Crypto Lengthy & Quick: No, Bitcoin shouldn’t be in a bubble

To think that such a festive concept that evokes both sophistication and childlike amazement could be so financially burdened …

Last week, Bank of America Securities chief investment strategist Michael Hartnett said in a note that Bitcoin looks like "the mother of all bubbles."

Harnett appears to be using the strength and speed of Bitcoin's price rise as the basis for his diagnosis, as if it were the main characteristic of a financial bubble. It is not so.

In a note quoted on Bloomberg this week, investment management firm Man Group continued the abuse of the word, saying, "Every time a bitcoin bubble bursts another grows back to replace it … It is precisely this frequency that makes the Bitcoin narrative compared to the somewhat atypically large bubbles of the past. "

This is less irritating as Man Group recognizes that Bitcoin is "atypical" – but it also seems to believe that Bitcoin is a bubble. It is not.

Words are important

To see why, let's pull out our financial dictionaries:

Investopedia: "During a bubble, assets typically trade at or within a price range that is significantly greater than the intrinsic value of the asset (the price does not match the fundamentals of the asset)."

Nasdaq: "A market phenomenon characterized by an increase in asset prices to levels well above the base value of that asset."

Wikipedia: “A situation where asset prices appear to be based on implausible or inconsistent views about the future. It could also be described as (an asset that is traded) at a price or price range that greatly exceeds the intrinsic value of the asset. "

Do you see the common thread? An asset is in a bubble when its price increase is not related to its intrinsic or fundamental value.

What is the intrinsic value of Bitcoin? Nobody knows anymore. We are seeing a still young technology that is evolving alongside the demand for that technology. The future use cases of the technology are still unclear, as is its place in the financial ecosystem. Bitcoin's unique investment properties and unfamiliar metrics make it impossible to apply traditional valuation techniques. Many have opinions of its fundamental value, but you just need to look at the broad spectrum to see that they are based on unestablished theories and untested logic.

So whoever says that Bitcoin is in a "bubble" decides its intrinsic value. But they never share (at least not what I've seen) their calculations or even reveal the number they are thinking of.

Social concepts

Perhaps these analysts and commentators use the term "bubble" in a social sense?

The economist Robert Schiller defines a speculative bubble as "a social epidemic whose contagion is mediated by price movements". Those of us who spend time on Twitter or YouTube may nod approvingly. But Schiller specifies "epidemic" (an unfortunate metaphor in 2020-21) which implies mainstream involvement. The cacophony of Bitcoin maximalists and altcoin enthusiasts is far from the mainstream.

Cliff Asness, co-founder of AQR Capital Management, gets it. In a 2014 article written for the CFA Institute, he said, "The word" bubble "is used very widely even if you are not an efficient market buff (if you are, it should never be pronounced outside the tub)."

Aside from Suds, he adds: “Whether a particular instance is a bubble will never be objective. We will always have disagreements ex ante and even ex post. However, in order to have content, the term bubble should indicate a price that no reasonable future outcome can justify. "(My emphasis)

Most professional investors who allocate part of their portfolio to Bitcoin do so to hedge against the currency devaluation scenario that seems less and less inappropriate. How do you fix that?

What is the “fundamental value” of a good that does not depreciate with the underlying currency, that does not suffer from the effects of a weak economy, and that cannot be co-opted to make profit for a select and powerful few? What is the "intrinsic value" of a technology that enables the verifiable, unchangeable and censorship-resistant exchange of information? How do you assign a base price level to a cryptographic token that embodies all of this and can also be used as a payment innovation and as a confiscation-resistant store of value?

For Bitcoin to be in a bubble, its price movements must be independent of its underlying value. Given the astounding surge in global dollar supply at a time of stagnant demand due to widespread pandemic-induced recessions and the likely occurrence of recovery-induced inflation that will be difficult to control, it could be argued that the underlying value of Bitcoin as the potential offset to the resulting economic chaos is increasing rapidly. It could be argued that Bitcoin's price movement is catching up with its underlying value.

