Well, it’s been an interesting year for bitcoin, blockchain and the world of crypto. Bitcoin, which is the leading indicator of all things crypto, enjoyed some nice gains in Q1 including a recovery after things settled down from the FTX debacle and then a nice jump due to the banking crisis in March. Since then, however, the venerable asset has been hovering in a channel.
I say that’s about to change, and we’re about to run, run, run. And, as bitcoin goes, historically (the quality digital assets in) the markets follow. Given that we’re expecting asset decorrelation this run as more and more adoption of technology occurs, we expect many of the other blockchain based crypto assets to have gains that will far exceed those of bitcoin. I don’t generally write about potential market runs but I would be remiss if I didn’t do so given where we are right now.
I’m not expecting you to take this on faith, however, so let’s look at some of the indicators that are pointing to an expected run for the ages.
Over the past decade a bitcoin ETF has been as elusive as Lewis Carrol’s Bandersnatch. With dozens of ETF applications filed since 2013 the SEC has consistently denied them. I didn’t matter whether it was from a big bank or investment manager like VanEck, Valkyrie or Fidelity or digital-asset focused players like Greyscale or Bitwise, the result was the same. No spot ETF for you. Period. This has led to a dearth of institutional friendly products on the market, with the most well known alternative being the Greyscale Bitcoin trust, which is a closed-end vehicle with limited tradability and generally higher fees than one would find in an ETF.
It seems that’s about to change. Grayscale, who has had many applications denied over the years, sued the SEC stating that their most recent application to convert their notable trust to an ETF was wrongfully rejected. On August 30, a DC court ruled in favor of Greyscale, stating that that the SEC improperly rejected their application. They are now pressing to be the first spot ETF on the market. Friends, this is massive.
This opens the door for ETFs. This is important because ETFs open the door for institutional capital, which favors a more regulated, more liquid and less encumbered vehicle. Institutional capital in particular also prefers instruments that are backed by large, well-known managers such as BlackRock, Fidelity, etc. They can mitigate risk by relying on the reputation of said players in the space, which in turn provide access through vechicles that are more institutional- friendly. There’s not a vehicle much more friendly than an ETF.
Now, no one knows for sure when this approval will occur or who will be the first awarded with this crown jewel of investing, but seven firms — BlackRock, WisdomTree, Invesco Galaxy, Wise Origin, VanEck, Bitwise and Valkyrie Digital Assets — joined Greyscale and Ark Capital’s quest by publishing ETF applications in the Federal Register on July 19. The next approval date could be as early as mid-October 2023. That’s right around the corner.
I want to point out on a separate paragraph “The BlackRock Effect.” (and no, that’s not a new Netflix series.) BlackRock, the world’s largest asset manager, directly manages $9.4 Trillion in assets. Their CEO Larry Fink, who in 2017 said that bitcoin was an “index of money laundering”, has now stated that crypto will “revolutionize finance.” BlackRock has filed for an ETF. Need I say more? Guys and gals, BlackRock, who is in partnership with Coinbase, is eyeballing this, and as BlackRock goes, markets follow. It’s not a stretch to think that these markets are poised for significant gains.
The institutional Impact
The importance of institutional money cannot be overstated because this is where the majority of the roughly $98 Trillion dollars of investable assets reside worldwide. In the stock market for example, institutional investors comprise approximately 80% of all trading, while a 2020 report from Institutional Investor noted that 60% of the global market of institutional assets were from institutional investors.
Let’s look at basic supply and demand economics. We know that the vast majority of institutional assets have not chosen to participate in these markets (yet). We also know that bitcoin, for example, has a finite supply of 21 million, of which approximately 19.4M are in circulation. What do you think will happen once big money, via a regulated ETF, starts to buy a scarce asset such as bitcoin? Increased demand with finite supply leads to… well, you get the point. Just to make this impact real, If only 5% of institutional moneys flow into this space, it will be an additional $3 trillion of funds flowing into a market that is currently only $1 trillion in total. If 10% flows in that’s $6 trillion. This new capital will drive prices higher. Significantly higher.
And it’s not just institutional money. Ric Edelman of DACFP notes that RIAs throughout the US manage about $8T in investor assets, but most have held back in recommending such assets for investor portfolios due to lack of an ETF.
A trillion here, a trillion there, and pretty soon you’re talking about real money.
