Pricing Bitcoin risk through Microstrategy's $650 M bond vs. other bonds. U.S. M1 Monetary Supply increased by 14% in 14 days. Vaccination week in the U.S. & Canada - implications on monetary velocity and markets.
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The Bitcoin Economic Calendar:
Week of Monday December 14th to Sunday December 21st.
Market Commentary:
Bitcoin: Bitcoin started the week heading south from the mid $19ks to test lows in the mid $17ks - however, it caught a bid on Wednesday when Michael Saylor announced it was raising a $400 M bond offering to buy Bitcoin through a Microstrategy's convertible bond. Additionally - we also saw that Massachusetts Mutual Insurance Corporation purchased over $100 M of Bitcoin for its investment account on Thursday, also taking a $5 M equity stake in an institutional crypto asset custodian - the news was covered by the Wall Street Journal. Then, on Friday Saylor announced that the bond offering had closed at $650 M - offering a 0.75% annual coupon. We are going to talk about what this means - how this may impact bitcoin prices, and how this compares to bonds from other countries from a risk perspective in our Market Trends section today. We also have COVID vaccinations starting in the U.S. and Canada this week. This will increase the expectation of renewed economic activity - increasing monetary velocity and perhaps accelerating inflation in the U.S. - which bodes well to Bitcoin's current narrative.
Separately, this idea of borrowing below the perceived cost of inflation to buy an asset that is appreciating at a higher rate is a very compelling concept that may drive others to do the same. You can actually do this by borrowing against your bitcoin - and use the proceeds to buy more bitcoin. We have been offering that exact same ability to our clients in one simple step through our B2X product for over a year. It is our most popular loan product.
All of this added up to Bitcoin closing the week at $19,166 for the week, finishing down -1.08%. We are going to cover what the bitcoin bond price tells us about bitcoin risk vs. sovereign bonds from similar maturities.
S&P 500: As we had mentioned last week - it was a big week of data for the U.S. last week - with a lot of key data coming out on Thursday. But the news that stole the show this week was a landmark antitrust lawsuit against Facebook from the U.S. regulators and 48 states - accusing it of abusing its power and asking it to divest from Instagram and WhatsApp. This brought down both the S&P 500 and the Nasdaq indices significantly - and investors may continue rotating out of large tech stocks like Google and Amazon for similar concerns.
Additionally, the economic data out of the U.S. came out broadly beating expectations. A stronger than expected jobs report and a higher than expected inflation reading for November were both signs that the Fed's actions may be steering the economy in the desired direction.
Lastly, in a development that went by largely unnoticed, on December 10th the U.S. Fed released the M1 monetary supply data for November 16th - November 30th - showing an increase in the M1 of $809 Billion - up 14% in the 14-day period. M1 is currently sitting at $6,542 B - and it was only $4,026 B at the beginning of March.
With vaccinations just around the corner, this may boost monetary velocity (M2) - which had been subdued because of lockdowns - leading to upward pressure on asset price inflation (the stock market, real estate, gold, bitcoin).
Gold: Gold ended the week almost entirely flat - even in the backdrop of signs of inflation for the U.S. dollar. It does seem to reflect that the "risk-on" narrative is picking up more steam in the investment community. Although this may favour inflation - that expectation may have been priced into the 25% rally from March, and investors are now more open to rotating back into industrial and energy sectors that may benefit from an economic rebound and renewed stimulus spending. With Insurance companies now in the mix, it now looks like most circles in the institutional investor community have bought into the concept of Bitcoin as an inflation hedge. This can bode very well for Bitcoin prices going forward.
Separately, as we have been saying in previous issues - it does feel like Bitcoin is starting to take a lot of the inflation hedging interest away from Gold. With so many high profile investors joining the club - it starts becoming risky _not_ to have bitcoin if you own any gold in a managed portfolio.
DeFi: Looking at the FTX DeFi index we see that it performed significantly worse than the protocol level assets closing at -5.31% vs. BTC's -1.08% and ETH's -2.04%. This is consistent with the observation that last week's price action of DeFi outperforming the protocol level assets to the upside may have been driven as a short covering rally. The institutional attention seems to be focused squarely on Bitcoin recently, and DeFi will likely continue to underperform on a relative basis.
The world's first "Bitcoin Bond" has been issued - and we can learn a lot from it
Microstrategy's bond offering provides tremendous insights as to how institutional investors perceive and price Bitcoin risk. While it has not yet started trading in the open market, and we cannot properly compute it's "effective yield" in the secondary market - we do have very important data points, namely the interest rate, and the fact that the initial offer started at $400 M and the note closed at a $650 M subscription - meaning that there was much more demand than anticipated.
