As we’ve written previously, we are neither bitcoin evangelists nor skeptics. We have entered the crypto debate only when we saw evidence concrete and compelling enough to reach a credible conclusion. We saw it in September of 2017 when euphoria appeared to be approaching a breaking point. And we saw it in April of last year when evidence suggested the weak hands had largely left the market and the strong hands had begun an accumulation phase that would drive up the token’s value. Over the next two months, bitcoin nearly tripled in value.
Now, we see powerful evidence suggesting bitcoin is once again poised for outperformance. In May, it will experience its third “halvening”. By design, once bitcoin miners have created 210,000 blocks, the subsidy miners receive for creating a block (fees and token compensation) is cut in half. In 2012, when the block reward went from 50 to 25 tokens, bitcoin’s price gained roughly 8,200% in a year. In 2016, the gain in the 18 months following the halvening was 2,200%.
Yet, our optimism goes beyond the halvening. Bitcoin has traded in a stable range since late September, suggesting evangelists once again control the market. Institutional investment appears poised for growth. And the more traditional asset markets inflate with central bank stimulus, the more evidence emerges that investors—particularly millennials—are looking to bitcoin as an untethered hedge and store of value.
Some short-term downside risk exists—bitcoin still trades slightly above where its “intrinsic value” suggests it should (i.e. its value as indicated by marginal cost of production). However, we see enough upside potential to make bitcoin a portfolio imperative.
On Tuesday, bitcoin hit a two-month high of $8,700, spiking roughly 2% in an hour and breaking out of a six-month channel (chart below). The move corresponded with the launch of CME bitcoin options on Monday. In a single day, CME reportedly traded 55 contracts worth roughly 275 bitcoins or $2.19 million, nearly double what BAKKT has traded since its launch in early December. According to JPMorgan, open interest in CME BTC futures has spiked 69% since year-end, reflecting rapidly rising institutional interest.
Source: Twitter, @PeterLBrandt
Institutional money has always been the key to bitcoin fulfilling the expectations of evangelists—offering the capital volume and stability necessary to give the currency store-of-value credibility. The institutional deluge many evangelists predicted during bitcoin’s parabolic rise in 2018 has not come. Trustable infrastructure—infrastructure owned by brand-name institutions rather than upstart exchanges—had not been built. That has changed. Beyond ICE and CME, TD Ameritrade, Fidelity, and JPMorgan have all advanced crypto initiatives over the past year. In turn, we finally appear at the beginning of a significant acceleration in institutional interest.
And the more millennials rise in the ranks of financial institutions, the more institutional investment will accelerate. The following chart from Blockchain Capital, based on polling by Harris, tells this powerful story:
Source: Blockchain Capital
As we’ve written previously, a millennial backlash is coming with seismic investment implications (see WILTW May 23, 2019). Bitcoin is likely to prove a key financial weapon in this battle. No generation was set back more by the GFC, nor benefited less from central-bank driven asset-inflation over the past decade. Bitcoin is a millennial hedge against a centralized financial system they believe is rigged and destined to fail. In turn, at a time when geopolitical uncertainty is rising and central banks are once again inflating asset prices, bitcoin is likely a vital hedge for all investors.
We see proof of this as bitcoin interest spikes in nations experiencing turmoil:
Source: Blockchain Capital
These macro factors combined with the halvening could drive a dramatic bitcoin run-up. Last year, a crypto analyst that goes by the handle “PlanB” put out a compelling report: “Modeling Bitcoin’s Value with Scarcity”. He dissects the potential impact of the bitcoin halvening based on stock-to-flow ratio (stock being the size of existing reserves and flow being yearly production), using precious metals as a model. We quote PlanB:
Gold has the highest SF 62; it takes 62 years of production to get current gold stock. Silver is second with SF 22…Palladium, platinum and all other commodities have SF barely higher than 1…Bitcoin currently has a stock of 17.5m coins and supply of 0.7m/yr = SF 25. This places bitcoin in the monetary goods category like silver and gold. Bitcoin's market value at current prices is $70bn.
What is very interesting is that gold and silver, which are totally different markets, are in line with the bitcoin model values for SF…Note that at the peak of the bull market in Dec 2017, bitcoin SF was 22 and bitcoin market value was $230bn, very close to silver.
Of course other factors also impact price, regulation, hacks and other news, that is why R2 [in the chart below] is not 100% (and not all dots are on the straight black line). However, the dominant driving factor seems to be scarcity/SF.
As for the halvening, here is PlanB’s conclusion: “Current SF of 25 will double to 50, very close to gold (SF 62). The predicted market value for bitcoin after May 2020 halving is $1trn, which translates in a bitcoin price of $55,000.”
Of course, bitcoin’s track record is far too short to assume it’ll always obey the laws that define the gold and silver markets. Time will tell whether PlanB’s price analysis proves prescient. But one way or another, we see demand for bitcoin increasing at the same time supply is poised to fall.
And this could trigger bitcoin’s next great hype cycle. As we’ve pointed to for years, bitcoin follows a J-Curve pattern: It slowly builds fundamental momentum. FOMO sets in. The value skyrockets. It becomes a bubble that inevitably pops and the value comes crashing down to a new higher low. We expect much the same in this cycle with the halvening the potential trigger of FOMO.
The price may fluctuate in the short term. A crash may come in the long term. But now is the time to position for a bitcoin run-up.