Bitcoin
It was a quiet week of range-bound trading on low volume for bitcoin, closing -0.66% for the week at $26,752.
Looking at the bitcoin derivatives markets, we see that the bitcoin futures curve is still showing a healthy contango in most exchanges, with prices moving higher as the delivery date moves farther out. This is considered a “healthy” setup.
The funding rate on bitcoin perpetual futures swaps are near 0% - meaning that the positioning is very balanced between long and short investors. This is also considered a “healthy” setup.
Lastly, we see that short interest for bitcoin in the spot market also remains near historical lows.
Based on this investor positioning, it appears that investors are not anticipating a large move in either direction for bitcoin in the near future.
This is consistent with positioning in the options markets. The upcoming Options Expiration day on Friday shows a “maximum pain price” of $27,000 - which is very close to the current price.
In other words, positioning around the spot and derivatives markets suggest that investors are not expecting a significant move in either direction this week.
Digital Asset Markets:
Monetize this, but not that
Part I: The meaning of monetization:
When fiat money starts losing its store of value attributes, (e.i. when its purchasing power drops), people turn to “monetize” other assets that preserve value better - and use them as “money” instead.
Monetization literally means turning something into money. For the purposes of this essay we define it as: the act of using or trading a commodity or asset primarily as “money”, with the asset’s intended productive use becoming a secondary consideration.
The closest modern example would be residential real estate in large U.S. or Canadian cities. In Canada, the price of residential real estate has become so disconnected from the underlying economy, that it displays clear signs of being monetized. A few examples:
Just this year, the average price of a home in Canada has already increased by $100,000 - and that’s just 6 months in.
According to Statistics Canada, the median household income in Canada was $76,000/year in 2020. Even assuming consecutive 8% increases from 2020 to 2023, the empty house has still “out-earned” the people living in it in 2023 - and it's not even June.
Let me say that again, an empty house earns, on average, more than two people doing full time work over the same period.
Canadian & U.S. real estate, on average, preserves value better than fiat currency.
Because of this dynamic people buy real estate to store their wealth. Renting the assets, or living in them, become a secondary consideration. Homes appreciate in value whether they are rented or empty. The appreciation of the asset over a year is such that it covers the foregone rent income. As a result, Toronto and other Canadian cities have a bad problem of “empty homes”. So much so that it had to pass a special tax for it.
A different way of saying this is: houses go up in “price” over time, not in value.
Going up in price means you can sell the house at the higher price, but would barely have enough money to purchase a very similar house in a similar neighbourhood.
If the house has gone up in value, you should be able to purchase a bigger/nicer house in a similar neighbourhood.
When a house goes up in dollar terms, more often than not it is simply maintaining the original purchasing power of your dollars - it is not giving you additional purchasing power. To demonstrate this, look at the chart of canadian real estate prices vs. the Canadian money supply below:
Part II: Permissioned Monetization
Modern economies set up their incentives and regulatory requirements in order to favour the monetization of certain assets, but not others. In today’s world, broadly speaking, modern economies like Canada and the U.S. are structured in such a way that it favours the monetization of 3 asset classes:
- Government bonds
- the local stock market
- local real estate
And it disfavours the monetization of other assets such as gold and Bitcoin.
This is a very deliberate decision with strategic goals.
The primary goal is to prioritize the monetization of assets that keep governments in power, and prevent society from monetizing other assets that the government may not deem “strategic” for the same purposes. Let’s cover the monetized asset classes and the reasoning behind each:
Monetized Asset 1: Government Bonds:
After the U.S. went off the gold standard in 1971, it had a big narrative problem. Because gold is clearly a monetized commodity, if its price increased in U.S. dollar terms, it meant that people were choosing to save in gold, and not the U.S. dollar. Gold going up in price undermines the trust in the U.S. dollar. As with Bitcoin, there would be no other reasonable explanation for its increase in price other than “the dollar is doing poorly”.
The government needed central banks globally to monetize (or purchase) a different asset for their reserves. To accomplish this, it first orchestrated an arrangement whereby key oil-exporting countries would price and sell their oil in U.S. dollars, and invest their excess U.S. dollar savings in U.S. government bonds. This would ensure military protection from the U.S., and “peace” in the region.
Similarly, with China the U.S. “traded” access to its consumer market for Chinese exports, in exchange for China using the excess savings from its sales to invest in U.S. government bonds. If you look around at which central banks are holding the most U.S. treasuries, you’ll find a lot of U.S.-aligned countries.
Similarly, it passed local regulation that forced its domestic banks to invest client deposits into U.S. government bonds.
All of this caused Central Bank gold reserves to decrease from the mid 1960s until 2009.
Conversely, the amount of U.S. government debt held by foreign central banks exploded during the same period…
When the public asks “why are U.S. government bonds doing so well” - the answers can range from “Because we are the strongest economy in the world”, to “because people trust the United States of America and its army”.. or insert any other patriotic response.