The anti-bubble

It could also be argued that Bitcoin is the anti-bubble, that its price is rising due to bubbles elsewhere in the economy. Many investors are buying Bitcoin in response to what they believe is a massive government bond bubble that they believe the government will try to purge by printing money.

And for stocks, the soaring market valuations of tech companies depend heavily on low interest rates that could rise quickly if the bond bubble bursts. This would make "alternatives" like Bitcoin even more attractive.

To get a feel for the anti-bubble nature of Bitcoin, try to imagine what its “fundamental value” would be if we had central banks that don't print money, governments that keep balanced accounts, and no fear of MMT at all , financial repression or the like are kind of populist uprisings. In this scenario, the demand and price would be much lower than today.

Before we accuse Bitcoin of being in a bubble, before implying that its current price in no way reflects its potential utility in a chaotic and increasingly uncertain world, let's wonder where we think the drivers of Bitcoin utility are going.

None of this means that Bitcoin price isn't falling – it could be, and if so, it could go so quickly. The probability for this lies with every investor.

However, this means we need to study more than just recent price movements. A strong return does not automatically deserve the term "bubble". Bubble isn't about price, it's about price versus value.

Labels are important, and what comes next will be confusing enough with no charged words misrepresenting new concepts.

Macro currents

When institutional investors praise the current macro environment as “perfect” for Bitcoin, we listen. Low interest rates, a falling dollar, and fears of inflation ultimately lead investors to invest low-interest cash in high-yielding assets like gold and bitcoin.

But do these investors return to the drawing board when BTC falls more than 20% while 10-year government bond yields surpass 1%? I am starting to wonder if the macro portrayal of the continued Fed support that is stifling yields and fueling market speculation is still standing.

Just like the Fed, investment managers care more about real returns (adjusted to remove the effects of inflation) than they do about nominal returns. The fact that real yields are still negative means that the inflation outlook is muted. The Fed will continue easing monetary policy until it sees a significant pickup in growth and inflation, which supports the base for Bitcoin as a speculative asset.

And what about bitcoin as a hedge against inflation?

Some might say that there is still no sign that inflation is running wild. However, market participants would not agree as they position themselves in front of economic data. We can see this in the breakeven rates (a market-based measure of inflation expectations), which topped 2% this week.

Source: Federal Reserve Bank of St. Louis

(The graph above shows the US 10-year real return struggling to raise inflation expectations, which should keep the Fed active – which supports the macro case for Bitcoin.)

To be fair, volatility metrics such as government bond swaption premiums show no hedging bias for a significant rise in interest rates. This means that the volatility in the interest rate market remains very low, which suggests that investors are not yet demanding a higher reward for the rising interest rate (or inflation) risk.

Where can investors find such a reward? Bitcoin. The cryptocurrency attracts greater institutional flows as it generates high returns when compared to traditional assets. Bitcoin's high relative return offsets investors for volatility and inflation risk.

As long as the Fed keeps the punch rolling, the speculative pursuit of high returns will continue. It's a goldilocks environment for Bitcoin as an asset class.

Chain links

Investors speak:

· “We have long watched and believe it is a unique beast as an emerging store of value that combines some of the benefits of technology and gold. Yes, it's a seemingly nonsensical asset – but one that makes perfect sense to the way we see the world. “- Excerpt from a beautifully written and thoughtful investor letter from Jonathan Ruffer, Chairman of Ruffer Investment Company

· “Every time a Bitcoin bubble bursts, another grows back to replace it. It is precisely this frequency that makes the Bitcoin story somewhat atypical compared to the great bubbles of the past. "- – Man Group Investment note

· "In our view, cryptocurrencies are attractive to speculative investors because of their high volatility and the size of their previous drawdowns, but they are neither a suitable alternative to safe-haven assets nor do they necessarily help diversify the portfolio." – Strategists UBS Asset Management

· "I don't even know enough to say this with confidence, but I'll say that I'm a little cynical that someone is going to come up with a really good valuation model for the right price." – – Cliff Asness, Co-founder of AQR Capital Management, in a Bloomberg interview

Speech on CNBC's The Coin Rush on Tuesday, Goldman Sachs & # 39; Global Head of Natural Resources Research, Jeff Currie, said the cryptocurrency market is "maturing" but has a long way to go and believes institutional investors account for roughly 1% of current bitcoin market cap.

