Good Morning. February inflation data came out this week and unfortunately, inflation rose slightly. Inflation rose .4% for the month and 3.2% from a year ago, which was slightly higher than investors’ expectations. Stocks pulled back slightly yesterday as investors digest the new data and will most likely be waiting to see how the Fed interprets this inflation news at the next meeting starting March 19th.
Bitcoin, on the other hand, seems unbothered with the general market as it continues to soar. It has surpassed $73,000 this week and continues its ascent. Part of this recent breakthrough is due to the UK announcing its plans to allow bitcoin products to trade later this year. Read more on that in the news section. But how high will bitcoin climb? Read our thoughts below.
Lastly, this is also a special time of year as the one-year anniversary of the bank runs of 2023. Read on to learn where SVB is now and what has changed since!
Crypto News You Can’t Miss: UK Allows Bitcoin ETNs
The bitcoin ETF train keeps on rolling. On Monday, the UK’s regulatory watchdog, the FCA or the Financial Conduct Authority, approved the launch of crypto-backed exchange traded notes (ETNs) for professional investors. More specifically, they “will not object to requests from Recognised Investment Exchanges to build a listed market segment for crypto asset-backed ETNs.”
Remember, exchange traded notes (ETNs) are a type of unsecured debt security backed by a bank or an investment manager that tracks the performance of an underlying asset. It is then up to the exchanges to be responsible for making sure there are sufficient controls in place. This product will only be available to investment firms and credit institutions and it’s the FCA’s way of ‘shielding retail investors.’
The London Stock Exchange then came out with a separate statement on Monday saying that they would accept applications for the admissions of bitcoin or ether ETNs in the second quarter of this year.
Since Monday, the price of Bitcoin has spiked past $70,000 as investors begin to bet on a future supply crunch as more institutional funds look to invest and bitcoin’s supply output is about to be cut in half next month. For more on bitcoin’s price, read on.
Bitcoin's Price Check: How High Can Bitcoin Climb?
It has been a big year for crypto with Bitcoin now up over 67% year to date and the capitalization of Bitcoin breaking above $1.4 trillion. Bitcoin now has a greater capitalization than the silver market (estimated to be $1.38 trillion). For perspective, the gold market capitalization is around $14.5 trillion, so there is plenty of upside if you think that Bitcoin could become the new gold.
What has been driving this rally? What has changed? Readers who have been following us know that we believe the ETF listings in January were a major factor in this rise. There are two key factors that we believe will have a lasting impact. Investors tend to like the simplest ways of accessing an asset class. There are a limited number of investors who have their own on-chain wallets and investing through a trust (with high fees) did not appeal to many investors, but the opening up of Bitcoin ETFs changed that and we have seen this pent-up demand lead to inflows into Bitcoin which have been a key driver of this rally. The second factor is that well known and respected firms like Blackrock and Fidelity have issued their own Bitcoin ETFs. Before these ETFs were listed, most traditional money managers and RIAs (registered investment advisers) simply considered crypto outside of their area. Very few chose to address it in their research or investment process. Now with some of the larger money managers issuing easily accessible ETFs in this space, every asset manager must have a view on crypto. Some will simply say that it is a short-term trend that should be avoided, but many will begin to look at a small allocation for client accounts with the appropriate risk tolerance and interest in this space. The longer Bitcoin continues its climb, the more difficult it will be for asset mangers to ignore this space. And with firms like ARK Investments suggesting investors should have a 19% allocation to this space, it is waking up investors to the importance of understanding it.
When looking at the intrinsic value of Bitcoin, there is no simple or accepted way of putting a value on what a Bitcoin should be worth. Similar to gold, it appears to be developing a reputation as an investment in an asset which is not susceptible to central bank excesses. In the case of gold, as prices go up, so too does mining, creating more supply over time. In the case of Bitcoin, the mining is regimented in exactly how many coins are created with a shrinking number of coins being created as we approach what is call the ‘Halving’ which is a pre-programmed event which occurs roughly every four years. This mechanism cuts the block reward for miners in half, inherently reducing the new supply of Bitcoin entering the market.
Although much of gold goes into jewelry and gold bars which investors can hold for investment, around 11% is used for industrial purposes, so unlike Bitcoin, there are some real world uses for gold. It is worth noting that gold has recently traded at an all time high of $2,195 which highlights investment demand for alternative investments.
