Intro to Bitcoin (Pre ETF)
Meet my brother, the financial philosopher. He’s got this unique perspective that cash is the like unicorn of money - mythical, elusive, and quite possibly, a figment of our imagination. You see, for him, if it’s not chilling in his bank account or doing a dance on his computer screen, it’s just not real money. It’s like Monopoly cash but without the colorful board and the risk of landing on Park Place. According to his financial doctrine, if he can’t see it in his banking app, it doesn’t matter. So, in his world, spending it is as consequence-free as arguing with a mirror. Now, let’s take this whimsical journey into the era of Bitcoin, where the lines between “real” and “not real” money blur faster than a chameleon in a paint store. Strap in, because we’re about to dive into the wild world of digital currency, where even the unicorns might be cashing in their horns for Bitcoin.
😒 Considering Bitcoin
In 2024, this week actually we might see the first US based Spot Bitcoin ETFs being green lit by the SEC. This is big news and it’s time for some of you to pay attention. Let’s break down this shiny coin. Consider Bitcoin as the antidote to the age-old tale of governments playing fast and loose with the value of our money. Look back, and you'll see how currencies, like Roman coins and the U.S. dollar, have taken a rollercoaster ride from gold-backed glory to a fiat existence backed by little more than promises. Bitcoin, on the other hand, operates in a trust-less, permission-less, and borderless space. This means no government whims or geographical boundaries can mess with its value. It's like a financial superhero that doesn't need a central authority pulling the strings. In a world where currencies have a history of being debased, Bitcoin's decentralized nature becomes a shield against the age-old tendency to devalue money. It's not just digital cash; it's a guard against the pitfalls of monetary history, offering a more resilient and trustworthy alternative to traditional currencies.
📊 The Data Disco
One of Bitcoins key risks and argument against incorporating it into a large portfolio has always been volatility and the huge price swings. It has become clear that much of the interest in this orange coin is speculative as buyers simply chase price appreciation. This has led to rapid price swings. In the past ten years, Bitcoin has experienced three distinct drawdowns of at least 70%. Honestly, if I had portfolio value of $100,000+ I would also be a little skeptical about my weighting in this digital asset, but I would like to present some data for us to tango with. Also with Bitcoin comes this culture of HODLing and you can see that here in this figure here.
💡: “HODLing” refers to the buy-and-hold strategy. Buy-and-hold investors tend to hold their assets for an extended period of time to profit from the long-term value appreciation.
The long term holders are always increasing as the price of this asset appreciates. There are real investors here it seems… the long term holders are increasing and the short term holders are slowly decreasing this is attractive to see as someone managing risk.
Here’s some interesting data though — not my data of course.. but not a crypto bro’s data either. Cambridge Associates data — Cambridge Associates is a global investment firm that provides investment consulting, research, and advisory services to institutional investors such as pension funds, endowments, foundations and other large investors. The firm was founded in 1973 and has since gained prominence in the investment industry and “big money”. Ever since 2019 when they started to write research about crypto assets it should’ve been a signal to us that this type of asset was here to stay. Big money rarely misses, but when they do they miss very very badly… lookin at you FTX.
Small bitcoin allocations did improve the performance of a traditional portfolio of equities and bonds in a recent period we reviewed, Additionally, poorly timed investments in crypto assets could have detracted from overall portfolio returns. This is true for investors that bought into bitcoin in late 2017, when prices were surging, then hastily closed positions after massive drawdowns in the next two years.
Sean Duffin, Cambridge Associates (*2019)*
Even recently there was some research done that compared a traditional 60/40 portfolio holding VTI (Vanguard Total Stock Market Fund) and BND (Vanguard Total Bond Market Index Fund) and a 58/40/2 portfolio holding 2% BTC instead of the 2% in VTI. This research provided some pretty solid evidence supporting the proposition that adding a modest 2% allocation of Bitcoin to a traditional 60/40 portfolio can yield consistent benefits over a 4-year time horizon. This research also found that introducing a 2% bitcoin allocation enhances the overall CAGR, (Compound Annual Growth Rate) of the modified 60/40 portfolio. Furthermore, the Sharpe and Sortino Ratios highlight improved risk-adjusted returns for the modified portfolio.
Wtf is a Sharpe and Sortino Ratio? Shannon Sharpe?