In its latest investor memo, Oak Tree Capital has founders Howard Marks reveals that his son "fortunately has a significant amount for our family". He continues, “With cryptocurrencies, I've probably allowed my pattern recognition around financial innovation and speculative market behavior – along with my natural conservatism – to spawn my skeptical position. … So I came to the conclusion (with Andrew's help) that I am not yet sufficiently informed to get a solid overview of cryptocurrencies. In a spirit of openness, I try to learn. "


According to sources Goldman Sachs is considering starting a crypto-custody service. BRING AWAY: I remember earlier we said that Goldman Sachs, who got into the crypto business, was the turning point for institutions. Years later, even if other major legacy institutions were already providing digital asset services, it would still be a very big deal as it would be the strongest signal of Wall Street interest yet. This would also create a mess to catch up with other traditional financial institutions and encourage professional fund managers to at least be better informed.

This week, Reuters reported that the incoming Biden administration is expected to name a name Gary Gensler, a Washington and Wall Street veteran who studied the cryptocurrency market extensively as chairman of the US Securities and Exchange Commission. BRING AWAY: This is very good news for the crypto industry. Gensler has experience in capital markets, science and public administration. He was the chairman of the United States' Commodity Futures Trading Commission (CFTC), a key financial regulator for former President Obama and the Treasury Department during the Clinton administration. More recently, he taught a Blockchain and Crypto Assets course at MIT, spoke at several Crypto conferences, and even wrote a comment for us in 2019. Gensler sees blockchain as a "catalyst for change" and appears to have a nuanced understanding of how crypto assets work and their impact on capital markets. That nomination is likely to rekindle market expectation that a Bitcoin ETF will be approved this year. (See Jeff Bandman's statement from the former CFTC official on the reported nomination here.)

Crypto custodian Anchorage has received conditional approval for a national trust deed from the US Office of Currency Auditors (OCC), making it the first national “digital asset bank” in the US. BRING AWAY: There are now three crypto-native banks in the US that were exactly zero a few months ago (crypto exchange) octopus was awarded a Special Purpose Depository Institution (SPDI) charter and a crypto bank by the state of Wyoming last September Avanti got one a month later). There are notable differences between the three that should be noted. As a national trust, Anchorage cannot accept deposits, which means it does not automatically get access to the Fed discount window and payment system. However, it makes Anchorage a qualified custodian under the rules of the US Securities and Exchange Commission and adds another crypto piece to the puzzle of regulated financial institutions. The more “authorized” financial firms there are in the crypto industry, the greater the institutional trust.

Crypto exchange in New York BakktThe company, backed by NYSE parent company ICE, will become a publicly traded company through a merger with a Victory Park Capital-sponsored special purpose vehicle (SPAC). BRING AWAY: The expected valuation for a pre-product and pre-sales business is $ 2.1 billion. According to a presentation by the Bakkt team to the SEC, the company expects the cryptocurrency market to reach $ 3 trillion in 2025 – in other words, it will more than triple in five years.

Gemini TrustFounded by twins Tyler and Cameron Winklevoss, the cryptocurrency exchange and custodian could soon go public, according to a Bloomberg report. BRING AWAY: It looks like a number of infrastructure companies for the crypto market will go public in 2020. There's Bakkt mentioned above and other rumored options are Coinbase, BlockFi, eToro, and I'm probably missing a couple. This is great news for us analysts as we are excited to see detailed financial data for some of the largest platforms in the industry. This is also good news for the industry as these listings are likely to grab the attention of mainstream investors and offer investors an alternative route to cryptocurrency risk.

Over $ 3 billion went into Crypto Asset Manager's products Grayscale investment in the fourth quarter of 2020 according to its latest report (Grayscale is owned by DCG, also the parent company of CoinDesk). Over 90% of these came from institutional investors, mainly asset managers. BRING AWAY: The report also showed that fourth quarter inflows accounted for nearly 60% of the full year, even though most funds were closed to new investment for the last 10 days of the year, underscoring the acceleration in institutional interest in crypto assets. In addition, the weight of institutional inflows in the mix was significantly higher in the fourth quarter than for the full year. Almost 90% of the inflows went into the company's Bitcoin Trust GBTC.

