Eric Wall is part of the Arcane Research Team and serves as Chief Investment Officer.
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Source: Adobe / martinlisner
Market Research 101
The wheel is moving and cannot be stopped.
What we’ve seen over the past few months is how open high-profile investors seem to be to the Bitcoin (BTC) pitch. One analogy that I keep coming back to is that of a focus group – you take a small sample, expose it to a particular idea or concept, and study its reactions. If the members of the focus group are representative of a larger population, the group’s responses can be expected to reflect the views of that larger population.
The results are there now; the place works.
So far, our focus group is still a nibbling, early majority. Over time, more and more allocators will be exposed to the Bitcoin pitch. The more data we have, the more we learn about the penetration of the argument and can start thinking about the result. Little by little we leave the hypotheses behind and move into a world in which we can make reasonable assessments of where Bitcoin is headed.
Sonata in ₿, Allegro
In my November mind, I was talking about the psychological effects of the Bitcoin price, which has passed its recent peak, also known as the “second nudge effect”.
Between November 25th and December 15th, we struggled to break cleanly the psychological threshold of $ 20,000, even falling for a moment to a low of $ 16,200. Quite inconsistently, this happened amid one of the most concentrated bullish news flows we have ever had. A summary:
- November 20: BlackRock (world’s largest asset manager) CIO Rick Rieder announces that he sees Bitcoin as a competitor to gold
- November 24: Pendal Group (USD 73.6 billion AuM) begins investing in Bitcoin futures
- November 29: Guggenheim’s Macro Opportunities Fund (USD 5.3 billion AuM) reserves the right to allocate up to 10% of the Grayscale Bitcoin Trust
- November 30: AllianceBernsteins ($ 631 billion AuM) Bernstein Research recommends that Bitcoin can represent 1.5-10% of the portfolio
- December 2nd: BlackRock CEO Larry Fink: “Bitcoin may ‘develop’ into a global market value”
- Dec 4: MicroStrategy Inc. buys additional bitcoins valued at $ 50 million
- December 9: MicroStrategy Inc. offers $ 550 million in convertible bonds and plans to use the net proceeds to purchase Bitcoin
- December 10: MassMutual (USD 235 billion AuM), a US life insurance company, buys Bitcoin worth USD 100 million
- Dec 15: Ruffer ($ 27.4 billion AuM) confirms a Bitcoin exposure of ~ $ 745 million, around 2.7% of the company’s AuM
Based on the symphony analogy of the previous month, we actually recorded a faster, livelier part of the first sonata.
I don’t think I’ve ever seen anything like it for Bitcoin before. The fact that we were still down to $ 16,200 in the middle of it all was a godsend and a rare opportunity for anyone looking to top up. I bought options, futures and long positions in my own accounts for the first time in years.
Where are we going anyway?
To make an exact price call for a new bull cycle is, in my opinion, a rather unfounded guess. The climax will depend entirely on how intensely the hysteria reaches its climax.
It’s more like trying to guess how viral a meme will go – even if you think it’s the best meme you’ve ever seen, you can’t reliably tell if it’s 50 million people or 250 Will reach millions of people, and it really does exist, neither is there any way of telling whether Bitcoin will hit $ 50,000 or $ 250,000.
Of course, that doesn’t mean you can’t apply fundamental analysis, albeit with limited precision and no clear timeframe.
Using gold as a framework for evaluating Bitcoin is probably the most common method. It is from there that the Winklevii derive their arguments for $ 500,000 BTC, as does Guggenheim’s $ 400,000 forecast, as do many others. The calculation just divides the value of all the gold in the world by the bitcoin supply. However, these aren’t exactly predictions for the next year; it could very well take 5 or 10 years or more for them to take hold.
While I didn’t want to be picky about these projections, as they essentially put all forms of gold (jewelry, investment gold, central bank reserves, electronics) in a single bucket and should probably be revised down a bit, I’m inclined to agree that the method is more conceptual Level.
But at the same time it’s an optimistic projection, but also quite conservative. Gold today is a holdover from what used to be the foundation of money, but has since fallen largely out of favor in society. According to a 2019 survey, only 12% of Americans own gold. Most people don’t hold gold. Most people prefer stocks or real estate as a way of preserving their wealth. Gold is a niche asset.
I refuse to accept the idea that if bitcoin reached an asset size similar to gold over time and people learned to get used to it, it would just remain a niche and store of value alternative.
