Has Bitcoin graduated?

Photo by Joshua Hoehne on Unsplash

Our view on Bitcoin has always been very open-minded either way. The critical exam question always has been whether Bitcoin has risen so spectacularly because it is validating its claim as an escape hatch from a financial system gone wild (inflation etc) or whether it is simply, yet another speculative frenzy fuelled by constantly pouring liquidity and low rates. The only way we were ever going to know what if the liquidity flood came to some kind of end and rates started edging else. 

Well, here we are. 

As it stands, we are very likely staring down the barrel of a gun called “no more QE” – whether it’s tapering, QT and/or rate hikes, it seems that the age of “money printer go brrr” has its days numbered, at least for now. Obviously, nothing is set in stone, and the money printer could still be turned back on, but even then, it’s a hard call to make as to whether the next round will be incrementally more effective than the prior rounds. 

So, let’s examine the evidence and by that we mean pure, unadulterated performance. 

January 2022 started with a bang, in very much the opposite direction of what everyone was expecting. After a relatively dramatic seesaw of sell-off and rally, the performance tally from mid-February 2020 till now looks something like this (as of time of writing): Nasdaq +52%, S&P500 +37%, Bitcoin +315%, Ether +991%. In the equities space, a few samples: the megacap champions MSFT +65%, GOOGL +81%, while the likes of FB and NFLX +3%, ARKK +23%, and even tech favourites (aka “proper growth companies”) like SHOP +51%, TWLO +58% and MELI +50%, with the outlier being SE +204%.  

Why these comparisons? Well, if we were trying to work out whether Bitcoin’s performance was correlated with an environment of easy money, then it would be apt to compare its performance against all the other beneficiaries of the same regime.  

Has Bitcoin earned its stripes as a store of value, a hedge against inflation? 

Furthermore, considering that despite all of the macro headwinds it’s facing, Bitcoin STILL trades – with no impediment to it going down in the form of any protective mechanisms – at $43k, after breaking out through its prior all time high of $20k in 2021, there is a strong case to say that something unique is happening here. 

Shake it off 

For a Bitcoin bear, witnessing what has taken place in markets in the past month is likely to be a highly frustrating episode. If there was one set up for holders to be shaken hard out of Bitcoin, it was here: a dramatic change in tone in Fed policy, as intimated in the FOMC meeting minutes released early Jan, clearly signalling the end of the intense speculative phase in which we have been. 

Instead, what we saw was holders being shaken out of growth equities instead. On one hand, low-quality growth names that were simply taken along for the ride have now clocked in dramatic declines from their highs from last year: profitless e-commerce businesses struggling to stem cash burn, SaaS businesses that turn out to have little by way of any technological edge, and other businesses which promise a great return but in many, many years to come. Faced with the prospect of higher rates, the market promptly sold these off, de-rating them significantly. 

But even the “good” names suffered: Netflix, whose leadership in streaming is almost undisputable, faced a violent de-rating just because forward growth expectations were taken down. Facebook, another undisputable leader in global advertising, also de-rated thanks to worries about cash burn and the security of their growth prospects. Add to the list of casualties other leaders like Spotify and Shopify – for a host of different reasons, all it took was a jitter to trigger an avalanche of concern around whether these companies would be able to live up to the market multiple they commanded.  

Could it have been just results? Possibly, but when we consider that even market leaders that haven’t yet reported their numbers (e.g. Nvidia) were marked down, what had come to pass was a reset in the forward multiples expected of companies. 

If it was an earnings multiple, was it too high? If it was a sales multiple… it would be safe to say that the age of 50x forward P/S is likely over, at least for the foreseeable future. 

But what about Bitcoin? -5% YTD puts Bitcoin in the same league of performance as the S&P 500 index itself over the same period. It makes no cashflow and isn’t a business, “just” a digital asset. We’re not saying that Bitcoin is as good as the S&P 500, but to some extent, the price action speaks for itself. Something else is going on, and it’s not entirely fundamentally driven. 

Graduation day? 

Could it be that after all these years, the doubts around Bitcoin’s viability have materially dissipated? Has Bitcoin “made it”? 

For a start, as a truly scarce store of value – at least in the digital realm – it has no competition. There are “alternatives” – backed assets like DAI or USDC, as well as other “base” assets like algorithmic stablecoins make for easy trading, but realistically no one would save large amounts of capital in the form of those assets. As we’ve learnt from prior experience, stablecoins are stable until they’re not. Suitable as a base currency for trading pairs, but as a store of value… not really. 

Bitcoin started its life as a P2P value transfer network, but it has since evolved away from that. All its early competitors (e.g. Bitcoin Cash, Bitcoin SV, Litecoin etc) serve very little purpose other than speculation, even if some claim they do not compete with Bitcoin. Ether is a completely different creature thanks to its programmability, so likewise it doesn’t hold itself out as a competitor to Bitcoin. It has many competitors of its own, but that’s a separate discussion to be had. 

And in the “real world”, Bitcoin has – against all odds – been meme-ed into being a credible competitor to gold itself. Whatever one thinks about El Salvador’s decision to have a country’s treasury hold Bitcoin, the fact remains that it is being used as a country’s reserve asset. Only time will tell if that was the right decision, and to be fair to them, not enough time has yet passed. 

These arguments have, for many years, been largely hypothetical arguments made by Bitcoin’s proponents. How much time is needed before they graduate into the realm of being a credibly accepted theory? For Bitcoin, it’s been just over 13 years since its inception.  

Maybe Bitcoin made it to graduation day. 

Not just crypto-natives anymore 

As we’ve written before, the “coming” of the institutions to crypto was really them coming to buy Bitcoin and (to a smaller extent) Ether. Along with institutional capital came institutional thinking around risk, trading, sizing. The marginal buyer and seller in the crypto market, especially at the overlap with the traditional world where Bitcoin resides, could be argued to be institutional. 

It could still well be the case, as some would suggest, that the institutional money that has recently joined in the Bitcoin party is “paper-handed” and would drop their Bitcoin positions at the first sign of weakness. That would especially be true if one took the view that these Bitcoin allocations that have been made are “cheeky” tester positions that a portfolio manager, disgruntled with the rest of the assets he or she has access too, decided to have a YOLO moment and buy some Bitcoin. As a result, at the margin, when a wobble comes, they just click sell and schedule a confession session with their risk managers. 

On the other hand, one could take the more likely view that in reality, the majority of such decisions are made with much more consideration than a cheeky punt. Therefore, these institutional allocators to Bitcoin are making very tiny allocations as a percentage of their books, but because they’re so small, they barely move the dial for a fund’s P&L. They do, however, introduce asymmetry: worst case -100%, best case could be whatever Bitcoin decides to do.  

Whatever your theory may be about the behavioural heuristics about institutional money, the bottom line is this: the marginal buyer/seller of Bitcoin is now an individual that consumes mainstream financial news, likely isn’t that fluent in Twitter slang, cares about macro and the Fed and operates on a very different bandwidth from the archetypal crypto trader. 

Bitcoin, for better or for worse, has been set apart from its brethren and institutionalised: into a potential store of value.  

Has it earned its stripes? There is a long way to go and lots of water to still pass under the bridge and of course Bitcoin is still a risk asset and certainly not mature as a financial instrument. 

But as something more than some flash-in-the-pan internet money? The evidence would suggest that despite everything that has been thrown at it, it is not only still not dead, but possibly even thriving.