Special Commentary from Steve Kurz – May 2020

Steve Kurz, Head of Asset Management

May 14, 2020

It is an understatement to say the last few months have been eventful, with traditional and crypto markets being no exception. The Galaxy Digital team hopes you and your families are safe, healthy, and sane.

We remain laser-focused on a number of exciting developments for bitcoin. Below are my thoughts on the most important developments, which include an increased recognition of bitcoin’s utility as an inflation hedge, a bitcoin adoption path that is becoming clear, and the reality that the world is digitizing at a breathtaking pace. All three strengthen our foundational conviction in the thesis for bitcoin’s inclusion in a diversified portfolio.

If you have any questions or would like to learn more about our Galaxy Bitcoin Funds, please feel free to contact GDAM@galaxydigital.io.

Best,

Steve


Increased Recognition of Bitcoin’s Utility as an Inflation Hedge

Last week’s news that legendary macro investor Paul Tudor Jones purchased bitcoin for his hedge fund, Tudor Investment Corp, may represent a watershed moment for the institutional adoption of bitcoin. In a letter to investors, Tudor Jones compared bitcoin’s role in a portfolio today to that of gold in the 1970s and bet that bitcoin would be the best-performing hedge against the current Great Monetary Inflation. He subsequently noted that he holds 1% to 2% of his assets in bitcoin as a hedge against a possible decline in the value of the US dollar.

We have previously written and spoken about the benefits of owning bitcoin as an inflation hedge, and we feel that this week’s halving event (the coin’s annual inflation rate is lowered from 3.6% to 1.8%) elegantly juxtaposes bitcoin’s scarcity with the real-time evidence of fiscal profligacy (e.g., 2020 US deficit estimates of nearly 20% of GDP1).

Bitcoin’s Adoption Path is Becoming Clear

Over the course of 2020, we expect to see bitcoin adoption levels increase across two major investor categories, both of which have largely avoided crypto to date: traditional hedge funds and wealth channels.

Tudor’s dive into bitcoin comes on the back of another legendary fund manager, Renaissance Technologies, reportedly entering the world of bitcoin trading. Other hedge fund managers, like Bridgewater’s Ray Dalio, continue to warn of the inflation risks associated with a dramatic uptick in government spending, coupled with unprecedented levels of monetary easing. As the world wakes up to this growing portfolio risk, the question investors ask large hedge funds becomes: what are you going to do about it? The traditional inflation protection toolkit for macro and multi-strategy managers includes leaning into scarce commodities (like gold) and certain portions of the equity market, while avoiding long-duration fixed income. The Tudor news means the proverbial Rubicon has been crossed for bitcoin, which can now be considered another inflation fighting tool for hedge funds. We expect other hedge funds to follow in Tudor’s footsteps.

Traditional wealth managers, like hedge funds, are also waking up to the potential diversification and purchasing power preservation benefits of including bitcoin in client portfolios. Two weeks ago, we surveyed hundreds within the financial advisor community, and found that 54% are likely to make an allocation to bitcoin in client portfolios over the next 12 months, and 53% have developed a more positive view of bitcoin over the past six months—less than 3% indicated a more negative view. This perception shift follows significant improvements to the institutional infrastructure (e.g., blue chip custody solutions coming to market from Fidelity and ICE), the launch of higher quality fund products that serve as more comfortable on-ramps, and a higher awareness of—and need for—bitcoin’s value proposition as a scarce asset.

The World is Digitizing More Rapidly

We are not surprised that renewed interest in bitcoin has occurred alongside a broad acceleration of digitization; Microsoft’s CEO recently said that the company has experienced two years of digital transformation in two months, and Gary Cohn wrote in the FT that the Coronavirus is speeding up the disappearance of cash. In the context of Cohn’s piece, it makes sense that early drafts of the CARES Act contemplated distributing stimulus payments to US citizens rapidly and directly via digital wallets. We have also closely followed the revamped, yet still significant, plans to launch the Facebook-backed Libra project and bring digital wallets to Facebook’s 2.5 billion users. We believe in a future in which digital money (USD, Chinese RMB), digital payments (Libra), and digital stores of value (bitcoin) exist side-by-side. Each of these projects will require ongoing and sustained investment in digital payment rails and infrastructure, a reality which, in our view, offers material support to the bitcoin as a digital store of value thesis. For more on the digitization theme, see the latest report from Galaxy Digital Ventures: Evolution, Not Revolution: Investing in Digitization & Blockchain.

1 Per the Committee for a Responsible Federal Budget, the fiscal 2020 US budget deficit is expected to hit a record $3.8 trillion, 18.7% of US economic output.