So how much higher can Bitcoin go? Are there alternatives that investors will look to buy should Bitcoin get too expensive? There are a few key points that investors need to think about when looking at Bitcoin. The last all-time high in Bitcoin was the fall of 2021 (we have now broken through and set new all times highs in the past week) and in 2021, rates were close to zero. With the cost of capital at zero, we saw the meme stocks rally, we saw NFT (non-fungible tokens) spike and we saw crypto rally, but as rates began to normalize, all of these came back down. This time, rates (and inflation) are higher, and yet Bitcoin and gold are both hitting all time highs. What is this telling us? It is difficult to know for certain, but my sense is that many investors are worried that currencies like the USD will, over time, need to inflate their way out of high debt (currently the US has around $35 trillion in borrowing). And looking at the US debt, the more typical way investors look at the amount of debt a country has is to look at the debt as it relates to GDP. In the US, this number hovered between 40% and 60% from the 1980’s through 2008 when we saw US borrowing spike higher. We now have a debt to GDP ratio of 120%, and according to the Congressional Budget Office, the projection of debt to GDP is likely to rise above 150%. As history shows, countries' debt levels like this are not sustainable and over time, this creates a risk for the USD.
So how high can Bitcoin go? Well, there is no easy way to answer that but if we continue to see the US deficit and debt to GDP ratio rise, it is clear to me that Bitcoin has a lot more upside. We do not have a way of forecasting a price target, but we do believe that having an allocation to Bitcoin is prudent. Additionally, we would expect to see more funds flow into Ethereum and other key tokens as more ETF’s are issued.
Happy Anniversary to Silicon Valley Bank’s Collapse
Also, Monday March 10th was the 1-year anniversary of the historic collapse of Silicon Valley Bank. At the same time, two other famous crypto-friendly banks, Silvergate and Signature Bank, were also shut down by regulators. It was a very precarious time for the US economy as many were fearful of a bank-run contagion.
So…has anything changed? As one Financial Times writer puts it, “Hypocrisy is everywhere with crypto and the banks” and we’re inclined to agree. Just last year there was an unspoken (and sometimes very outspoken) belief that these banks were shut down due to their affiliations with crypto. Not only that, their exposure to crypto was blasted by media outlets as the reason these banks did not have enough short-term capital on hand even though these banks were not holding crypto at all; they were the fiat banks for some companies that happened to also deal with crypto. It was their own poor portfolio allocation and risk management choices in cash and cash equivalents that caused their demise.
Where are we now one year later? Well, bitcoin has hit new all-time highs, the SEC approved multiple Bitcoin spot ETFs that have seen billions in inflows, and other cryptocurrencies have tripled in value. Not only that, but just days before this special 1-year anniversary of SVB’s collapse, New York Community Bancorp narrowly avoided the ‘same fate, thanks to a $1 billion cash infusion led by former Treasury Secretary Steve Mnuchin.’ Meanwhile, SVB continues to function as a portion of First Citizen’s, and they claim that they are still the same bank that ‘customers love’, just with ‘better risk management and some other tweaks,’ according to president Marc Cadieux in his interview with Axios.
Yet here we are, one year later with no new regulations while another regional bank narrowly avoids collapse and bitcoin sits happily above $70,000. At least some groups got smarter: the venture capitalists and the founders. Back when SVB collapsed, many startups were 100% banked with SVB, which is what also led to the bank run when VCs highly encouraged their portfolio companies to rip out their funds immediately. Now, companies are diversifying their banking needs ‘just in case’ something like this happens again.
In the meantime, bitcoin will continue to be traded amongst the same banking institutions that blamed it for their comrades’ downfall, and the rest of us citizens will wait patiently for the Fed and lawmakers to enact regulatory change and better enforce their existing regulations.
As Aaron Klein, a Brookings Institution senior fellow, put it so eloquently, “We put a Band-Aid on the structural problem and act like we fixed it.”
Media of the Week: ETF Inflows Surpasses $10 billion
Check out the table below with the latest numbers of the total amount of money that has flowed into the ETFs since inception. The total has surpassed $10 billion (remember, Grayscale has been losing funds since inception).