Bull Market Drawdown to Test Hodler Commitment

Welcome back to our Bitcoin Monthly newsletter. April has been a trying month for Bitcoiners as prices fell 15.49% in USD terms. As many have noted, this is the first sell off since the launch of US Bitcoin ETFs and so, for some, this is the first taste of Bitcoin’s famous volatility. It’s too early to say how that cohort will react, but in the closing days of the month, inflows into US Bitcoin ETFs dried up after a record-breaking run.

US Bitcoin ETFs Take a Breather

When we talk about US Bitcoin ETFs having a record-breaking launch, we’re not exaggerating. Blackrock’s IBIT ETF saw inflows each and every day for 71 days which puts it in the top 10 ETF launches of all time. But even this impressive stat understates the performance of the category. IBIT ranks 2nd in YTD ETF flows but it has only taken in half of the roughly $29 billion in flows (excluding GBTC). The longevity of the run along with the size of the flows is truly spectacular. We are very interested in watching these flows over the next few weeks as ETF investors react to the first drawdown since the launch. Some will HODL. Some will be shaken out by the volatility.

A Thought on Volatility

Every Bitcoiner has their own journey to travel in learning about the market dynamics. We continue to believe that volatility will dampen as Bitcoin adoption increases. It just stands to reason that as the cohort of investors broadens and includes institutions, corporations, governments, and new retail investors around the world, that the volatility will decline with more individual decision makers broadening the behaviour of the “market”. Bitcoin, to date, has been an unusual asset. In traditional markets, the early years are the pre-IPO years which hide the inherent volatility of finding product-market fit along with the ups and downs of survival. Other than the next round of venture financing there are no marks for the investment, so private investors often hold these investments at book cost or invent their own valuation methodology which usually assumes away the inconvenience of finding a buyer. I point this out simply to present in contrast the public and transparent nature of Bitcoin price discovery over its first 15 years. The volatility that scares many off is also true for private investments, but the difference with privates is you can’t see it. This should provide some comfort to many who think Bitcoin is too volatile but at the same time would love to be in private equity where risk adjusted returns are often the envy of public markets.

More Bitcoin ETFs!

In other news, 3 spot Bitcoin ETFs launched in Hong Kong on April 30th. It’s way too early to gauge demand but this is another positive sign for global adoption of Bitcoin as a store-of-value asset. It also opens Bitcoin to a huge Asian market in a format that is easy for people to hold. This is another example of the normalization of Bitcoin as an asset within the global financial markets and can only be viewed as a good sign. We expect more countries to follow suit now that Canada, the US and Hong Kong have these products in the market.

Where do we go from here?

Thinking back over the past month, equities also sold off with the S&P 500 posting its biggest monthly decline since September after a stunning bull run that resulted in new all-time highs in Q1. The overall mood of the market has shifted in recent weeks as US employment and core PCE have come in hotter than expected leading the Fed to keep rates unchanged and dial back dovish comments. In January, markets were pricing six rate cuts this year totaling about 1.5%; now they’re hoping for at least two, or 0.50% and nobody is expecting anything until late summer. Even though many investors view Bitcoin as a diversifier and long-term safe haven, in the short term it still gets lumped in with risk assets and is therefore subject to macro risk factors like these.

The bottom line is the US is currently stuck in the trap of fiscal dominance. Fiscal dominance refers to a situation where fiscal policy (government spending and taxation) is the primary driver of macroeconomic outcomes, rather than monetary policy (the actions of central banks to control inflation and economic growth). In a fiscal dominance regime, the central bank may be forced to accommodate the government’s fiscal policies, often leading to higher inflation and interest rates. This can occur when a government’s debt level becomes so high that the central bank must keep interest rates low to prevent the cost of servicing the debt from becoming unsustainable.

In a fiscal dominance scenario, the government’s fiscal policies, rather than the central bank’s monetary policies, are the dominant force in the economy. This can lead to a situation where the central bank is forced to maintain low interest rates to support the government’s borrowing needs, even if this leads to higher inflation.

Fiscal dominance is often associated with high levels of government debt and can lead to a situation where the central bank’s independence is compromised, as it must accommodate the fiscal policy decisions of the government. This can lead to a loss of confidence in the central bank’s ability to control inflation, which can have negative consequences for the economy.
We continue to believe Bitcoin offers an escape hatch for investors, over the long term.

In the meantime, buckle up. Stay humble and stack sats, as they say. Best wishes for the month ahead.

– Elliot Johnson CIO, COO Evolve ETFs

 

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