New Money: Issue #17
NEW MONEY is a long-form discussion of trends and macro events related to Bitcoin, Money and Digital Assets, published by Adam Pokornicky of DAIM Digital, a Registered Investment Advisor for Bitcoin and Digital Assets. Opinions are my own. Twitter: @callmethebear
For the month of September, Bitcoin was down (7.53%) tapping $12,000 to begin the month before rejecting strongly and ending the month at $10,787. Bitcoin briefly traded under $10,000 for a 4hr candle before quickly getting bought back above the vaunted $10,000 level, hovering for most of the month around $10,600. Bitcoin has now spent a record 70 consecutive days above the $10,000 level. While the beginning of the month offered a healthy retracement after almost 5 months of gains, sentiment measures have once again begun to turn bullish as the price continues to be supported despite negative news flow that in prior years would have adversely impacted Bitcoin’s price. However, it would be a mistake to get comfortable about where asset prices head from here, with so much uncertainty ahead of us with fiscal stimulus and a potentially ugly election driving much of the macro picture through early November.
Last month we briefly talked about our model portfolio allocation to Ethereum and humble bragged about its outperformance relative to Bitcoin and the explosion of DeFi(Decentralized Finance) and the double and triple-digit returns different tokens/projects were experiencing. Between food named tokens like Yams, Hotdogs, Sushi, and Uni, the DeFi space had reached full-blown mania as the greed around DeFi had reached a fever pitch by the end of August.
However, September was a very different story. As the market always does with parabolic returns and rampant greed when it comes to Bitcoin and Digital Assets, what goes up, must come down. One of the projects, “SUSHI” had the rug pulled, creating a catalyst for wiping out the investors and profit-taking in other projects that were both healthy and necessary. The DeFi Index was down (-36%), with other prominent DeFi projects like YFI (-33%), COMP (-45%), and SUSHI (-80%) all seeing significant double-digit losses, leading ETH to finish the month down (-17%) underperforming BTC by around 9%.
That being said, we believe the correction was of course necessary and healthy. Total Value Locked(TVL) in DeFi continued to accelerate and make new ATHs in September, despite the strong price correction. This is impressive and we believe when the dust settles there will be opportunities for us to recommend for clients in the months ahead.
The two major news items of the month were both net positives for Bitcoin. The crackdown of BitMex and arrest of one of its founders for violating money laundering and the Bank Secrecy Act and the continued investment of Bitcoin on the balance sheet of MicroStrategy by its CEO Micheal Saylor which I will touch on later. In terms of BitMex, a derivatives exchange that is nothing more than a casino for degenerate gamblers using 100x leverage was a welcoming sign. If we are to legitimize and clean up the crypto markets for more traditional players to enter, removing renegade firms like BitMex is a very good first step. A few key points worth noting:
The charges brought against it by the CFTC were for violating US anti-money laundering regulations and had tie-ins to the Bank Secrecy Act. There's a lot of US-based exchanges that have done business with Bitmex. There's DeFi projects that are potentially subject to similar money-laundering accusations due to the lack of KYC/AML. These DeFi projects need to get there house in order and truly become decentralized. US long hand of the law is going to flex and take their pound of flesh, undoubtedly so our criminal US banks which launder tons of money can get in the game. I reckon this won't be the end of this story
BitMex being taken out of the market is actually good for a Bitcoin ETF. Remove the leverage and manipulation and the markets become more orderly.
Have to wonder if they went this hard at Bitmex, then a full-throttle attack on Tether ain't fair behind. We’ve talked ad nauseum about Tether in the past and it appears the war on Bitcoin and how money gets in the system is on. Regulators and centralized powers want to map wallets and know who is doing what at all times.
With respect to BitMex, while I don’t love their operation because it’s a degen casino, I thought this tweet was super relevant about how our legal system works.
