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May 01, 2020

April Market Commentary

The fundamental theses for bitcoin and digital assets took center stage in April as markets recovered amid COVID-19 volatility. Bitcoin rallied to finish with a return of 36.12% while the broader asset class, measured by the Bloomberg Galaxy Crypto Index (BGCI), saw a return of 35.85%. For some this may bring back memories of April 2019, which saw bitcoin rally ~28% and the BGCI rally ~13.5% as the crypto winter began to thaw. However, it’s now crucial to understand, this time is different. The post-COVID-19 world is a world that doesn’t simply want bitcoin and digital assets—it needs them.

April began with choppy trading as bitcoin remained in a volatile range between $6500 – $7500 before beginning its ascent towards $9000 in the last ten days of the month. The last time bitcoin closed in this price range was this past February. The market then was severely levered, which culminated in a violent sell-off in March as markets delevered globally. During April’s rally, a foundation formed with seemingly unlevered long buyers—investors who understand bitcoin’s role as a non-sovereign, limited supply, and deflationary hard asset against the backdrop of monetary policy with potentially decades-long inflationary consequences. Again, this time is different.

What exactly is different? Potential investors in bitcoin or the broader digital asset market should understand five key developments: the bitcoin halving, new investor adoption, the post COVID-19 economy, monetary policy, and digital asset infrastructure. As this commentary expands on these themes, remember that this time is different because, now, everything is different.

In May we will have an event known as the bitcoin halving. This is a deflationary event built into bitcoin’s code that cuts the number of bitcoin mined in half every four years. While this may cause near term price volatility or even a move lower as the market adjusts, many see this as a positive event longer term. This will be the third halving event since Satoshi Nakamoto mined the first block over ten years ago, and it will cut production from 12.5 bitcoin per block to 6.25 bitcoin per block. Put simply, the supply velocity of bitcoin is going to decrease at the same time the Federal Reserve is pledging to print trillions more US Dollars—the world’s reserve fiat currency. As these trillions are printed and the government effectively borrows from itself, long-term inflation is practically a definite. By stark contrast and thanks to halving, there will only ever be 21 million bitcoin.

New investor adoption: the bitcoin story is resonating as the broader macro environment shifts; non-sovereign, deflationary, and hard assets are in demand, and we’re seeing larger, more sophisticated investors enter the market. During 2018’s crypto winter after 2017’s famed bitcoin bubble, we were often asked, where is the new money coming into the space? Well that answer has finally become clear. Not only has institutional infrastructure progressed, but as the world changes important players are entering the space. The most successful hedge fund of all time, Renaissance Technologies, recently announced their intention to trade bitcoin futures. Famed macro investor Paul Tudor Jones discussed in his most recent letter that investing in bitcoin today makes sense; in his view, bitcoin is to today’s market what gold was to the market in the 1970s. These recent moves are in addition to endowments such as those of Yale, Stanford, and Harvard all indicating they had bitcoin exposure.

The next two points, the post-COVID-19 economy and monetary policy, go hand in hand. For better or for worse, the economic climate post-COVID-19 will be different and the way people view money will likely change. Unemployment rose in April to record highs as 14.7% of Americans—more than 20 million people—lost their jobs, leaving many frustrated with our current financial system. Furthermore, as frustration grew and money was printed to fund bailout packages, many Americans felt left behind with their personal wealth dwindling against the backdrop of a rallying stock market, contracting GDP, and growing national deficit. Stocks and the economy were on diverging paths. This again supports the case for bitcoin: bitcoin is not controlled by any centralized government and allows for holders to be their own bank.

Finally, it’s important to understand that we have seen immense developments in digital asset infrastructure. While not immune to issues that accompany a burgeoning asset class or a new form of technology, the last three years has seen traditional market infrastructure enter the space to help it grow on an institutional level. Bloomberg, a name synonymous with data integrity and market standardization, has been involved with digital assets since May 2018 when the BGCI launched. More recently, trusted custody solutions like ICE/Bakkt and Fidelity have entered the space. CME BTC futures are not only seeing consistently strong and growing volumes, but are also providing sophisticated traders a regulated entity to speculate on whether the price of bitcoin will go higher or lower in the future. Additionally, administrators and platforms around the world are currently trying to figure out ways to provide digital asset exposure for their clients. These developments lower the barrier to entry and will likely allow bitcoin to sustain its rally as the adoption curve accelerates.

When all the above is taken into consideration, it’s clear that this asset class is poised for its next stage of adoption in world that is increasingly different.

After a volatile sell-off close to February, global markets continued the trend entering March as the seriousness of the Coronavirus pandemic began to take hold. The number of COVID-19 cases and deaths rose daily as nations began to accept the grim reality of what could lie ahead. Businesses and schools closed, jobs were lost en masse seemingly overnight, home confinement was necessary, and our very way of life itself came into question. Despite stocks moving lower in volatile fashion while the DOW and S&P 500 tried to shrug off large percentage moves with U.S. Treasury yields plummeting, bitcoin weathered the storm into the first weekend of the month trading in a relatively tight range between $8600 – $9100 amidst strong volumes.

When the week of March 9th opened it seemed no asset anywhere was safe. Cash became king once again as all assets correlated to one. The U.S. 10 Year note yield hit an all-time low of 33bps amidst an unprecedented global sell-off that saw markets turn red and leverage leave the financial system at a feverish pace. As our nation’s leaders began to focus on public safety, preparing our healthcare system, and sending non-essential employees home, uncertainty brought the markets to a feeling of peak fear on March 12th.

Bitcoin then hit its lowest point since February of 2019, briefly trading below the $4000 level on the evening of March 12th before stabilizing in the $5500 range, eventually leading to a recovery to close the month above $6400. Volumes soared north of $5 BN on real exchanges and remained elevated in the days following the move. Lending markets saw supply dry up and demand increase as rates to borrow shot up nearly three times their recent average to 12%. Futures also leveled off during this time. The aggressive price drop in the spot market was likely the combination of a few key factors: panic selling after U.S. equities closed, nearly $1 BN of deleveraging on large BTC exchanges (some offered 50x – 100x leverage), and rumors that some key exchanges were having issues with deposits and withdrawals.

While the price drop may have hurt bitcoin’s store of value narrative in the near-term (which we still believe holds true in the long-term), it is important to understand that the Fed’s actions may now present an even greater case for bitcoin as a new weapon in portfolios. In an effort to keep markets liquid and businesses and financial institutions solvent, the Fed printed an additional six trillion U.S. dollars on top of a 5% deficit. These figures could easily run significantly higher when all is said and done. As the government continues to take these measures and monetize stocks and bonds in conjunction with the reality of global currency debasement, the case for owning hard assets is rapidly being proven. It is clear that monetary policy in the U.S. will need to remain dovish in an effort for sustained quantitative easing to support market recovery.

The actions seen over recent weeks will most certainly lead to inflation, which is exactly what bitcoin is suited to protect against. Creating trillions of dollars of liquidity fueled by debt right before our eyes does not come without consequences.

Bitcoin is a limited supply, non-sovereign hard asset that holds the same worth no matter where you are in the world. Its digital nature gives anyone with an internet connection access to the same source of value without borders. Long said to be digital gold, bitcoin may now be the call option on the future of a system with unknown monetary policy, while gold is today’s “flight to quality” asset of choice.

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