Boss Crypto Letter To Investors #5 - AugustNote: Research data compiled from blockchain.info, coinmetrics and unchainedcapital.Bitcoin As GoldThe narrative around Bitcoin as “digital gold” or “gold 2.0” has been strengthening in recent months and we have even seen Bitcoin slip into a strong inverse correlation to US stocks. For us, this is not a new story and the potential for Bitcoin to shine in this arena is something we have been propagating for years. The topic is hotly debated given the potential diversification benefits that exposure to Bitcoin has in portfolio construction. There are certain times when Bitcoin trades in line with risk assets, selling off when equity volatility spikes and when liquidity runs dry, however it has little to no correlation with traditional asset classes like commodities, bonds, currencies, or stocks.The world unfolding around us is brewing the perfect storm that most perma Bitcoin bulls have been waiting for since the beginning. Bitcoin has only ever existed in a global bull-market and perhaps for the first time in 10 years that might be about to change. Amid extreme monetary policies and rising geopolitical tensions the narrative for Bitcoin as digital gold has scarcely been stronger. Combine this with the fact that investors are starving for growth and unable to hit their benchmarks with traditional portfolio’s the comparison between the current Bitcoin market cap and the market cap for investible gold becomes an enticing proposition. The best part? A comparison to gold might not even be the end of theroad for Bitcoin. Right now there are almost no assets that largely sit outside the purview of any single government. If we see the political tensions in our world rise and the ability of these governments to service their debts comes into question the demand for non-sovereign assets is likely to boom.The rising risk of currency devaluation, especially among reserve currencies, combined with its non sovereign nature is a longer-term catalyst that may propel BTC to new untold heights. The opportunity cost of not holding Bitcoin is getting higher every day as the long-term outlook for traditional asset classes and growth continues in a downward spiral.Late In The CycleIn this edition I wanted to take a step back to look at the global macro economic environment. I believe that we are entering an era where the understanding of economics and appropriate investment principles will be imperative for success. As of July we have now officially seen the longest period of sustained growth in history and it’s getting late (perhaps very late) in that cycle.-Bleak global growth projections-Trade wars-Weak inflation-$14 trillion of negative yielding debt-Unprecedented monetary policies-Late in the cycle stimulus-Declining corporate profits-Stocks rallying into the promise of rate cuts and additionalstimulus-Explosion of low quality credit-Explosion of IPO’s showing just as explosive lossesThe global slowdown everyone has been fearing is starting to show up in economic data. With short term interest rates already low economic stimulus measures may need to be more extreme to be effective. The central banks of our world are preparing the global market for more rate cuts and additional stimulus as they attempt to prolong the currenteconomic expansion, seemingly “forever”. The implication of economic policies favouring growth (including theforecast for multiple rate cuts by the end of 2019) are already impacting market prices and portfolio structure.As we have talked about many times in previous letters, investors are being pushed further and further out on the risk curve in their search for a return high enough to satisfy their benchmarks. With government debt yields, fixed income and traditional value assets underperforming the focus has shifted to growth assets throwing support behind Bitcoin for the time being. Money Supply and Risk Assets Monetary policy plays a significant role in markets. When there is anincrease in the money supply there tends to be a strong performance in risk assets while at the same time pushing investors further out the risk curve as they compete for the best returns. Lower rates and more relaxed monetary policy not only encourages borrowing (creating a surplus of money) it also forces investors to change the way they invest because it damages the potential returns from traditionally safe assets.It is speculated that the Fed will keep the door open for further rate cuts by the end of 2019, but be careful when analysing how much of this has already been priced into the markets, including Bitcoin. Generally speaking investors are willing to pay higher multiples when the other alternatives available to them are unattractive.Right now bond yields across the board from sovereign to corporate debt are very unattractive which has pushed investors towards equities.AnalysisThe almost illogically high concentration of Bitcoin and high-caps in our portfolio has continued to bring in immense rewards over the past few months. There were only 12 projects with a market capitalization over $15 million which outperformed Bitcoin year-to-date. UTXO Analysis When looking at the base of Bitcoin holders compared to our previous reports not much has changed in the last three months. Holders in the 3-5 year bands have decreased however the reason for the decrease is not from selling, it is because they have been moved into the 5+ year bands which is sitting around all time highs at 21.5% of total Bitcoin supply.The only longer dated band with a noticeable amount of sellers was the 1-2 year band where sellers accounted for about half of the 1.8% decline in that band, and a shift into the 2-3 year band representing the other half. By far the largest amount of selling during the recent rally can be found in the youngest bands. Holders in the 3-6 month band and 6-12 month band respectively. The 3-6 month band has come down from down from 10.2% to 6.8% with selling accounting for the majority of the drop.Liquid Supply(Defined as coins that have moved in the last 90 days)The majority of this liquid supply is continuing to come from short term UTXO’s (traders). When compared to the previous cycle bottom we can see a very similar pattern emerge.Around July 2015 the liquid supply began to increase as trading activity began to draw in speculators again. During this same period long term holders remained unphased. This type of movement is correlated with a rise in volatility as trading volumes begin to influence the velocity of price. From a cyclical perspective it is likely that volatility is peaking now. If that proves to be true it is likely that the liquid supply will again decrease over the coming months.It wasn’t until then 2017 bull run that long term holders started to contribute to the increased liquid supply, so without large increases or decreases in price I feel it is unlikely that long term holders will be drawn into trading and the current cycle of holding will dominate.ConclusionOne thing that I would like for you to remember here is that despite the potentially favorable economic environment for Bitcoin it is very important to note the following: In the face of any serious economic downturn, market crash or correction there will be a shortage of credit and a shortage of liquidity. This forces investors to sell off assets as they scramble for cash and risk assets are often sold off first. When investors need cash, they may need to sell their Bitcoin, no matter how badly they “wish” to hold it. A prudent Bitcoin investor will understand that Bitcoin is still an asset and has not yet proven itself in serious crisis as a miracle hedge, or even as a viable digital gold.. . .Taken from the Boss Crypto VIP Newsletter at: https://bosscrypto.co/
Submitted August 20, 2019 at 08:40AM
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