Bitcoin is an internet commodity. It should be broadcast over the internet. The reason gold is such a failure (yes, a failure), in my opinion, is because there is no easy way to trade with it. While attempts have been made to convert gold like e-gold, at its peak, e-gold did not transfer much more than $ 2 billion a year. Bitcoin has done more than ten times as much in a single day this week.
Once people get used to storing their wealth in Bitcoin, they will quickly learn to use Bitcoin’s transaction layers to transfer that wealth. This will undeniably allow Bitcoin to spread well beyond the status of gold.
So what is the end goal of Bitcoin?
Some optimists believe that Bitcoin can swallow a large portion of the $ 40 trillion of tight money in circulation around the world. Those who have delved deeper into the subject sometimes conclude that it is the $ 100 trillion in global money that better matches the overall addressable market of Bitcoin as a fixed supply currency in and of itself would be able to mimic many of the savings vehicles usually included in the broad money definition. But even this analysis misses the point of how unsuccessful today’s money is as an asset class compared to what it could be.
The money we have today is money in its weakest form.
Literally, people who have a lot of cash these days can’t stop thinking about how to get rid of it and what to use it for, otherwise their wealth will depreciate over time. There are a lot of wealth that could comfortably sit in cash, which is simply not the case today.
This is why we have such spectacular asset bubbles (~ $ 100 trillion and $ 250-300 trillion, respectively) in stocks and real estate, as these assets have a reputation for preserving and increasing one’s wealth. In a hard money world where the money you own would increase in value at the rate of GDP rather than deteriorate, these are the asset bubbles Bitcoin would chew on.
Well, what that means in terms of the unit price of Bitcoin, I don’t even dare to write (I don’t want an inferior news site to pick this up and exclaim, “Arcane Research predicts USD XX, XXX, XXX per Bitcoin!”), But you can easily do the calculations yourself.
Other thoughts
It seems that a lot of people are just thinking when the next “altcoin season” will begin. Everyone remembers how Bitcoin’s dominance fell from 65% to 32% in one month when it last hit $ 20,000, and how 2017 paved the way for altcoins to outperform Bitcoin by orders of magnitude.
On the one hand, I have to contrast how it took place in an environment where bitcoin transactions with fees of up to $ 20 were not deleted from the mempool and that retail investors were the only group that dominated the speculative element of the cryptocurrency market.
While transactions with only 1 Sat / byte (5-10 cents for a regular transaction) have been processed in the past 24 hours, institutional investors are the main culprit. Additionally, crypto derivatives have dwarfed spot volumes for quite some time, suggesting a more sophisticated view of who is moving the market.
I can also imagine that there is a slightly subdued interest in going on “DeepBrainCoin” as your most important financial bet this time around, when the whole press is writing that the financial elite invests their cryptocapital almost exclusively in Bitcoin.
On the other hand, I have to be careful here not to over-intellectualize.
Retail’s “stupid money” still plays a huge role in the crypto market, and altcoins rose multiple times in 2017 without Bitcoin fees reaching problematic levels.
Anyone who follows me knows that I am particularly interested in “Crypto TikTok”. I do this unironically to see how crypto memes fare when powered by the world’s most nifty virality engine. Results so far have only shown that the simplest prejudices and fallacies are still alive in the retail cryptosphere, and TikTok seems to be emerging as a huge booster for that.
It would also be unfair to say that the current story is all about Bitcoin. Among all the new crypto entrants we saw on the news last month, one thing stood out: The Alan Howard-backed institutional investment firm One River Asset Management acquired a $ 600 million stake in Bitcoin and Ether – a Share that they want to increase to $ 1 billion by early next year.
In all fairness, this isn’t unreasonable as DeFi is perhaps the biggest crypto growth story of 2020. In addition, the CME Group has announced that it will launch an Ethereum (ETH) futures product in February next year. I think there is no point in denying that Ethereum will continue to play an important role alongside Bitcoin for the foreseeable future.
What about the Mnuchin KYC rule?
There are many better voices than mine on this subject. I recommend reading the threads by Jeremy Allaire, Cynthia Lummis, and Jake Chervinsky if you haven’t already, as well as Coinbase’s answer and Coin Center’s abstract. While I find the trend troubling (albeit expected), I do not expect this proposal to have a significant impact on the market.
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This comment first appeared on the Arcane Research blog.
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Learn more:
Crypto in 2021: Bitcoin will ride the same wave of macroeconomic problems
Crypto Launch in 2021: Bitcoin Rules, Ethereum Growing and Facing Rivals
Crypto in 2021: Institutions prefer Bitcoin, retailers open to Altcoins
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