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First Mover: As Markets Turn Ugly, Bitcoiners Thank Secular Trend

21 December 2020
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Bitcoin was lower for a second day, retreating following an eight-day streak of gains that was the longest since June 2019. 

“A period of consolidation could be beneficial,” Simon Peters, an analyst for the trading platform eToro, wrote early Monday in an email, “allowing things to stabilize and cool down.”

In traditional markets, European shares fell the most since June as an apparent mutant strain of the coronavirus in the U.K. led the Netherlands, Belgium and France to impose border closures. U.S. stock futures pointed to a lower open, even after U.S. lawmakers agreed on a new $900B stimulus deal. Crude oil fell nearly 6%. Gold weakened 0.6% to $1,870.67 an ounce. 

Market Moves

(Editor’s note: This is the sixth and final installment of First Mover’s recap of how the bitcoin market evolved over the course of 2020 and what it means for the future. Today we cover the period from October through December, when big investors and Wall Street firms suddenly started touting bitcoin as a hedge against central-bank money-printing, causing prices to double and reach a new all-time high.) 

Bitcoin proponents have tried myriad strategies over the cryptocurrency’s 11-year history to pitch it to prospective buyers.

Satoshi Nakamoto, the cryptocurrency’s inventor, designed bitcoin to be a peer-to-peer electronic payments system outside the control of any person, company or government. For a while, some cryptocurrency analysts positioned bitcoin as a “safe haven” asset that would hold its value in times of deep economic dislocation and market turmoil. That proposition was dashed in March, when the initial global spread of the coronavirus sent global markets reeling, and bitcoin plunged 25% over the course of the month. 

What ultimately proved to be bitcoin’s breakthrough was big investors’ adoption of the cryptocurrency’s potential use as a hedge against central-bank money printing and the debasement of the dollar. The thesis derives from the hard-coded limits on bitcoin’s supply, as programmed into the underlying blockchain network; unlike government currencies that can be issued subjectively and at will by central bankers, only 21 million bitcoins can ever be created.

As of early October, bitcoin prices were trading around $10,800, up 50% on the year. It was already an impressive gain, especially during a year when the global economy had suffered the worst contraction since the Great Depression. U.S. stocks were up 4%. 

Despite the outperformance, bitcoin analysts were still bullish. The blockchain network was growing, brokers cited continuing interest from buyers, positive-looking patterns were forming in price charts, options markets were hinting at further gains, the dollar was weakening in foreign-exchange markets, and there were few signs that governments and central banks would curtail the seemingly endless flow of stimulus money anytime soon. 

Yet as of early October, few traders were betting that prices would more than double over the next three months, blowing past $20,000 to a new all-time high. 

As of early October, a negative “skew” in the bitcoin options market suggested that traders were expecting further gains.
Source: Skew.

And then, almost as if a gate were opened, big corporations and money managers started to pile into bitcoin, accompanied by a flurry of recommendations from once-skeptical Wall Street analysts. 

MicroStrategy CEO Michael Saylor shifted at least $425 million of his company’s corporate treasury into bitcoin. Square, the payments company, said it would put some $50 million, or 1% of its assets, into the cryptocurrency. PayPal, another payments company, announced it would allow 346 million customers to hold bitcoin and other cryptocurrencies, and to use the digital assets to shop at the 26 million merchants on its network. 

“It’s the sheer scale of PayPal’s reach that is attracting the headlines,” Jason Deane, an analyst for the foreign-exchange and cryptocurrency analysis firm Quantum Economics, wrote in a report in late October. “This could well go down in history as a watershed moment, the point at which bitcoin goes properly mainstream.” 

Analysts with JPMorgan Chase, whose CEO Jamie Dimon had famously called bitcoin a “fraud” in 2017, wrote that the cryptocurrency had “considerable” price upside. “Even a modest crowding out of gold as an alternative currency over the longer term would imply doubling or tripling of the bitcoin price from here,” they wrote.

Additional endorsements would flow over the coming months from the hedge-fund legend Stanley Druckenmiller, money managers SkyBridge Capital and AllianceBernstein, brokerage firm BTIG and life-insurance company MassMutual. Wells Fargo, the big U.S. bank, published a 2021 investment outlook with a full page discussing bitcoin’s big gains, even though executives said customers weren’t allowed to buy it in their accounts due to regulatory uncertainty. 

“I think cryptocurrency’s here to stay,” Rick Rieder, chief investment officer for the big mutual-fund company BlackRock, told CNBC on Nov. 20. 

Joe Biden’s victory in the U.S. presidential election reinforced investors’ belief that government stimulus money would continue for the foreseeable future, since the candidate had pledged to push for at least $5 trillion of new spending initiatives from education to housing, health care and infrastructure. 

In December, the Federal Reserve adopted “qualitative” guidance for its $120-billion-a-month of asset purchases – a form of monetary stimulus that relies on money printing. The move gave policy makers additional flexibility to continue the program as long as they deemed fit. 

Prices for bitcoin shot past $20,000 on Dec. 16, setting a new price record, and within days had surpassed $23,000. As of late Sunday, the cryptocurrency was changing hands at $23,642. 

