Well September certainly was a breath of fresh air in the world of the blockchain and crypto markets. After a very doldrum-y Q2 and most of Q3 (and by doldrum-y I mean bearish), we saw a strong response to the Fed’s policy change in September. Friends, I would argue the run has resumed. And, it is clear that our markets are more tightly correlated with monetary policy than ever. Let’s dive in.
The Magnitude of Macro
On September 18 we saw the Fed make a shift to its previous regime and deliver a 0.50-point rate cut. Not that this was much of a surprise. Europe and China began this process in June and July and, frankly, it’s long overdue here in the U.S. Powell kept us higher for longer, but now is, finally, relaxing monetary policy. And, no surprise, we saw a resounding response from the crypto markets, with bitcoin up roughly 7% over the month and other assets far exceeding that.
Which brings me to the point. One of the things that we discussed last blog was the impact of macro on the crypto markets. Simply, rate cuts and loosening monetary policy are significantly beneficial for crypto. Now that they are here we expect very strong positive response over the next 18 or so months. And it’s not just our view. Recently, Anthony Pompliano cited a report which plots macro data against bitcoin price and it reinforced this position. Note that this is an entirely different source that the data we presented in my blog last month, and it confirms that when we see Global M2 expansion, we see prices increase.
This is a pretty clear picture. (Hat tip to Lyn Alden for this report. For those interested you can find the full report here.) The punchline and summary is that historically, over the last 12 years when we’ve had monetary expansion, we have had crypto make big moves. In fact, looking a little deeper, bitcoin performance is 83% correlated to monetary expansion, which makes it the best asset to fight monetary inflation.
Likewise, where we’ve had contraction, it’s pulled back. Worth noting, while we use bitcoin as a barometer, remember that bitcoin’s rate of growth is decelerating, and at this point in the cycle we expect blockchain innovation assets to significantly outperform. As a demonstration of this note that during the month of September, which showed Bitcoin up 7%, the top AI assets, excluding outliers, up were up an average of almost 22%. That’s 3x! And we see this as just the beginning. In every cycle, there is a consistent pattern. Bitcoin goes first, with innovation assets following. While we expect a strong move in bitcoin over the next 18 months with a target of roughly 1.5x – 2x, we also anticipate the innovation stack will have much greater multiples over the same period.
In the simplest terms – this is what we have been waiting for.
So, Who’s Buying?
As if to reinforce this, Michal Saylor’s MicroStrategy, the single largest bitcoin holder in the world, added another $1.5 billion dollars of BTC to their holdings in September at an average price of $60,800 a coin. The first purchase was in the amount of $1.1B early in September, followed by a second of roughly $400 million in the middle of the month. Clearly, they remain bullish. This increases their holdings to a total amount of 252,220, or about 1% of all bitcoin, at a total value of over 16 billion. Its staggering and his strategy has been very simple almost, dare I say, Micro. Just. Keep. Buying.
Meanwhile, the small Asian country of Bhutan has been quietly adding bitcoin to its Treasury, and now holds over 13,000 BTC, which is more than even El Salvador, who legalized bitcoin in 2021. This is seminal, progressive, and puts them way ahead of the pack. Bhutan has been mining since 2019 and the gamble certainly seems to be paying off. While it’s true that the U.S. holds significantly more, a staggering 215,000 BTC, those holdings are due to law enforcement seizures, not a conscious commitment to strengthen our treasury. But I ask, can it be long before the U.S. and other countries follow suit?
I often hear people say, “I wish I bought bitcoin back in (whatever date)”. Well, unless you have a time machine stuck in your closet somewhere (in which case I kindly ask that you share it), all we have is now. The simple fact is that those bitcoin price increases should not be expected again. Sure, bitcoin will grow, but not 630,000,000% (growth rate from $0.01 to $63K). Today, bitcoin is becoming normalized around the world. Its growth is going to slow down.
So, then, the growth opportunity that exists now is in select alternate assets – the blockchain innovation stack. This technology is still young and where we believe now the greatest multiples can be found. Which brings us to a question I often get asked by investors: Should I hold Bitcoin? Or Innovation? The answer for me is simple. Both! Bitcoin, as digital gold, is for wealth preservation and is a good hedge against the dollar while innovation, as it always has been, drives wealth expansion. They serve different purposes in a portfolio. And, my friends, both are good.
D.C. Directives
I’m going to close out this blog talking about politics. Everyone’s eye is on the election coming up in November and for those following our markets the question is constantly, which candidate is better for crypto? I argue that it doesn’t matter. Seriously.
Certainly Trump has, smartly, made this a centerpiece of his campaign, pledging to promote the industry, dispose of current anti-crypto SEC chair Gary Gensler, put bitcoin in the U.S. treasury and, in general, support growth. Those are all great things if he wins and actually does them all. On the other side of the table, however, Harris just came out with a long overdue but welcome announcement that she is in support as well. In a break from the Biden administration, which has been actively hostile, she notes that it is important for the United States to maintain its dominance in blockchain technology. She further extended this position and in a policy document, stated she would “encourage innovative technologies like AI and digital assets” (Um, quick note to her first statement about U.S. dominance. We are not, in fact, dominating at this point. We might in the future, but that starts with acceptance and embracing the industry.) Fortunately, embracing this industry is exactly what is happening. This is excellent, important, overdue, and now moves the blockchain/crypto industry to be a non-partisan issue.
If blockchain and crypto are anything, they are truly innovative. The U.S. prides itself on being a world leader and if so, just like in the era of the internet, we need to embrace innovation if we are going to remain such a leader. It’s kind of a no-brainer. I’m most happy to see this from Harris, because without this position it simply means that we’ll fall way behind. The industry is here to stay, period, and if we don’t get on the train then our brightest minds will simple go elsewhere in the world to pursue their passions and that would be bad. Fortunately, both candidates are now on the train.
In Closing
So, with regards to our next president I say, “it doesn’t matter.” Sure, we may get a quick bump if Trump wins but, in the long run (even over the next 18 months), it won’t matter. This is a non-partisan issue. What is really going to drive prices? Global liquidity. Our markets love liquidity… near infinite fiat currency chasing finite assets.
Loosening monetary policies resulting in global M2 expansion are going to carry the banner for the next 18 months or so. Which may make this the last, best time to jump in before the run extends.
Alright, that’s it for now. Until next time be well, stay safe, and I’ll keep Decrypting Crypto for you!