Source: grayscale investments

Grayscale reopened some of the funds closed to new investments in December last year, including the Bitcoin Trust (GBTC) and the Digital Large Cap Fund (GDLC). BRING AWAY: Since Grayscale was responsible for much of the Bitcoin purchases in the fourth quarter of last year, the reopening could be seen as good news for the market – a buyer who temporarily left is coming back.


A prospectus for a new one Bitcoin Exchange Traded Fund (ETF) has been filed with the Ontario Securities Commission (OSC) in Canada by Arxnovum Investments Inc. BRING AWAY: With renewed attention to the possible approval of Bitcoin ETFs in the US, the measures taken by the OSC could set a precedent here – trading Bitcoin ETFs on a neighboring exchange could spark competition and help the SEC recognize that other jurisdictions innovation leads the way in finance; On the other hand, a rejection by the OSC could send a signal to the SEC that there is no rush.

3iq Corp.The Bitcoin fund, listed on the Toronto Stock Exchange as QBTC.U, has a market capitalization of over CA $ 1 billion (US $ 785 million). BRING AWAY: This growth in an exchange trading fund, originally listed in Toronto last April and on the Gibraltar Stock Exchange in September, underscores the demand for Bitcoin publicly traded vehicles.

The Bitcoin exchange-traded product BTCE, which was traded on the Xetra stock exchange of the German stock exchange in June 2020, is now also traded on the Swiss stock exchange SIX. BRING AWAY: The Financial Times reported this week that BTCE's daily trading volume on Xetra averaged 57 million euros for the first eleven days of January, compared with a daily average in December of 15.5 million euros, indicating increasing demand in Europe for listed Bitcoin products. With the SIX listing, the number of ETPs traded on the Swiss Exchange rises to 34, and according to the exchange, sales of cryptocurrency products reached CHF 1.1 billion ($ 1.24 billion) in 2020. This is still tiny in the overall picture (the stock exchange) reported sales of over CHF 1.7 trillion or almost 2 trillion US dollars in 2020. However, if the trend from BTCE to Xetra continues, this value should be significantly higher in 2021.

The number of Financial advisor The allocation of crypto to customer portfolios reached almost 10% in 2020, an increase of almost 50% from 2019. BRING AWAY: This is according to a recent survey conducted by Crypto Fund Manager Bitwise and the financial media website ETF Trends (the full report can be found on our Research Hub) submitted by nearly 1,000 registered financial advisors. 81% of them said they had received a question from a customer about crypto in the past 12 months. This underscores the need for financial advisors to at least be able to answer questions about crypto assets – they are doing their clients a disservice when they can't, and rejecting something because it's not easy to understand is against the ethics of the Professional.

Crypto trading platform CrossTower launches a capital market counter for institutional customers. BRING AWAY: This sums up two trends that we have seen over the past year: 1) the emergence of crypto-market services at the institutional level, expanding choice and deepening the convenience of institutional investors in the crypto-markets, and Gradually consolidating the industry into a few companies doing many prime-broker-style things. CrossTower expands its offering of spot exchanges and over-the-counter (OTC) transactions, now offering loans for digital assets, trade finance, structured products and trade settlement in multiple locations.

Digital asset manager NYDIG – which announced the acquisition of crypto data company Digital Assets Data earlier this week – is working with banking technology provider Moven to offer plugins for banks looking to launch Bitcoin products. BRING AWAY: This is yet another indication that traditional financial institutions are preparing to enter the crypto asset market, either through custody services, trading platforms, payments, or a combination thereof. In an online survey of more than 2,000 U.S. consumers shared exclusively with CoinDesk, NYDIG found that 80% of Bitcoin holders would transfer their crypto to a bank if they were in a safe bank. Of these holders, 71% would switch their primary bank account if a bank started offering Bitcoin products and 81% would be interested in buying Bitcoin through their bank.