Which begs the question, how much institutional money will flow in? Well, a recent report from BlackRock noted that optimal percentage of bitcoin in a portfolio was… wait for it… an astounding 84.9%. I repeat, 84.9%. (Now, before you rebalance your world, I do not recommend you put 84.9% of your assets into any one single asset class.) BlackRock, of course, has standard disclaimers on the report by saying it’s not an official recommendation, and that the report is only for professionals and institutions and not for public distribution.
I personally do not think that it’s a coincidence however that this analyst’s report surfaced on the internet around the same time that the ETF approvals were on the horizon, especially given that the report was originally written in February 2022. This directly addresses the allocation question – specifically – how much? Whereas consensus has been in the single digits for risk management (many advisors advise in the range of 1% to 9%), that sure seems pretty miniscule when compared against an “optimal” number of almost 85%. Against such a measure 10%, 15% or even 20% doesn’t seem so out of line.
So let’s pick an outlandish number like 15%. If 15% of the institutional monies flow into the crypto markets that would take these markets immediately to over $10 Trillion dollars which, by the way, is also predicted by notable pundit Anthony Pompliano. This would change everything. Even 5% would change everything. The simple fact is that any institutional capital will change everything.
A Positive Perfect Storm
All of this has me incredibly bullish, but it is SO MUCH more than that. Adoption of blockchain technology is happening at an ever increasing rate, and over half of the fortune 100 are developing blockchain initiatives, while 83% of surveyed Fortune 500 executives have stated that their companies either have such initiatives or are planning them, and the average fortune 500 project budget is nearly $5.8 million. This adoption rate is supported by Garter, who pointed out at the beginning of 2023 that we were 1-3 years from blockchain technology impact. We’re already seven months into that prediction, which I discussed in my February 2023 blog.
This corresponds to the macro environment which is also clearing up. Even now, there is talk that we will avoid a recession or, at the very least, have a soft landing. Even if that is not true and we do have a backslide we seem to be coming to the end of rate hikes as inflation as measured by the CPI recently hit 3.2%. We’re getting close.
Importantly, all of this corresponds to the bitcoin halving cycle. The halving event happens every four years and it reduces the amount of bitcoin that is moved from reserves into circulation via mining rewards. This upcoming halving cycle deserves its own blog and we’ll revisit it shortly, but suffice it to say that this time period of increased demand, regulatory clarity, imminent ETF approval and general blockchain adoption is happening right at the time that mining rewards are being again cut in half, from 6.25 BTC to 3.125 BTC. Every time this has happened in the past, we’ve seen an order of magnitude jump in the price of bitcoin, with the general crypto markets following.
How high will bitcoin get? It’s hard to say, though it seems that a price target adopted by many, including miner Standard Chartered, as noted in Bloomberg, is that we’ll see $120K bitcoin by the end of 2024. What’s more important, however, is that this could well be the year we’ll see decorrelation among crypto assets and, while bitcoin represents money, the others (that we care about anyway) are technology plays, and we expect select assets could be up 10x, 20x, 30x and even more.
There’s one other aspect which I’ll just touch on. Given the rise of BRICS and the threat of the East moving away from the dollar as the world reserve currency, we’ve also seen interest from some in apportioning a portion of any portfolio to non-dollar denominated assets. Bitcoin in specific and crypto in general certainly fit this bill.
Adoption is happening. Big banks and managers are on board. ETFs are pending. Rate hikes are coming to an end. And all of this corresponds to the bitcoin halving cycle. Any one or two of these points have me bullish, but all five is a positive perfect storm.
Everyone wants to buy low and sell high, but few want to deploy with blood in the streets. Consider that right now, in these markets, the blood has been cleaned up, we’re off absolute bottoms and, in my opinion, we’re at prices that we will likely never see again.
I know many of you have been watching for years and, if ever there was a time to jump off the stands and onto the field, well, it would seem that time is here. And for those that have been in these markets and patiently waiting… well done. In my opinion, you won’t need to wait much longer.
As always there’s more to say. As always, I’ve gone long so I’ll wrap this up. Until next time be well, stay safe, and I’ll keep Decrypting Crypto for you!
Disclaimer: Not investment advice. This information should not be construed as a recommendation, investment or tax advice, or an offer or solicitation to buy or sell any security.