“Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it.”
~ Michael J. Saylor, CEO, MicroStrategy Incorporated
After a fierce price rejection at the USD12,000 level on September 1, bitcoin ($BTC) traded down below $10,000 and bounced at $9,800 to end the quarter with an 18% gain. This bounce back tested the upper trend line of a 2 ½ year pennant turning that resistance into support from the earlier breakout in mid-July.
Today’s bitcoin trading range around $11,400 looks to test the yearly high and make a run for the 2019 high of $14,000. The success or failure of this move probably depends less on any fundamental or structural factors in bitcoin and cryptocurrencies, and more so on the performance of US equity and treasury markets in the coming quarter in response to the U.S. Presidential election, passage of significant new fiscal stimulus in Congress and the outlook for normalization of business and consumer activity derailed by the pandemic.
The research team at leading U.S. cryptocurrency exchange Kraken summarizes the month of September as follows:
Key Takeaways
September kicked off with bitcoin’s annualized volatility touching a 5-week low of 38.8%, followed by a rally above 50% on September 3. It then bounced between 50% and 56% and snapped a 5-month downtrend by concluding September at 55.4%.
Bitcoin’s correlation with the S&P 500 sank to an 8-month low of -0.27 in the first week before rebounding and finishing the month at 0.60. Inversely, bitcoin’s correlation with the U.S. dollar index (DXY) momentarily turned positive before resuming a 5-month trend of negative correlation.
It was business as usual last month with September seasonality weighing on global assets and dragging bitcoin -8% lower MoM – in line with the month’s 10-year average (-7%) and median (-8%) returns.
With bitcoin coming off what is, on average, the least volatile month of the year, one ought to expect incremental market volatility to surface as 4Q2020 begins.
In addition, the ever-growing number of addresses containing between 1,000 BTC and 10,000 BTC and the number of coins held in these addresses suggests that Bitcoin’s strong fundamentals and vigorous demand from “smart money” is not entirely reflected in bitcoin’s price.
What to Watch for Next
Better Returns in October: With bitcoin’s worst-performing month now behind us, October may outperform September, just as it has for 8 of the past 9 years, with an average return around +11%. Note that bitcoin has underperformed its monthly average in 6 of the past 9 months.
The Suppressed Pocket (Again): Twelve times in the past, bitcoin’s annualized volatility bottomed between 15% and 30% before climbing, on average, to 140% and returning +196% over 94 days. As of the end of September, 68 days have passed since the volatility low of 23% set on July 24, with volatility rising to 55% and price gaining +12%. So, history indicates that we may have ample room for higher volatility and gains, though only about one month remains for bitcoin to match its historical averages.
Fundamentals Lookin’ Good: Bitcoin’s fundamentals continue to look good, with both the average hashrate and average number of active addresses continuing to trend higher at a pace that doesn’t seem to be fully reflected in the spot price.
The “Smart Money” is Alive and Well: The number of addresses containing between 1,000 BTC and 10,000 BTC continues to grow strongly. Further, the total number of coins held in these addresses is still growing. Overall, the numbers indicate a strong pattern of accumulation that started about 7 months ago.
Of note in the prior quarter was a new trend of large firms diversifying their treasury holdings by acquiring bitcoin as a reserve asset.
As reported by Coindesk today, Stone Ridge Holdings Group (an institutional asset manager) is holding 10,000 bitcoins with its crypto subsidiary, NYDIG. The private firm called bitcoin its new "primary treasury reserve asset," language that was first adopted by publicly traded MicroStrategy. The business intelligence company MicroStrategy told the U.S. Securities and Exchange Commission in its 8-K filing that it "may increase" its bitcoin ($BTC) holdings beyond the $250 million it purchased in August. That purchase transformed much of MicroStrategy's cash reserves into bitcoin. On August 11, 2020 their board formally recognized bitcoin as MicroStrategy's "primary treasury reserve asset on an ongoing basis."
From the August 11 company press release:
“Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders,” said Michael J. Saylor, CEO, MicroStrategy Incorporated. “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”
Mr. Saylor continued, “MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”
In considering various asset classes for potential investment, MicroStrategy observed distinctive properties of Bitcoin that led it to believe investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments. Mr. Saylor articulated the opinion, “We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”
Another publicly traded company, Square Inc., published its “Bitcoin Investment Whitepaper” as a way to “open source” their process for others considering a similar move. They state:
On October 7, 2020, Square, Inc. purchased approximately 4,709 bitcoins at an aggregate purchase price of $50 million. Square has been a leader in the bitcoin space since 2018 through our Cash App product, which provides customers the ability to buy and sell bitcoin. As believers in bitcoin’s potential for continued future growth, the company formed Square Crypto, an independent team solely focused on contributing to bitcoin open source work for the benefit of all. Square also recently launched the Cryptocurrency Open Patent Alliance (COPA), a non-profit organization encouraging crypto innovation, opening access to patented crypto inventions, and helping companies and individuals defend themselves against patent aggressors. Given the rapid evolution of cryptocurrency and unprecedented uncertainty from a macroeconomic and currency regime perspective, we believe now is the right time for us to expand our largely USD-denominated balance sheet and make a meaningful investment in bitcoin. We view bitcoin as an instrument of global economic empowerment; it is a way for individuals around the world to participate in a global monetary system and secure their own financial future. This investment is an important step in furthering our mission.
