Chop Wood, Carry Crypto

September 16, 2021

September is kind of an in-between month. Summer is over. It’s not Fall yet. It’s kind of a transition, I suppose. Kind of a “get back to work” month. Kind of… meh. It seems to be the same for crypto as well, seeing that the past 3 Septembers have had negative performance. Certainly, that could change this month given the bull cycle we’re in and, September aside, we expect Q4 to be very exciting indeed. Bitcoin is trading well below its target price according to the stock-to-flow model. This represents significant value and, historically, this is the time period when we would expect the big post-halvening move.

Ultimately we will see, but we have a lot of green indicators, not the least of which is that the New York Fed’s Consumer Inflation Report expects inflation to hit 5.2% next year and continue for the next three years. Yikes. I’ve noted the many who have adopted crypto specifically as a hedge against inflation (Paul Tudor Jones, Saylor, Druckenmiller, Mr. Wonderful, etc) and here comes the inflation. Well done hedgers. Well done indeed.

In any case, while we’re waiting for “Green October” let’s take a quick look at some key things that have been happening in the world of crypto.

Banks and Billionaires become Bitcoin Bulls

I remember a time not that long ago when the big banks were shunning crypto. Now however, in the latest round of “do as I say don’t do as I do”, Morgan Stanley increased its position in bitcoin as its Insight Fund purchased 1M shares in the Grayscale Bitcoin Trust. This brings Morgan Stanley’s holdings to 6.5M shares, worth over $240M according to SEC Filings. I could comment a ton on this, but I think I’ll let it speak for itself.

In addition to big banks getting bigger positions in bitcoin, Bloomberg recently reported that British billionaire, Simon Nixon, was seeking bitcoin exposure. Nixon seems to be following the lead of Mexican billionaire Ricardo Salinas Pliego, Mexico’s third wealthiest individual, who recently began publicly advocating for crypto. Salinas Pliego, who is worth $15.4 billion, is noted for having 10% of his liquid portfolio in bitcoin and also for declaring this past June that he was working to have his Banco Azteca to be the first bank in Mexico to accept bitcoin.

Speaking of banks, Fidelity (the bank who always seems to show up late to the party yet always wants to be the center of attention) jumped in by predicting bitcoin would hit $1 million in 2026, and Cathie Wood of Ark investments reiterated her $500,000 price prediction.

The El Salvador Experiment or “Going First is Hard”

Crypto enthusiasts around the world cheered when El Salvador became the first country to declare bitcoin legal tender and mandated it’s acceptance at all locations across the country that are technologically able to do so. And, there’s the rub. Remember Bitcoin is a technology. A network of computers that allow peer-to-peer transactions to occur.

Let me now take you back to your own life and the last technology roll out that you participated in. I literally mean, pick any technological rollout that you’ve been a part of or, rather, have been subject to. I would make a healthy bet that the rollout was not snag free. In fact, it almost certainly had bumps. Well, so too did El Salvador’s rollout, as the government sponsored wallet Chivo had to be taken offline and was not available to many until late in the day and, on top of this, many smaller businesses just aren’t technologically ready to accept this new currency.

That’s rough but, let’s be honest, certainly not unexpected, especially since this is the first nationwide government-endorsed implementation of this technology. Rather than berate the country (markets did dip 10%, which is kind of silly if one thinks about it) I think we should applaud El Salvador’s boldness and progressiveness as it is paving the way for others to follow suit. Ukraine & Panama you’re on deck.

More than Money

Look, I talk a lot about Bitcoin because it’s the 800-pound gorilla, but in the past few months it is worth noting that platforms (like Ethereum & Algorand) have been prospering, governance tokens (such as Maker DAO) have been growing, and DeFi offerings (such as Aave) have definitely been thriving. This is just a reminder that the world of crypto assets is wide and varied and this technology is working its way, silently in many cases, into the fabric of our world.

Years ago, I was at the Inc. 5000 conference and the CEO of GoPro was asked how his company became an overnight success. His reply was “it was an overnight success after 11 years”. I suspect, that in about a decade many will look up and say “Hey, how did the world get so blockchainy overnight?” Well, it’s happening right now, and this is why many investors have exposure to much more than bitcoin. (Shameless plug: This is also why our fund continues to outperform both bitcoin as well as the Barclay Hedge Cryptocurrency Trader’s Index.)

This is really summed up by well by technologist Mark Kenigsber, who states “Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential.” It is important to remember this. It’s the tech that is the breakthrough; it’s the tech that makes this work. Stay tuned, for the rest is coming, and sooner than most think.

Boring but Important

SEC Chair Gary Gensler knows this transformation is happening as well, which is why he keeps touting regulation while, at the same time noting, “You’ll find I’m not negative or a minimalist about crypto, I just think it would be best if it’s inside the investor protection regime that Congress laid out”. There’s a lot of debate over how much, where, why, and what this actually means. Undoubtably, this will be an unfolding that includes a number of high-profile duels over the coming years. In general, however, I say great, we need some guardrails for these markets to progress. Let’s just hope that this regulation, as my partner Jake Ryan put it so well in his Newsweek Article, happens at an appropriate pace.

In Closing

Maybe September isn’t so “meh” after all, though it certainly is a month where, we like to say, the cake is continuing to bake. While the markets may not break any records, we see this as the calm before the next leg of this historic run. I encourage everyone to continue to do your homework, separate the signal from the noise, and really pay attention to the transformation that’s happening right now. Rarely do we have a chance to profit from history while it’s happening…. but in the case of this growing asset class, we have just that, right now.

Until next time be well, stay safe, and we’ll continue to Decrypt Crypto for you.

 

 

 

About the author James Diorio

James is the principal and chief executive officer of Tradecraft Capital.