To start, let's compare that to a different U.S. Corporate Bond - on August 13th 2020, Apple tendered $5.5 B in bonds with several maturities, and it offered to pay 0.55% interest on its 5-year bond. In comparison, Microstrategy's "Bitcoin Bond" was priced at an interest rate of 0.75%. This means that the difference between the cost of financing for Apple - the most valuable company in the world, are just 20 basis points lower than the cost of debt to buy and hold more Bitcoin. To get even more context, let's examine how the Bitcoin bond's interest rate compares to a similar gold bond and some Government bonds of similar durations:
As we can see from the graph above, the Bitcoin 5-year bond is actually priced at a much lower rate than the 8-year Gold bond offered by India's ICICI bank. It is also significantly lower to borrow dollars to buy bitcoin, than it is to borrow dollars to fund the needs of the Government of Mexico, for example. In certain cases like in the U.K., government bonds actually offer negative returns - which is a concerning sign, as it signals that there are investors prefer to obtain negative returns on their invested dollars. Central banks have recently began experimenting with negative interest rates as they want investors to "put their money to work" in other parts of the economy.
For further context, now that we understand what investors will demand as a return in order to fund the purchase of Bitcoin for 5 years, lets take a look at how much it costs countries to borrow funds. The most widely used benchmark for this type of "country risk" is the price of the 10-year government bonds. Let's look at how the Bitcoin Bond fares in comparison:
Although different durations materially affect the risk profile of a bond, as a thought experiment, it is fascinating to see that the rate on a bond to buy bitcoin for 5 years is a mere 20 basis points away from the rate investors get when they fund the U.S. Government's 10-year bond. The fact that both rates are even in the same ballpark is fascinating. Similarly - we can appreciate how the interest cost of borrowing to buy Bitcoin through a U.S. public company is perceived to be "far less risky" than funding the governments of countries like Colombia, Mexico, Brazil and Turkey for 10-year terms. Bond market participants are known to be experts at pricing risk - and they have voted with their allocations to Microstrategy's offering. The other point in this chart that deserves to be called out is how wildly different the borrowing costs are for countries in developed markets vs. emerging economies - this has a huge impact in their debt servicing costs but that's enough for an entire new segment. For now - we can safely assume that based on the success of this offering, it won't be the last one (maybe the last one in 2020).
Difficulty Commentary
We had a difficulty adjustment kick-in last night which brought us down to 18.87 TH or -2.54%. The Bitcoin mempool has been pretty empty as of late so it is a good time to do some UTXO housekeeping.
What’s ahead for the week:
Very important week ahead with the vaccinations starting in the U.S. - and with it, expectations of "The Great Reopening". This may lead to a euphoric 2021 spring full of economic activity and more stimulus. All of this is getting institutional investors thinking about inflation (M1 rising + M2 rising = inflation) - when that word gets mentioned these days... all roads (and links) lead to Bitcoin. We don't expect the Microstrategy offering to be the last Bitcoin bond - and as the Bitcoin treasury and investment positions become more common (and continue to outperform gold), the risk becomes not to own any.
In not-so-exciting news, it is widely anticipated that there will be legislation introduced by the U.S. Treasury Department this week on the use of self-hosted wallets for American citizens. Articles abound of exchanges reporting the largest outflows in 3 years, and the lowest BTC balances on exchanges since 2018. We hope that the proper thought, consideration to industry input, and legislative debate is given to this law before it is introduced. If this is not the case, we will work with our industry peers and groups to help move the legislation in the right direction.
Lastly, Michael Saylor's future purchase of $650 M, along with the $500 M allocation from Guggenheim announced 2 weeks ago, continue to build a massive buy wall for Bitcoin. To put things in perspective, Kraken trades about $200 M in Bitcoin volume per day, and Coinbase does about $275 M. These allocations need to be fulfilled - and that puts a lot of price pressure to the upside.
As always, we'll keep you posted on any relevant news throughout the week from our Twitter account @hodlwithLedn.
Market-Moving Stats:
Bitcoin Hashrate and Network Difficulty:
Current Difficulty: 18.87 TH
Estimated Next Adjustment: 18.18 TH - 2.62%
Time to next Difficulty Update: 14 days (Sunday December 27th, 2020)
Difficulty All-time-high: 19.97 TH
Corporate Earnings
No relevant earnings for Bitcoin this week.
Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
Source: https://www.bankofcanada.ca/rates/
U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
Source: https://apps.newyorkfed.org/markets/autorates/fed%20funds