Asset management company Arca has completed a $ 10 million Series A financing round led by RRE Ventures. BRING AWAY: Arca is one of the most innovative crypto fund managers in the industry. Not only does it manage its crypto fund, but it also sets standards in terms of financial products and fund management. In 2019, on Friday, she filed with the Securities and Exchange Commission (SEC) a prospectus for a pension fund whose shares would be listed on the Ethereum blockchain. In 2020, it advocated the concept of “token holder activism” and urged the decentralized exchange and forecasting market platform Gnosis to stick to its original mission or to return funds to investors. It will be interesting to see what it does with the funds raised in the last round.

This report from Bloomberg on the Arctic's first bitcoin mining facility not only has beautiful photos; It also reminds us that Bitcoin doesn't just exist in cyberspace and is not a purely technology game. It also has an industrial side. BRING AWAY: The report also reminds us that the high power consumption of bitcoin mining is not an industry killer, as many early critics insisted.

Speaking of mining, based in Minnesota Calculate the north and based in New York Foundry digital (owned by DCG, also the parent company of CoinDesk) have teamed up to provide a turnkey hosted mining solution that allows investors to purchase hosted machines through both companies. BRING AWAY: This is a step in making bitcoin mining an investment option with fewer barriers (e.g., locating, buying the machines, etc.). It could also serve as the basis for other types of financial products, such as: B. mining-based collateral and hedging derivatives. Investing in crypto is not just about buying an asset and watching the price move.

Babel Finance lets Bitcoin mining companies use their machines as loan collateral to get significantly better loan terms than those offered for collateral for crypto assets. BRING AWAY: This provides a glimpse into the growing sophistication of the mining industry in China and the emergence of leveraged operations. On the one hand, more leverage means more risk. On the other hand, the leverage will allow for faster industry growth, which will lead to even more secure blockchain networks, which will lead to more financial inflows, and so on in a positive circle.

The venture arm of the US cryptocurrency exchange Coinbase participated in the start-up round of mining software and services company Titan, which announced what it claims to be the first ever corporate bitcoin mining pool in North America in December. BRING AWAY: This reflects the aforementioned trend of crypto mining facilities being packaged as investment opportunities, and Coinbase's confirmation of the potential makes it an even more fascinating area to watch.

Bitcoin mining company based in Las Vegas Marathon Patent Group (MARA) has entered into a securities purchase agreement with institutional investors for the registered offering of 12.5 million common shares at a price of $ 20 per share to raise $ 250 million. BRING AWAY: CEO Merrick Okamoto informed CoinDesk in an email that he intended to use the funds to, among other things, buy more mining equipment and expand facilities as part of the ongoing "arms race" as manufacturers struggle to keep up with demand to keep. The increased activity in the "Mining as a Business" space is largely due to the rising price of Bitcoin, which has a direct impact on the profitability of mining. It also has to do with the growing sophistication mentioned above, advances in mining technology affecting the economy, and growing global competition that is good for the entire industry.

Crypto Derivatives Exchange in Panama Deribit, the largest options exchange in the industry, already recorded around 25% of the total trading volume of Bitcoin options last year. BRING AWAY: This is amazing growth that underscores the growing maturity of the market. Growth is not limited to Deribit, although it does cement its position as the segment leader. The Open Interest (OI) on all exchanges for crypto options has increased from a little over USD 520 million a year ago (16% of the OI of Bitcoin futures) to over USD 8.3 billion today (66% of the OI of Bitcoin futures). Futures!) Exploded.


Bitcoin miners Selling their stocks is often used to explain market falls, and this week was no different – but the data doesn't support that theory. BRING AWAY: The transparency of on-chain data enables us to track outflows from known Bitcoin miner addresses to known exchange addresses. This shows that miners' outflows to the stock exchanges have declined. While this does not result in over-the-counter activity, the overall balance at mining addresses has dropped to early 2020 levels, according to the data. However, accounts from mining pools support the conclusion that miners are more likely to sell less BTC into the rally than to dump and drop the price.

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