Happy New Year Bitcoiners!
The Gregorian Calendar, popularized in 1582 by Pope Gregory XIII has minted another block. This fun-fact is a great way to diffuse Bitcoin criticism from folks who mock or criticize the breakthrough of blockchain tech. Just point them to the Wikipedia article on the Gregorian calendar and mention that life would be easier for everyone if we adopted the far superior, 1849 suggestion of a 13-month calendar with 28 days each that would also give us two days off at the New Year, instead of one. It only takes a few minutes pondering the madness of our existing traditions to come to a new appreciation of the elegance of Satoshi’s creation. Either way, we hope you enjoyed the holidays and are mentally prepared for 2024.
Looking back at last year we must point out that Bitcoin was by far the best performing asset class. To be fair, everything was up, but Bitcoin more than the rest. After an admittedly miserable 2022, it was nice to see that indeed Bitcoin’s famous volatility runs in both directions.
The journey through the year was generally a happy one for Bitcoiners, except for a few air pockets from time to time. As you can see from the above chart, price really moved up once the Fed started saying they were done hiking. This set up all assets for a strong Q4, with Bitcoin leading the way. How will prices react when the Fed announces the first interest rate cut?
In USD-terms for Q4, Bitcoin was up 55.4%, the Nasdaq-100® up 14.6% and Gold a mere 12.19%. Now Gold did make new all-time highs, so that was nice, but if you’re looking for a store-of-value to defend against further expansion of global M2 money supply, it might make sense to have at least some allocation to the faster-horse.
All of this is cold comfort for those still on the sidelines which prompts the main question for 2024: how much dry powder is out there? This question applies to risk assets in general, but with US Bitcoin ETFs expected to be approved in the month of January, it especially applies to Bitcoin this year. The good news is Bitcoin generally performs well for several years in a row, so if you’re not in yet, you’re not late. The main catalysts for 2024 are US ETFs in Q1 and the halving in Q2. Both are bullish trends to be considered anytime someone tries to tell you it’s all “priced in”.
Is it priced in? According to skeptics on X (formerly known as Twitter), US ETFs have been priced in since $26,000 in July when Blackrock filed. Well since then Bitcoin is up roughly 65%, so it must all be really priced in now, right? The short answer is nobody knows. Expect the unexpected, but the bottom line is Bitcoin is an asset with fixed supply and a shrinking block-reward. Fixed supply is about to meet new US and global demand. Once Bitcoin obtains a US CUSIP (an ETF!) investors and institutions who previously couldn’t own any, will be able to do so. It’s hard to see how this results in lower prices, but it may take the balance of the year to get a real sense of where this is going. The outcome is uncertain, but excitement guaranteed.
One of the fun things about ending a year is looking at annual returns. You get a chance to sit back, away from the news cycle, and ask a relaxing question: do you want to own this chart?
We often talk about Bitcoin being an exponential technology which is why I’ve chosen log format for the Y axis. Exponential trends are hard to hold because in linear terms they move so much you either get whipsawed out by drawdowns (2022, I’m looking at you), or you become convinced things have run too far in an up-swing. But owning exponential trends is critical to long-term investing success.
At Evolve, we’ve been in the exponential investment business since we started the firm. We built many ‘Canadian first ETFs’ to help investors gain exposure to trends such as cybersecurity (TSX: CYBR), eGaming (TSX: HERO), automobile innovation (TSX: CARS) and digital innovation (TSX: EDGE). What makes a trend “exponential” in our view is that it stems from a technology where the network effect results in value creation according to Metcalfe’s Law. Proposed by Robert Metcalfe in 1980, this principle states that the value of a network is a function of the number of connected users. In the electric vehicle industry, for example, more EV-sales make it more valuable to build charging stations, and more charging stations makes owning an EV more valuable. In this virtuous cycle, every new EV-owner contributes exponential value to the utility of all other EV owners. And this principle is even more clear when we think about a monetary network: just consider the utility of Canadian dollars compared to Canadian Tire money. Both are money, but one has a bigger network.
For this reason, Bitcoin adoption metrics are always on our radar, whether it be regulatory clarity (US ETFs), growth in number of wallets on-chain, or growth in Layer 2 technologies such as the Lightning Network. Every new Bitcoiner adds value for everyone else. Every new business that chooses to accept payment in Bitcoin, adds value for other Bitcoiners. Every new investor to hold Bitcoin in an ETF, takes Bitcoin out of liquid circulation which creates value for everyone else because there is a fixed supply.
Nobody knows if or when Bitcoin will be adopted globally as a means of exchange. We expect the future will continue to be a mix of fiat currencies, digital assets, and everything in between. We expect 2024 to be something of a breakthrough year for Bitcoin in terms of mainstream adoption and changing minds of skeptical investors. If we have one wish for the year ahead it’s that investors finally get the message that Bitcoin and “Crypto” are not synonymous and start to appreciate the unique position Bitcoin holds as the asset with the greatest decentralization and adoption, and that’s why there is no second best.
Finally, to end the year we have updated our Bitcoin-vs-everybody table. Historically, Bitcoin has been the best performing asset class each year, for three years, following the year when it was the worst. 2022 was a “worst year”, and last year was a “best”. Will the pattern continue? Time will tell, but either way we wish you good luck and best wishes for a prosperous 2024!