The month of November saw Bitcoin continuing its October rally driving the price up to $38,000 with the news cycle routinely seasoned with teaser details of the US ETF race. This is a when, not if, question for the approval of US physical ETFs given the minute level of detail being edited with each revised submission. The SEC has clearly already decided to approve these funds and the best guess estimate is that announcement comes by the middle of January. Nobody would put this kind of effort into something that they were going to deny, and it’s a marked change from the past where regulator issued denials before getting this deep into the weeds. Of course, nobody knows when the approvals will come or how long between approval and launch, but there’s little doubt at this point that the ETFs are the biggest impending catalyst to price action in the weeks ahead.
Broadly speaking, there was a rally in risk assets in November with the Nasdaq 100 gaining 11% for the month. While we’re willing to debate the assertion that Bitcoin be considered risky, there’s no doubt that we’re in the minority and risk-on sentiment generally puts in a bid with crypto in general. Either way, the correlation between easier monetary policy and Bitcoin is well documented, especially as it relates to global liquidity.
The man with his finger on the scale continues to be Fed Chair Jerome Powell. The market believes he has finished hiking for the moment and is repricing everything. The 60/40 stock/bond portfolio had its best month since the fall of the Soviet Union according to research from Bank of America. Even Bitcoiners who, as a rule, dislike central banking are wise to remember the old saying “don’t fight the Fed”.
On-chain data was also positive with Bitcoin’s network hash rate reaching an all-time high of a almost 500 Exahash/second. Some analysts believe this is a last minute effort from large miners to upgrade their hardware prior to the halving as all of them prepare for the lower profit environment that will being in April. It’s still the case that mining stocks exhibit leverage tracking to the price of Bitcoin, in both directions. If you’re a bull, there might be some miners worth adding to your portfolio but we recommend doing extensive research to ensure the company has large cash reserves to survive the Hunger Games of the post-halving block reward. You don’t know how long you have to outlive those who don’t make it so you need ample cash reserves and nerves of steel.
As far as we’re concerned, Bitcoin and Bitcoin miners represent vastly different risks as investments. Held for the long-term we view Bitcoin as a low risk way to preserve purchasing power and appreciate from new participants in the network. Bitcoin mining, on the other hand, is a game that will eventually be won by those with access to the cheapest power and non-recourse capital for regular capex upgrades. We have nothing against investing in miners, there are several great public companies some of whom will survive for the long term, we are only suggesting investors act cautiously. We don’t recommend HODL’ing mining stocks in the second half the next year if you find yourself with a losing position.
CME Bitcoin Futures also hit an all-time high in November possibly indicating a rising institutional interest. This could also be a sign that the cash-settled futures contracts are standing in for physical Bitcoin given how strongly held the physical asset has become. Big institutions need liquidity.
Bitcoin’s liquidity is something we’ve been pondering recently. Assuming new, long term demand will arrive in the form of an ETF, total Bitcoin available for purchase should drop. As we’ve noted in the past: long term holders are not selling at these prices. 85% of Bitcoin is currently in the hands of wallets that have held for a year or more. Liquidity will be unlocked by a rising price, and as adoption continues (spurred on by Blackrock) this could be the speed limit on institutional adoption. Big institutions no doubt regard Bitcoin as insufficiently liquid to use, but as the price rises in the next bull run they will suffer the question of how to allocate as supply shrinks. It’s hard to see how this dynamic does anything other than move the price higher when rising demand meets fixed supply for an infinitely divisible asset. Put another way, a day will come where it becomes exceptionally expensive to be a “whole-coiner”. Plan your long term allocations accordingly
The final question on our minds as we move into December is whether there will be demand in the month ahead from those who have been on the sidelines all year. January could be full of tough conversations with clients for advisors who have stayed “on zero” for this year’s best performing asset class. Time will tell.