April 2020 Market Commentary

Paul Cappelli, Portfolio Manager

May 11, 2020

The fundamental theses for bitcoin and digital assets took center stage in April as markets recovered amid COVID-19 volatility. Bitcoin rallied to finish with a return of 36.12% while the broader asset class, measured by the Bloomberg Galaxy Crypto Index (BGCI), saw a return of 35.85%. For some this may bring back memories of April 2019, which saw bitcoin rally ~28% and the BGCI rally ~13.5% as the crypto winter began to thaw. However, it’s now crucial to understand, this time is different. The post-COVID-19 world is a world that doesn’t simply want bitcoin and digital assets—it needs them.

April began with choppy trading as bitcoin remained in a volatile range between $6500 – $7500 before beginning its ascent towards $9000 in the last ten days of the month. The last time bitcoin closed in this price range was this past February. The market then was severely levered, which culminated in a violent sell-off in March as markets delevered globally. During April’s rally, a foundation formed with seemingly unlevered long buyers—investors who understand bitcoin’s role as a non-sovereign, limited supply, and deflationary hard asset against the backdrop of monetary policy with potentially decades-long inflationary consequences. Again, this time is different.

What exactly is different? Potential investors in bitcoin or the broader digital asset market should understand five key developments: the bitcoin halving, new investor adoption, the post COVID-19 economy, monetary policy, and digital asset infrastructure. As this commentary expands on these themes, remember that this time is different because, now, everything is different.

In May we will have an event known as the bitcoin halving. This is a deflationary event built into bitcoin’s code that cuts the number of bitcoin mined in half every four years. While this may cause near term price volatility or even a move lower as the market adjusts, many see this as a positive event longer term. This will be the third halving event since Satoshi Nakamoto mined the first block over ten years ago, and it will cut production from 12.5 bitcoin per block to 6.25 bitcoin per block. Put simply, the supply velocity of bitcoin is going to decrease at the same time the Federal Reserve is pledging to print trillions more US Dollars—the world’s reserve fiat currency. As these trillions are printed and the government effectively borrows from itself, long-term inflation is practically a definite. By stark contrast and thanks to halving, there will only ever be 21 million bitcoin.

New investor adoption: the bitcoin story is resonating as the broader macro environment shifts; non-sovereign, deflationary, and hard assets are in demand, and we’re seeing larger, more sophisticated investors enter the market. During 2018’s crypto winter after 2017’s famed bitcoin bubble, we were often asked, where is the new money coming into the space? Well that answer has finally become clear. Not only has institutional infrastructure progressed, but as the world changes important players are entering the space. The most successful hedge fund of all time, Renaissance Technologies, recently announced their intention to trade bitcoin futures. Famed macro investor Paul Tudor Jones discussed in his most recent letter that investing in bitcoin today makes sense; in his view, bitcoin is to today’s market what gold was to the market in the 1970s. These recent moves are in addition to endowments such as those of Yale, Stanford, and Harvard all indicating they had bitcoin exposure.

The next two points, the post-COVID-19 economy and monetary policy, go hand in hand. For better or for worse, the economic climate post-COVID-19 will be different and the way people view money will likely change. Unemployment rose in April to record highs as 14.7% of Americans—more than 20 million people—lost their jobs, leaving many frustrated with our current financial system. Furthermore, as frustration grew and money was printed to fund bailout packages, many Americans felt left behind with their personal wealth dwindling against the backdrop of a rallying stock market, contracting GDP, and growing national deficit. Stocks and the economy were on diverging paths. This again supports the case for bitcoin: bitcoin is not controlled by any centralized government and allows for holders to be their own bank.

Finally, it’s important to understand that we have seen immense developments in digital asset infrastructure. While not immune to issues that accompany a burgeoning asset class or a new form of technology, the last three years has seen traditional market infrastructure enter the space to help it grow on an institutional level. Bloomberg, a name synonymous with data integrity and market standardization, has been involved with digital assets since May 2018 when the BGCI launched. More recently, trusted custody solutions like ICE/Bakkt and Fidelity have entered the space. CME BTC futures are not only seeing consistently strong and growing volumes, but are also providing sophisticated traders a regulated entity to speculate on whether the price of bitcoin will go higher or lower in the future. Additionally, administrators and platforms around the world are currently trying to figure out ways to provide digital asset exposure for their clients. These developments lower the barrier to entry and will likely allow bitcoin to sustain its rally as the adoption curve accelerates.

When all the above is taken into consideration, it’s clear that this asset class is poised for its next stage of adoption in world that is increasingly different.

 

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