“Bitcoin has graduated from ‘digital assets playground’ to ‘mainstream global investment,’” Jeff Dorman, chief investment officer for the cryptocurrency firm Arca Funds, wrote Saturday in a column for CoinDesk. “Investors now have the knowledge and means to buy bitcoin themselves, and we are seeing it in real-time, which happened quicker than we anticipated.”

Bitcoin’s cumulative year-to-date gains, versus the S&P 500 and gold
Source: CoinDesk Research

What comes next? Analysts are still bullish. 

Dan Morehead, CEO for the cryptocurrency-focused money manager Pantera, recently cited a formula that projects a price of $115,000 by next August. Scott Minerd, chief investment officer for the Wall Street firm Guggenheim, predicted bitcoin could go to $400,000. 

The cryptocurrency investment firm NYDIG published an analysis arguing that the Bitcoin network’s growth could justify prices in the range of $51,611 to $118,544 in five years. Kraken Intelligence, a research unit of the digital-asset exchange Kraken, published results of a survey noting that clients expect an average bitcoin price of $36,602 in 2021.

Even the Kraken customers’ comparatively modest prediction would represent a 55% gain from current price levels. That could mean bitcoin outperforms again in 2021, with Wall Street analysts on average predicting a 9% return for U.S. stocks next year. 

A once-in-a-generation calamity like the coronavirus was bound to create extreme gyrations in global markets, with some assets proving big winners and some losing big. (Remember The Big Short?) 

The final few months of 2020 validated some investors’ bets that the economy wouldn’t return to its former strength anytime soon, and that trillions of dollars of fiscal and monetary stimulus, from governments and central banks around the world, would be needed on an ongoing basis to nurse any recovery. 

In hindsight, bitcoin was the biggest winner from that trade.

“The current macroeconomic environment is set up perfectly for an asset that blends the benefits of technology and gold,” the U.K. money manager Ruffer Investment said in a recent portfolio update, after confirming a bitcoin purchase worth more than $745 million. “Negative interest rates, extreme monetary policy, ballooning public debt, dissatisfaction with governments – all provide powerful tailwinds.”

Bitcoin marketers couldn’t ask for a more compelling selling point. As if this year’s 225% year-to-date price gains weren’t compelling enough. 

Bitcoin Watch

(Editor’s Note: CoinDesk’s Omkar Godbole, who writes Bitcoin Watch, is off this week.) 

Token Watch

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What’s Hot

[crypto-donation-box]

U.S. Treasury Department proposes long-dreaded plan to make crypto exchanges identify personal wallets (CoinDesk) 

Slowing of Grayscale bitcoin fund inflows could prompt price correction, JPMorgan says (CoinDesk) 

Global head of equity strategy for Wall Street brokerage firm Jefferies initiates 5% long-only asset allocation for U.S. dollar-based pension funds, while cutting gold’s share to 45% from 50% (CoinDesk)  

Ruffer Investment used Coinbase to execute $745M bitcoin buy (CoinDesk) 

Decentralized stock trading (in Airbnb, Tesla, Amazon, Google shares) launches on DeFi platform Injective Protocol, using Band Protocol’s oracle technology (CoinDesk) 

Blockchain data suggest more institutions are buying bitcoin over-the-counter (CoinDesk) 

How two of Coinbase CEO Brian Armstrong’s top lieutenants got in screaming matches and then both exited in rapid succession (Excerpt from Jeff Roberts’s “Kings of Crypto,” published on CoinDesk website) 

Goldman Sachs reportedly wins mandate to lead Coinbase IPO preparations (Reuters)

“Bitcoin in portfolios represents more than a new recipe. It represents the need for a new recipe,” CoinDesk Research Director Noelle Acheson writes in weekly column (CoinDesk Opinion) 

Analogs

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The latest on the economy and traditional finance

U.S. lawmakers set to vote on $900B coronavirus-stimulus bill, including $600 checks for individuals, $300-a-week supplemental jobless benefit, $284B for Paycheck Protection Program (forgivable loans for companies), $15B to reinstate payroll reimbursements for airlines and $1B for airline contractors; when coupled with $1.4T bill to fund government operations, cost of total package is $2.3T (Bloomberg) 

Debate over Federal Reserve’s emergency-lending powers is unresolved, after Republican lawmaker insisted on provision barring U.S. central bank from restarting some programs set to Dec. 31, then deleted language that would have prevented “similar” programs from being launched (Bloomberg)  

Manhattan’s historic Chrysler Building still eerily empty (Bloomberg Businessweek)  

Federal Reserve affirms banks’ Countercyclical Capital Buffer (CCyB) should be set at zero, after November report found that “vulnerabilities” in money markets were “substantially” mitigated by the U.S. central bank’s own emergency-lending facilities (Federal Reserve) 

Fed allows banks to resume share buybacks (CNBC) 

Wall Street strategists see U.S. stocks gaining 9% in 2021 (CNBC) 

Yellen pressed to back strong dollar in reversal of Trump-era tone (Bloomberg)

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