Donald Trump was diagnosed with CoronaVirus
Asian Crypto Exchange KuCoin Hacked for $150mm in Crypto
MicroStrategy Buys $175mm More Bitcoin, Brings Total to $425mm
Bermuda Stock Exchange Approves Listing of World’s First Bitcoin ETF
US State Bank Regulators Agree to Blanket Set of Rules for Money Transmitter Licenses
Kraken Wins SPDI Bank Charter in Wyoming, First-Ever for Crypto Company
OCC Allows Federally Chartered Banks to Custody Stablecoin Reserve Accounts
DEX trading volumes hit $23billion
MicroStrategy Does It Again
One of the most bullish fundamental drivers for Bitcoin continues to be the conversion of cash reserves on the balance sheet of MicroStrategy (NASDAQ:MSTR) into Bitcoin. I spoke about MicroStrategy in great detail back in my newsletter back in August “And So It Begins..... A Public Company Buys Bitcoin on Their Balance Sheet” about why this was such an important “FIRST” and event for Bitcoin. To my great surprise, MSTR’s initial purchase of 21,454 Bitcoin would be followed up by an additional purchase of 16,796 Bitcoin bringing them to a total of 38,250 Bitcoin.
After completing the purchases, CEO Michael Saylor was open to talking about how they came to buying Bitcoin, saying “We just had the awful realization that we were sitting on top of a $500 million ice cube that’s melting,” Saylor said.
“I want something that I could put $425 million into for 100 years,” Saylor told CoinDesk.
“I went down the rabbit hole” during COVID-19, Saylor said, admitting he “was wrong” to have doubted bitcoin back in the $600 range. I wish I knew then what I know now,” he said.
“I started to cheerfully assign homework” to MicroStrategy’s executives and directors, Saylor said. He staged “a series of learning exercises to bring everyone up to speed.” If MicroStrategy was really going to move millions into bitcoin, then everyone had to be on board. MicroStrategy has settled on bitcoin as the treasury alternative.”
“This is not a speculation, nor is it a hedge,” said Saylor. “This was a deliberate corporate strategy to adopt a bitcoin standard.”
To listen more about Michael Saylor and how MSTR became the first public company to own Bitcoin as a cash reserve on its balance sheet I highly recommend listening to the following podcasts. They are simply fascinating beyond your wildest imaginations and he even hints that he is currently advising other companies who want to follow his lead.
In this conversation, we discuss how Michael built MicroStrategy, how he sold a domain for $30mm, what his $500 million dilemma earlier this year was, and why he choose to put more than $400 million into Bitcoin with the company's balance sheet.
Why did MicroStrategy buy $425 million of Bitcoin and adopt it as primary treasury reserve asset? How did the team learn about Bitcoin? What is driving people to learn about Bitcoin in this high inflation environment? Michael Saylor, CEO of MicroStrategy joins me to discuss.
What We Are Watching
New Bitcoin wallet addresses went parabolic in the last week of September/beginning of October. It’s unclear at the moment if this is a one-week anomaly as a result of trader exodus from Bitmex or an intriguing bullish backstory that could mark a new bull market catalyst. What we do know is that this is something we should be keeping an eye on. (h/t @ColeGarnerBTC )
data | @glassnode
Here’s why: Volume precedes price and Bitcoin active address counts are a reliable on-chain leading indicator of volume. A spike in activity by new participants entering into BTC not yet reflected in price does not occur often. When price action is down or flat and volume is up, this is what traders call a divergence. In this case, it’s a bullish divergence.
Historically speaking, Bitcoin tends to see about 5-10k new Bitcoin addresses/day. That figure grew it its highest level in over two years last week, peaking above 22k/day.
data | @glassnode
The important question is, where are these addresses coming from? While the exodus from Bitmex after it being charged by the CFTC for violating the Bank Secrecy Act would make the most sense, the on-chain data shows this is not the case.
After getting charged by the CFTC and one of the founders being arrested, a massive spike of 4,500 in withdrawals began Oct 1. Withdrawals have since returned to normal.
data | @glassnode
If BitMex were responsible for the address growth we’d naturally expect to see new addresses spiking prior to the batched BitMex withdrawals. Once the withdrawals are processed, the addresses should revert to the norm in lockstep with BitMex transfer data. Except, the data shows the opposite.
