Ecoinometrics - July 13, 2020
The next bull run will come from...
… actually nobody knows. Really. Keep on reading though, you might learn something!
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
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We print it digitally
One of the great things about falling down the Bitcoin rabbit hole is that you get to dig into how the global financial system really works.
So I started digging into the US Federal Reserve statistics. I came across this data on the M2 money supply.
That’s right! Since the beginning of the year the M2 money supply is up $3 trillion and growing. M2 is going parabolic.
Why is it bad news? Well basically M2 is anything that is money or almost money when it comes to the US economy.
We can think of it as the growth in supply of US$ in the system.
Between 1980 and 2019 M2 has been growing at an average of 5.85% per year. But this year it is already up 20%!
That’s twice the largest yearly increase since 1980. I don’t really see how people expect that the purchasing power of their US Dollar will stay the same.
The US Dollar debasement is accelerating.
Dig a well before you are thirsty… Stack sats and opt out of the system while you still can!
The CPI numbers don’t tell you anything
Here is an interesting tweet by Daniel Lacalle:
The CPI is supposed to be a measure of inflation for the average person buying an average basket of goods. That’s a lot of averaging… and it ends up not telling you that many useful things.
The Cantillon effect is bidding up assets that the top 1% want to own. That would be things like financial assets, education, the medical sector and so on.
So what happens is that for most people the CPI does not reflect their experience. Sure vegetables are (kinda) affordable. You can also purchase a TV or a phone at reasonable prices. But when it comes to paying university fees, buy a house or settle your medical bills prices have skyrocketed.
Long story short the headline CPI number is useless. If you want to get a better picture of the situation go down to the sector by sector data and you’ll find something closer to the reality experienced by the majority.
The next big thing for Bitcoin is millennials
If you had no idea about what could drive the next bull run then look no further than millennials! In this Bloomberg article some crypto analysts are making the following reasoning:
There are a lot of millennials interested in trading these days.
They are using platforms like Robinhood and trade based on social media interactions.
Those millennials are known to buy crap stocks such as Hertz AFTER they got bankrupt.
Their next thing could be to buy Bitcoin.
So the argument for the next bull run boils down to: “Hey look those millennial Robinhood traders don’t know what they are doing. Maybe they’ll buy Bitcoin if we can start some FOMO on social media.”
They almost got it right! Except Dogecoin pumped instead of Bitcoin...
Also the next big thing for Bitcoin is institutional investors
Apparently institutional investors are interested in Bitcoin. How do we know? Well according to this article there are signs:
Open interests on Bitcoin derivatives are rising.
We are seeing more block trades than in the past.
Volatility is low.
Grayscale BTC Trust is growing fast.
The Big 4 accounting firms, Western Union, Paypal, etc… they all want a piece of the crypto cake.
I would be careful in interpreting some of these points.
First of all big businesses taking an interest in crypto is not new. The fact that some companies are adding “blockchain projects” here or there isn’t necessarily much more than marketing. I don’t need Paypal or Western Union to send BTC…
Second, Bitcoin has low volatility these days. But I don’t think any institutional investor either care or expect that it will last. Professional investors care about risk adjusted returns not volatility by itself.
Finally the rise in open interest on the BTC derivatives market is a good sign that institutional interest is growing. But that doesn’t mean those traders are long BTC…
Last time I checked on the CME the smart money was still net short Bitcoin.
People worry about Bitcoin correlations
One of the nice things about Bitcoin up until March this year is that it had a very low correlation to the SP500. That made it a very good asset to add to your portfolio for diversification.
Remember Ray Dalio holy grail of investing: a portfolio of 15-20 uncorrelated assets. That’s all you need to get great risk adjusted returns.
Of course finding that many uncorrelated assets is tough.
So yes, people worry about losing Bitcoin as one of those assets that has low correlation with the rest of the market.
I’ve looked at this last week. Here is the updated chart:
The correlation between the SP500 and Bitcoin has increased. But after the crash this correlation remains below 0.5 which isn’t super high.
I don’t think it is time to worry yet but let’s continue watching the trend.
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
Follow Ecoinometrics on Twitter at https://twitter.com/ecoinometrics.
Done? That’s great! Thank you and enjoy.