Monetized Asset 2: The Stock Market
The next asset class that governments prioritize becoming monetized is its local stock markets. Again, there are clear strategic reasons for this:
For one, the local pension and retirement programs are largely dependent on increasing stock prices. To incentivize this behaviour, governments create “tax-sheltered” options for local investors to pour money into their local stock markets. This ensures that more people will be contributing to the pie over time.
An active stock market allows for capital formation and local companies to access capital to grow. This also benefits the country in that companies with capital can invest and create more jobs - jobs that then contribute to the health of the local stock market.
By encouraging participation from local investors, governments also enhance the liquidity available in that market, which in turn draws more participants and investors from other markets globally.
The combination of deep liquidity, fast price discovery and property rights almost forces all global investors to participate in the U.S. (and to some extent the Canadian) market.
In summary, a rising stock market keeps local investors and companies happy. Happy investors and happy companies means happy voters.
And most importantly, if and when anyone asks why the stock market is going up in price, you can say “because U.S. companies lead every industry”, or “because there’s a premium to listing in the U.S. stock market”, “because the U.S. economy is roaring and international investors want to participate” - or any other patriotic response.
In reality, the answer is much more trivial. Look at the S&P 500 chart priced in gold below:
As we can see, the S&P 500 might be breaking record after record when priced in U.S. dollars - but if we price the S&P 500 in gold, the performance becomes lackluster. From the chart we can see that the S&P 500 is not worth a lot more in gold terms today than it was in the late 70s. Almost all of the appreciation has been the dollar getting weaker - not the S&P 500 becoming more valuable as reflected by its price in gold.
But, similar to government bonds, saying that U.S. companies got stronger sounds a lot better than saying the U.S. dollar got weaker.
Monetized Asset III: Real Estate
As we showed in the first example, real estate is a monetized asset class in the U.S., Canada and other developed countries. Similar to the other monetized asset classes above, there’s a clear strategic reason that governments allow this.
First, monetizing real estate leads to consumption of more real estate. This, in turn, leads to demand for real estate construction, which is a very physical activity and creates jobs of all levels in the economy.
By incentivizing home ownership for its local citizens, and allowing for the continued monetization of the asset class, the government allows its citizens that own property to build wealth, which they can later redeploy into the economy. The proverbial American Dream.
Last, and perhaps most importantly, is that the answer to “why real estate is going up in price” is socially acceptable and makes the government look good. Somehow, people still believe that “land is limited” (especially in Canada, hint hint), and that “we cannot build houses faster than people reproduce (or arrive into the country)” are sensible explanations as to why real estate prices go up. I find this very comical.
To demonstrate the difference, consider that the Canadian Money Supply has increased by roughly 34% since early 2020.
And, poeatically, the average price of detached properties in Toronto has increased by 31% since the pandemic.
But I guess “your house is up in price because everyone wants to come to Canada” sounds a lot better than “you didn’t actually make any new money, we just printed 30% more dollars and your house is the same”.
The first answer gets you reelected, the second one makes you look like a fool.
Part III: Closing thoughts:
Government actions are about getting re-elected. To do that, they need to be able to control the narrative. Monetize the right assets and control the narrative means you get elected. If you allow other assets to get monetized and you lose control of the narrative, you won’t get elected.
Notice that the assets that they want monetized have tight narratives that are positive for the government.
The biggest problem governments have by allowing gold or bitcoin to get monetized is narrative violation. There is no way to explain increases in the price of bitcoin and gold that are positive for the government. They, in fact, expose their mismanagement, and the fact that they print their currency recklessly. Bitcoin and gold are assets whose primary purpose is to protect value. If their prices are increasing, it means the assets or dollars that they are priced in are becoming less valuable. It means the government is not doing a good job.
You or me having more bitcoin does not buy a government’s debt, it does not prop up their artificial real estate markets, and doesn’t feed their unsustainable pension liabilities.
Holding bitcoin allows you, me and millions around the world to opt out. To protect the value of our savings from monetary mismanagement. It creates an independent voter with critical thinking. The type of voter that can put a check and a balance on the government. Ultimately, more will see the light. And more “bitcoiners” will lead to a more transparent society. People don’t need to be “fooled” into acting how the government wants. We should all be educated about how the system works, and empowered to improve it. Bitcoin gets us closer to that future.
The Week Ahead
This week we will have a big options expiration day for bitcoin on Friday with contracts representing over $2.2 Billion dollars worth of bitcoin set to expire. The maximum pain point price for this upcoming expiration will be $27,000 - so keep an eye out for that price level as we approach Friday.
We will also get key inflation data from the U.S. with April’s Personal Consumption Expenditures index - a metric that the Fed watches very closely.
Lastly, we will also get 6 speeches from the Fed as well as the minutes from their May FOMC meeting.
As always, here’s a summary of the events and data that could move markets in the week ahead:
Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans.
As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.
Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts.
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