Welcome back to the office, Bitcoiners. We hope you had a chance to unplug over the summer and didn’t make the mistake we did of checking the price of Bitcoin every hour. August was not a relaxing month as Bitcoin once again demonstrated its famous volatility.

In a nutshell: the price of Bitcoin declined by over 15% in the first week, before regaining all the lost ground over the following fortnight and then dropping another 8% in the final week. Long term hodlers love this behaviour and step in to buy the dips as they happen. Indeed, for the past six months there has been strong buying anytime the price has dropped below $58,000 and August was no exception. During these dips, coins are moving from short-term traders into the hands of long-term investors, or in other words, from high time preference hands to low time preference hands. Those who intend to hold for the long term are happy to vacuum up sats at these prices, and we count ourselves among them.

As we’ve said many times, the best way to deal with short term volatility is to zoom out. As you can see from the monthly log chart below, Bitcoin has been consolidating around the levels of the 2021 highs which is entirely healthy behaviour. We expect this trading range to end at some point by the end of the year, but when and what happens between now and then is anybody’s guess. Major macro factors can still have influence in the short-term including the US Presidential Election and Federal Reserve interest rate policy. We are of the view that these specific outcomes don’t matter all that much because regardless of who is in the White House the USA will continue to run huge deficits and expand the money supply. This will cause the US dollar to lose value, and other G7 currencies are in no better shape. In times like these, investors look to hard assets to protect their purchasing power and Bitcoin adoption as a store-of-value is growing as a result.

One question we get asked a lot is whether Bitcoin has sufficient capacity to absorb increased investor adoption, and whether it can continue to grow as that happens.

Liquidity for the largest investors continues to be something to monitor. For instance, if Canada Pension Plan Investment Board (CPPIB) wanted to allocate 5% of its CAD $575 billion to Bitcoin it would be roughly equivalent to an entire day of global traded volume. So, they and their peers are likely to be under-allocated for the time being. But if the price of Bitcoin were to rise by 10x then you can imagine how liquidity would similarly improve. Dollar-denominated liquidity is heavily influenced by unit price, which is something we keep a close eye on. This is a positive cycle: more adoption leads to a higher price, which leads to better liquidity, which leads to further adoption.

For the time being it continues to be the retail investor who has the jump on the institutions! Bitcoin is certainly investable for individuals, even the most wealthy, and when you look at it in the context of widely held tech stocks it is approaching “magnificent 7” market cap levels.

In fact, Bitcoin’s market cap is bigger than all US equities except for Meta, Alphabet, Nvidia, Microsoft and Apple. In fact, it’s bigger than next-in-line Berkshire Hathaway which for many decades was arguably the best choice for investors with very low time preference.

Another consideration when looking at this table is, unlike everything else, Bitcoin is infinitely divisible. The standard smaller unit today is the Satoshi: one millionth of a Bitcoin.- Dividing is something we expect to see in the fullness of time because further division is, naturally, non-dilutive, and as Bitcoin’s adoption grows along with its value there will be a need for smaller units for small transactions.

This feature is under appreciated, in our opinion, because most investors are used to owning assets that must be diluted to be more widely adopted. Hence the question: have I missed the trade? In most early-stage equities, for example, there is dilution from additional capital raising and employee stock options. Unless the company has positive cash flow and a commitment to share buybacks, long-term shareholders are diluted over time. Typically, companies as old as Bitcoin are still operating with negative cash flow and therefore raising capital, or if they have positive cash flow they are ploughing it back into growth. Again, Bitcoin is different: growth and adoption are not being funded through dilution.

And don’t get us started on government deficits and money printing….

The TLDR is that the volatility we have seen through the month of August represents a wonderful opportunity for investors looking to build a position for the long-term. We don’t know what the future holds and don’t make price predictions, but we do know that Bitcoin adoption is still in the early stages and there’s still an opportunity to allocate ahead of the world’s largest investors.

We hope everyone has a wonderful September and wish you the best of luck for the month ahead.

– Elliot Johnson CIO, COO Evolve ETFs

Source: Shutterstock Credit: Godlikeart

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