CRYPTO CORNER

• Bitcoin has achieved a new all-time high, and after a successful retest and breakaway, a bull phase in the market was confirmed.
• Monetary policy, liquidity, and the dollar are other essential factors that impact Bitcoin’s price and the bull market.
• The fundamental value of Bitcoin’s price is based on network size, real rates, and credit spreads. The price floor is expected to be $49k—$53k.
• The downside risk from the current price is -20% to -30%, similar to stocks.
• Investors with an appropriate time horizon of 5-7 years should still be able to invest profitability from this price level.
• Bitcoin is becoming normalized as an asset class, which could provide an additional tailwind to this bull cycle.

A new all-time high has been achieved, and crypto investors await a confirmed breakout from that new high to officially call the bull phase in the four-year cycle. A breakout from $67,734 was required; investors should expect the price to retrace and confirm this price level as support and then appreciate further to complete the bull phase call.

The four-year cycle for Bitcoin, which is popularly held to be linked to halving dates covered in previous research notes, could be a mere coincidence. While this relationship has historically existed, nothing guarantees it will continue to hold. The timing of halving event booms is not reliable for the future.

However, the US business cycle tends to span 3-5 years, is a recurring feature of the economy, and is unlikely to go away. As a result, future price booms are most significantly related to monetary policy, and the feature of the halving event and monetary policy inflections will likely continue to overlap. Due to the limited supply of bitcoin, a decrease in interest rates, the value of the dollar, and an increase in the money supply are the most likely causes of significant price changes in Bitcoin. In the last cycle, the halving rate cycle analysis was forecasted to push Bitcoin’s price above $100k. Instead, the price approached $68k and pulled back twice, forming a double top. What happened? The central bank began telegraphing interest rate hikes and tightening the money supply.
Liquidity analysis is the most crucial factor to study to understand the most likely path for risky asset prices such as digital assets. The US and the world have an infinite liquidity cycle due to demographics and debt loads. In 4Q 2023, the total global debt to global GDP ratio hit an all-time high of 336%. Said another way, the size of global debt exceeds global revenue by ~3.4X. According to the CBO, the weighted average coupon of 10Y UST notes was 3.9% by YE 2023. The debt supply must grow at the coupon rate of 3.8% * 3.4X = 12.92% to avoid a deflationary debt collapse. The IMF projects global GDP to increase by 3.1% in January 2024. Global spending can then be expected to grow by 3.1% to cover debt growth, but the remaining must be made up with an expansion in the money supply, aka fiat debasement, of ~9.82%. Hiking interest rates only increases the need for money debasement, and when a recession inevitably occurs, this will only increase the need for all governments to debase their currency. Demographics create a shrinking labor supply and decrease productivity absent a technological boom. Realistically, the M2 money supply is set to double from current levels in the next 1-3 years.

Several other factors can influence Bitcoin’s price: real rates, below investment-grade credit spreads, global liquidity, and correlation with gold and the NASDAQ index price. Astute readers will note that these also relate to the economic cycle, monetary policy, and the dollar. Currently, all of these are supportive of the recent price rise. We would look for negative divergence before raising any caution flags. Model pricing based on these factors, in addition to network size, proxied by the number of active addresses, would point to support between $49,000 and $53,000. Another measure, named Lowest Price Forward, is an observation of price based on an increasing look-back period, which points to ~$45,000 as a support level. The downside case from ~$66k Bitcoin spot price is between -20% to -32%. This is in keeping with historic equity volatility and what most would agree to be manageable. If an investor buys even close to these estimated price floors, they will likely make money over a business cycle time horizon of 3-5 years. This is important to remember with occasional bouts of volatility and price pullbacks.

The next most crucial point to address is that as daft as it may sound, the marginal bid for any traded asset ultimately increases its price. This applies to everything from housing to stocks to digital assets like cryptocurrency. This is important as we have seen increased institutional adoption after the recent Bitcoin spot ETF approval by the SEC.

The spot ETF’s approval follows the approval of large financial platforms, such as Fidelity and Blackrock, including Bitcoin in allocation platforms. Notably, Fidelity discloses a 1% allocation in their All-in-One Conservative allocation, as shown below.

Bitcoin’s market capitalization currently stands at $827 billion. The prior market peak in 2021 achieved a market cap of ~$1.1 trillion. The total market cap of global equities stood at $109 trillion in 2023. The global market cap of debt was last approximated to $307 trillion in Q3 2023, and global real estate at ~$7.2 trillion by IMARC Group in 2023. Therefore, a crude approximation of the Global Asset portfolio could be estimated at ~$423 trillion. Hence, Bitcoin is about 0.20% of the global asset mix, which compares to gold at 3.4%. According to an allocation mix such as Fidelity’s conservative mix, a 1% allocation would represent growth to ~$4.23 trillion or 5x from the present market cap. This is not meant to be predictive but illustrative of the opportunity as bitcoin becomes normalized in investor allocations. One will have a challenging case to argue against this normalization trend and protection against fiat debasement.