the current market price. Take a look at the chart below.
Going forward, we think an MVRV of around 3.5 indicates a frothy market and a possible peak in the cycle. Remember, taking profits means trimming your position in anticipation of a drawdown. You should always hold Bitcoin long-term. Do not sell all of your holdings trying to time these moves. Over the long run, you will destroy more value than you create.