💡: Sharpe Ratio: The Sharpe ratio compares the return of an investment with its risk. It’s a mathematical expression of the insight that excess returns over a period of time may signify more volatility and risk, rather than investing skill. Click the link if you want to learn more about that stuff it’s really interesting.
🧠Bigger Ideas
I don’t even consider this small allocation that I have made myself in this asset as one that is a hedge on the dollar or a hedge on the Federal Reserve I would say it is more like a land grab. There is a fixed supply and this scarcity inherently is one factor of value that gets added and I just simply want my hand in the cookie jar. Just incase right? It is my hedge on my own FOMO (fear of missing out) my hedge on possibly going insane if it goes to a bazillion dollars.
Look at all of these funds, this is big money finally bending the knee. I think giving this asset a second chance this time around might be something worthwhile. I told you last week “listen to what they do not what they say” and well look at all of Wall Street ready for their Spot Bitcoin ETFs. Go back to last weeks newsletter, what was this previous years return on BTC? 157%…
It looks like it is finally time where Bitcoin is gaining its legitimacy, we will know for sure this week when the SEC green lights the slate of ETFs that have been filed and we will see what I predict to be the highest single day inflow on day 1 of ETF launch we have ever seen for a Spot ETF tracking any underlying asset. Dare I say $10 billion on first day.
The volatility of Bitcoin indeed adds complexity to comparing its purchasing power against traditional currencies like the U.S. dollar on a day-to-day basis. The importance of the four-year cycle and a longer time horizon in Bitcoin investments becomes crucial for several reasons. Bitcoin has exhibited distinct market cycles in its relative short history, characterized by periods of rapid price increases (bull markets) followed by corrections or consolidations (bear markets). Understanding and considering this four year halving cycle that Bitcoin has is essential for making informed investment decisions. The four-year halving cycle is not just a price mechanism; it is deeply tied to the fundamental aspects of Bitcoin’s supply schedule. These events, which can reduce the rate at which new Bitcoins are created, can have long-term effects on supply and demand dynamics. A longer time horizon allows you as an average joe to assess how these fundamental changes unfold and potentially increase or decrease your allocation.
🎨 My Chart Artwork(s) of the Week
🖼️ The Art Gallery
Rising concerns over the Federal Reserve printing more money and the increase in M2 money supply lies in the potential negative consequences associated with inflation and loss of purchasing power
You can’t make this stuff up.. presented by David Andolfatto member of the Research Division of the Federal Reserve Bank of St. Louis. Source: St. Louis Fed
US Consumer Price Index: Purchasing Power Of the Consumer Dollar is at a current level of 32.60, up from 32.50 last month and down from 33.60 one year ago. This is a change of 0.31% from last month and -2.98% from one year ago. Source: YCharts
Money is a self-organizing system of resource management. Bitcoin is better money, because it allows for more pure self-organization as a result of its money supply being predetermined by hard-coded, low-inflation algorithm — rather than by fiat decree. Bitcoin's growth is inevitable; over time, capital will flow through the path of least resistance: the resource allocation mechanism that preserves purchasing power and the ability to predictably offset value claims over time. Bitcoin might be that, I’ll hold that statement back a little with adding the might — as even I am waiting to see that unfold in real time but I am pretty confident in saying that USD is not that.. Here’s something that is pretty eye opening and something that seemingly seems to work under no one’s decree unlike our fiat dollars. Some out there in the community have observed this power law and charted an equation to visualize it.
💡: In statistics, a power law is a functional relationship between two quantities, where a realtive change in one quantity results in a relative change in the other quantity proportional to a power of the change.
Power law p=A\(t-t1)alpha1,A=1.0014e-17, alpha1 = 5.82; t days from t1=Jan 3 2009, R2=0.953 04-Jan-2024*
🗓️ Calendar Clues:
Tues (1/9): 1:00pm - 3-Year Note Auction**Expected This Week: Bitcoin Spot ETF (Jan 10th-11th)Wed (1/10): 1:00pm - 10-Year Note AuctionThurs (1/11): 8:30am CST - CPI (Consumer Price Index)Thurs (1/11): Initial Jobless ClaimsThurs (1/11): 30-Year Bond AuctionFri (1/12): 8:30am CST - PPI (Producer Price Index)
