ByteTree Market Health Update; Issue 48
People ask me about the stock-to-flow models as being a bullish driver of Bitcoin. I have my doubts for many reasons, mainly because if something is too good to be true, it generally is. But my latest retort comes from Alan Greenspan (hat tip to @JanGold_ for highlighting this).
Back in 1994, he told Congress:
“Gold is a different type of commodity because virtually all of the gold that has ever been produced still exists and, therefore, changes in the levels of production have very little effect on the ongoing price, which means that it is wholly a monetary demand phenomenon since it is a store of value, not something which is used to a very large extent in industry.”
Greenspan knows a thing or two about money. In fact, he loves it so much he created bucket loads of it. I would expand on his point about production and point out that few gold market professionals get excited by mine supply. They analyse it and make forecasts, but it rarely features as a significant factor in price forecasts. When you have a huge stockpile, the market is trying to value that over the long-term, while new supply, at most, only has influence over the short-term.
Why is gold so valuable?
Gold has some remarkably physical qualities, including density; it is inert, and it has beauty. Scarcity is also important as it supports the store of value. Crucially, low supply creates price stability, yet is not value-creating (high supply would certainly be value destructive).
The real value comes from gold’s role as a monetary asset, as it represents a powerful network that has taken years to evolve. The gold market has depth, so much so, that it is liquid during times of crisis. That means it tends to outperform (not necessarily rise) other asset classes during times of market stress. And if inflation is rising when the tide is going out, last seen in the developed world in the 1970s, it surges just at the point when other assets are on their knees.
On the macro “Money Map”, as I call it in the Fleet Street Letter, gold sits in the top left where it benefits from rising inflation and risk-off conditions; otherwise known as falling real yields. Silver and other commodities sit in the top right, which is where I believe Bitcoin currently sits having come from the bottom right.
Source: ByteTree Asset Management.
The evidence from Bitcoin’s short history firmly points to an asset that has seen its best gains during risk-on periods when inflation has been stable or rising. That said, it has also enjoyed high correlation (not performance, but direction) with technology stocks. This makes sense because it is an internet creation, a fintech, and a network. The past link to internet stocks in general is unsurprising, but as Bitcoin has matured, it is starting to decouple from tech, and as a result, has moved to the top right and correlates with value. This is happening now.
I’m not sure how many people have noticed, but the price of Bitcoin is moving ever closer to the US long bond yield. That reinforces the notion that Bitcoin is a risk-on asset, a value asset; also known as a real asset. Real assets protect you when the financial system blows up, and it is encouraging to see Bitcoin rise as the price of bonds fall. And boy, do bonds have a long way to fall.
Bitcoin likes a rising bond yield
Source: Bloomberg. Bitcoin and the US 30-year yield since May 2020.
This is all the more interesting because Bitcoin has just broken above $12k following a period of consolidation. Breakouts are good, so no problem there. But the one breakout that regular readers know I have been waiting for is the outperformance over tech, which could be imminent.
The most important chart for Bitcoin
Source: Bloomberg. Bitcoin relative to the NASDAQ since 2018.
I believe tech and the FAANGs are big bubbles that will end in disaster. The companies are great, but the prices you pay to own them are pie in the sky. Investors will be destroyed by rising bond yields, as once they pass a certain threshold, they cause general asset prices to fall. Not only do bonds have a long way to fall, but so does tech. Anti-trust issues won’t help much either.
Having looked at what makes gold the financial god that it is, it becomes clear that as Bitcoin becomes more widely distributed, and becomes materially more liquid, it will slowly move over to the top left and sit alongside gold. But I stress, this could still be many years away.
In any event, it is helpful to have a vision to see where Bitcoin is headed, and why. My price forecast for gold is $7,000 by 2030; learn more.
Assuming there are 200,000 tonnes of gold in the world, worth $1,900 per ounce, that values today’s stockpile at $12.2 trillion, or $45 trillion on my $7,000 target for 2030. With just over 19 million bitcoins in circulation by 2030, and if Bitcoin matched the value of gold, the Bitcoin price would rise to $2.3 million; a gain of 197 times from here.
A bullish forecast for sure, but not an impossible one. After all, this is the internet, which is pretty good at spreading ideas. Bitcoin probably has the physical properties in that it is inert, secure, and scarce. The internet will inevitably see it become more widely distributed over time. The missing link for Bitcoin mimicking gold is a massive increase in market liquidity, especially when the economic tide is going out. For that, we need to see a boom in institutional ownership and for the brave central banks to step over the line. Once they do, the others will follow.
$2.3m Bitcoin is farfetched, and I would be surprised if Bitcoin took over from gold. But just over a decade ago, negative yields and quantitative easing seemed farfetched. Now they are normal. In this mad world we live in, I believe it pays to keep an open mind. And whatever happens, best not be short Bitcoin.
Please visit https://bytetreeam.com/ if you would like to learn more about ByteTree Asset Management.
Network Demand Strategy
This remains at 5 out of 6 in line with last week. The price action is strong, and transaction value and fees have both started to turn up. First Spend remains healthy, and the miners are reducing inventory. That reaffirms a strong market bid, which given the recent breakout is stating the obvious.
Here is an interview I recently did with Miha Grčar, Global Head of Business Development at Bitstamp.
This article has been cross-posted from ByteTree Insights, originally published 21st October 2020.