No particular spike in address growth before the withdrawals.
Growth gets stronger after withdrawals have fully returned to normal.
~100,000 new $BTC addresses since Oct 1. But only 4,500 BitMex withdrawals.
data | @glassnode
So where the hell might all these new addresses be coming from? It’s impossible to know for sure but On-Chain analyst, @ColeGarnerBTC offered a plausible explanation from a story that made its rounds the last week of September that mostly passed under the radar — despite being one of the most bullish backdrops for the market.
It’s particularly odd to see the Chinese government pushing out propaganda supporting crypto assets, which is contrary to its ever-increasing tightening control over fx exchange at the retail level. However, the source and validity of the newspaper is the Reference News, the #1 circulated newspaper in China. News and information does NOT get published here without a greenlight from the CCP.
So what could be the intent? Well, as we’ve discussed in prior issues of New Money, the People’s Republic of China is rolling out their DCEP, more publicly known as the Digital Yuan, an updated and more innovative currency and payments infrastructure poised to take over trade and remittances in emerging markets and challenge American influence on the global stage.
If you want to learn more about China’s initiative to integrate adoption of the DCEP and blockchain technology using the BSN(Blockchain Services Network) across government, big business, and emerging markets, I highly recommend reading, “China’s Checkmate: The Technology Weapon You Didn’t See Coming” by Tatianna Koffman where she discusses “how the BSN will be the backbone infrastructure of interconnectivity through mainland China, city governments, private businesses, and individuals, in both China and abroad. This network will form a new Digital Silk Road to create a link to China and its trading partners globally.”
The about-face from China is extremely fascinating and almost totally on-brand. While China has been one of the harshest and negative forces over the years, often suppressing Bitcoin momentum(perhaps intentionally to keep the price down as they accumulated and positioned themselves over the past 10 years), it’s also strongly supported Bitcoin miner activity in a major way, dominating miner hash rate and controlling a large amount of newly minted Bitcoin supply, holding more Bitcoin than any other country by a large margin. While the United States prints money in infinite terms to satisfy its insatiable appetite to bail out rich people, corporations and keep the Ponzi scheme going for its outrageous debt load that is impossible to ever pay back without creating rampant inflation, Bitcoin has quietly become China’s national treasure.
Sooner or later, maximizing Bitcoin’s potential becomes an unavoidable economic incentive and it appears with the rollout of the DCEP, the Chinese government seems to want to ignite the bull market.
While I see reasons to be cautious over the next few weeks heading into the election with all the f*ckery expected from Trump in playing games with Democrats, holding back stimulus, manipulating the stock market, his issues with Covid-19, suggesting he may not accept a peaceful transition of power if election results run against him and a Supreme Court nomination process that could stir up the deepest angst of America’s culture wars coming at an unimaginably difficult moment, I am extremely bullish about the direction of Bitcoin over the next 3 months and into 2021.
While it’s very likely we see volatility, sideways actions, and lower prices to shake out weak hands over the next few weeks/months, fundamentally speaking, we see this period as an excellent and dare I say the last great buying opportunity to build a multi-year long-term position and/or deploy new capital if you're thinking to increase BTC exposure around $10k before the bull run takes off. It’s my belief that Bitcoin holders will be very happy by Christmas 🎄🎅🏻and that 2021 will be a lot of fun for HOLDers. (I know 2020 has been 💩 💩 but I mean in Bitcoin terms).
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Odds & Ends
Bitcoin. “A bet against the ruling class.” I’m personally developing a crush on Chamath Palihapitiya and believe we need to protect him at all costs.
If you fancy watching the entire interview (I recommended there’s lots of free jewelry), you can do so here as Laura Shin and Chamath talk about a wide range of issues, including Bitcoin, COVID, civil unrest, wiping out hedge funds and corporations and broad economic trends and forecasts.
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