Underscoring this mainstreaming of long-term cryptocurrency holding is a flurry of regulatory activity demonstrating an accelerating timeline for governments around the world to plan for implementation of an alternative to the current paper-based fiat monetary system. Even as replacing the crumbling current USD backed global system is not openly admitted or covered by mainstream financial press, all signs point to a rapidly maturing internationally coordinated regulatory structure that can accommodate the new digital network protocol-based operating system for money and finance that I have been highlighting over the past couple of years.
See, e.g., the following reports by the BIS, FSB and CBDC progress announcements for Japan and China:
Central banks and BIS publish first central bank digital currency (CBDC) report laying out key requirements
09 October 2020
Seven central banks and the BIS release a report assessing the feasibility of publicly available CBDCs in helping central banks deliver their public policy objectives.
Report outlines foundational principles and core features of a CBDC, but does not give an opinion on whether to issue.
Central banks to continue investigating CBDC feasibility without committing to issuance.
A group of seven central banks together with the Bank for International Settlements (BIS) today published a report identifying the foundational principles necessary for any publicly available CBDCs to help central banks meet their public policy objectives.
The report, Central bank digital currencies: foundational principles and core features, was compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS, and highlights three key principles for a CBDC:
Coexistence with cash and other types of money in a flexible and innovative payment system.
Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
Features should promote innovation and efficiency.
The group of central banks will continue to work together on CBDCs, without prejudging any decision on whether or not to introduce CBDCs in their jurisdictions.
Based on these principles, the group has identified the core features of any future CBDC system, which must be:
Resilient and secure to maintain operational integrity.
Convenient and available at very low or no cost to end users.
Underpinned by appropriate standards and a clear legal framework.
Have an appropriate role for the private sector, as well as promoting competition and innovation.
Further development of CBDCs requires a commitment to practical policy analysis and applied technical experimentation. While this has already started, the speed of innovation in payments and money-related technologies requires the prioritisation of collaborative experimentation.
Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements
13 October 2020
This report sets out high-level recommendations for the regulation, supervision and oversight of “global stablecoin” (GSC) arrangements. GSC arrangements are expected to adhere to all applicable regulatory standards and to address risks to financial stability before commencing operation, and to adapt to new regulatory requirements as necessary.
So-called “stablecoins” are a specific category of crypto-assets which have the potential to enhance the efficiency of the provision of financial services, but may also generate risks to financial stability, particularly if they are adopted at a significant scale. Stablecoins are an attempt to address the high volatility of “traditional” crypto-assets by tying the stablecoin’s value to one or more other assets, such as sovereign currencies. They have the potential to bring efficiencies to payments, and to promote financial inclusion. However, a widely adopted stablecoin with a potential reach and use across multiple jurisdictions (a so-called “global stablecoin” or GSC) could become systemically important in and across one or many jurisdictions, including as a means of making payments.
The emergence of GSCs may challenge the comprehensiveness and effectiveness of existing regulatory and supervisory oversight. The FSB has agreed on 10 high-level recommendations that promote coordinated and effective regulation, supervision and oversight of GSC arrangements to address the financial stability risks posed by GSCs, both at the domestic and international level. They support responsible innovation and provide sufficient flexibility for jurisdictions to implement domestic approaches.
The recommendations call for regulation, supervision and oversight that is proportionate to the risks. Authorities agree on the need to apply supervisory and oversight capabilities and practices under the “same business, same risk, same rules” principle.
The performance of some functions of a GSC arrangement may have important impacts across borders. The recommendations also stress the value of flexible, efficient, inclusive, and multi-sectoral cross-border cooperation, coordination, and information sharing arrangements among authorities.
The FSB has agreed to the following further actions as a key building block of the roadmap to enhance cross-border payments commissioned by the G20:
Completion of international standard-setting work by December 2021.
Establishment or, as necessary, adjustment of cooperation arrangements among authorities by December 2021 (and as needed based on market evolution).
At a national level, establishment or, as necessary, adjustment of regulatory, supervisory and oversight frameworks consistent with the FSB recommendations and international standards and guidance by July 2022 (and as needed based on market evolution).
Review of implementation and assessment of the need to refine or adapt international standards by July 2023.