Welcome to our Bitcoin Monthly newsletter and allow us to be the first to wish you a Happy Halving Month! The block reward will be cut in half on April 19th with implications we will discuss shortly, but first let’s recap a few news items from March.

For the month of March Bitcoin rose a modest 10.19% in USD terms with typical volatility along for the ride: there was a 15% gain in the first half of the month, followed by a return to starting levels and then a rally again in the back half.

Source: Bloomberg

All of this volatility is a blessing to some and a burden to others. We tend to believe investors in an asset class with these dynamics should look at their allocation monthly or quarterly. In other words, zoom out. This is another reason we like to show monthly candles with log scale. As the bull run continues, notional dollar moves will become increasingly large and a typical one month percentage swing of 10 – 15% can be stomach turning if you are following on a daily basis. Keeping position sized for the swings and staying the course has always been the best recipe for “hodling”.

Source: Bloomberg

On the Bitcoin ETF front, US Bitcoin ETFs continue to vacuum up assets at a record pace despite some large GBTC outflows for the month. GBTC’s asset bleed was attributed by many to the restructuring of bankrupt sister company Genesis. If you’re not familiar, both companies are owned by Digital Currency Group, and GBTC shares were widely used as collateral by Genesis within their lending platform. When Genesis went bankrupt, investors were unable to access their GBTC holdings, or any other assets, until the bankruptcy process had been completed. Some of this was settled in March causing some investors who had been “frozen-in” to run for the exists. The silver lining, such as there is one, is that the price of Bitcoin is higher today than in January 2023 when Genesis filed for Chapter 11, so the victims were forced to “hodl” through the bear market. GBTC converting to an ETF that trades at-NAV is a further benefit. And given there are many other ETFs to choose from now, it’s reasonable to expect that some of those redemptions made a round trip into another fund. All of this is healthy for the ecosystem as it helps to put the crypto trauma of 2023 in the rear view mirror.

Source: https://twitter.com/EricBalchunas/status/1772646326125130034/photo/1

Source: https://x.com/JSeyff/status/1772216608242721131?s=20

Bankman-Fried is sentenced to 25 years in prison.

On a bitcoin-adjacent topic along the lines of putting bad news behind us, the final scene from the FTX drama played out on March 28th with Judge Lewis Kaplan sentencing former CEO Sam Bankman-Fried (“SBF”) to 25 years in prison for orchestrating the largest financial fraud in history. The sentence was widely viewed as a middle ground between those who expected a Madoff-style 150 years and those who believed SBF should be given leniency because the recent rally in crypto prices is helping the FTX estate recover value for the victims. We sincerely hope this is the last we hear of SBF and the industry can move on with lessons learned. The bottom line is this wasn’t really a crypto story, and certainly not a Bitcoin one: this was simply fraud, executed on a massive scale. Just as Bernie Madoff’s crimes didn’t reflect the risks of holding stocks, SBF’s fraud has really nothing to do with Bitcoin; however, it does highlight the importance of dealing with regulated entities anytime you invest. This is why we created EBIT in 2019: investors needed a regulated ETF, operated by a regulated issuer and using regulated service providers. It sounds simple, but the importance of working with investment managers who are clearly operating well within the law is something that was forgotten during the mania of the last crypto bull market. We hope it is better remembered this time around.

The big news for the month ahead will be the Halving.

Every 210,000 blocks, or roughly every four years, the Bitcoin protocol reduces the reward for mining a new block by half. Starting with the Genesis block on January 1st, 2009 the block reward was 50 Bitcoin. The block reward is what the miner who first guesses the solution to the puzzle (that “mines” a new block) receives for their effort. On November 28, 2012, and 210,000 blocks later, the reward dropped to 25 Bitcoin. It dropped again to 12.5 Bitcoin on July 9, 2016 and to 6.25 Bitcoin on May 11, 2020. On April 19th of this year it will drop again, this time to 3.125 Bitcoin.
Why does this matter? One element of Satoshi’s design was to reduce the inflation rate of new Bitcoin as the network matured. Some people think the 21 million hard cap is written into the code, but this is not quite so: what’s in the code is that the block reward will drop in half every 210,000 blocks until it approaches 21 million. You can model this yourself to see it in action:

There are a few interesting observations to be drawn from this supply schedule.

For starters, most of the Bitcoin that will ever be mined already has been: 96.9% to date. Secondly, over 99% will have been mined by 2032 with the rest coming over the next 72 years. So, the point is that the size of the “stock” (mined Bitcoin) is increasing relative to the “flow” (Bitcoin to be mined). A high stock-to-flow is an attractive feature when considering how good an asset is as a long-term store of value.
As a point of comparison, here’s a chart of US dollar M2 money supply. Since the Great Financial Crisis the amount of USD M2 has increased by 348%. Without getting into a debate about the various causes of inflation, simply ask yourself: is this sound money? To many people, Bitcoin is the alternative we need to escape political manipulation of the money supply. After all, Satoshi referenced Great Financial Crisis bank bailouts in the Genesis block. In other words, this is the whole point.

Source: Bloomberg

So where does the Halving leave us in the near term?

One way to consider it is, again, in the context of US Bitcoin ETFs. To-date they have been growing at 5 times the pace of newly mined Bitcoin. If their growth continues in dollar-terms, they will immediately be buying 10 times the amount of new mined Bitcoin after the Halving. Insatiable demand meets dwindling supply. All other things being equal, prices will have to adjust.
In previous cycles, the price did not react to the Halving immediately. There is often a multi-month lag as those who were anticipating the change sell more coins into the market offsetting the supply shock. It’s certainly expected that selling will increase as prices move higher and investors look to take some gains off the table. That being said, there is no denying the power of a shrinking supply schedule over time, and so while we can’t hope to know what will happen in April or May of this year, we remain confident that Bitcoin is becoming more valuable as it ages. We believe more and more investors are coming to the same conclusion because Bitcoin has come back from several sharp bear markets, only to rally to new all-time-highs. This behaviour inherently generates FOMO as investors are increasingly likely to know someone who has done very well by “hodling” while weaker hands were shaken out. It’s all about “time in the market” rather than “timing the market” as they say. Eventually we expect the volatility to decline as adoption increases, and based on our discussions with clients we still get the impression there are far more people who have a zero rather than a non-zero allocation. It is still early in the year, and we are still early in this asset class. Best wishes for the month ahead!

Elliot Johnson CIO, COO Evolve ETFs



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