Down the Bitcoin Rabbit Hole
Chapter 8: The Bull Case Gets Stronger
Bitcoin hit $40,000 yesterday. We can get into the why’s of it, I will tell you what I think is going on here, but the why’s are not all that important, the simple fact of the matter is that the trend is up. The price has more than doubled since the last time I wrote about it. My friend Charlie posted some data showing how long it has taken bitcoin to move to the next $1,000 interval.
My younger daughter, Gabby, is excited (I told her she owns some) because she wants to buy a new Lego set. As a side note, after Christmas, I am not in the market for more Lego sets and if I step on another Lego, there is high probability that we will have zero Lego sets in the house.
What’s happening here is people are getting used to the idea that in a world where central banks are in, what seems like, a never ending race to devalue their currencies via monetary stimulus, an asset with a fixed supply looks extremely attractive. The bullish case is more nuanced that than that but at a high level, this is a pretty good starting point.
Fast forward to this week and the Democrats look like they are going to win both seats in the Georgia Senate run-off and the stage is set for more stimulus and more spending. As I wrote the other day, I don’t see much scope for draconian tax hikes, so it seems that more stimulus and more spending have the prospects to lead to more inflation. So as the purchasing power of our money declines (inflation), once again an asset with a fixed supply looks incrementally compelling.
Not only is the supply fixed, but new supply comes to the market at a decreasing rate. A good way to think about this is in a way known as stock to flow. Stock being the existing supply on the market and flow being new supply. The higher the number, the more scarce the asset. This paper from March 2019 does a good job of explaining what this means. As of that time, gold (one of the most scarce assets in the world) had a stock to flow ratio of 62. Silver clocked in at 22 and bitcoin was 25. These numbers have likely changed since the paper was published but the point is pretty clear. Bitcoin is scarce. The flip side is fiat currency, the money that we use today. Fiat money, as the central banks are showing us, is not scarce. Here is a look at US Money Stock over the past 10 years.
So we have a scarce asset that is being priced in increments of an asset which is not. At the same time, with the price of bitcoin rising, it is becoming more likely that large investors will be in a position to add it to their portfolios, in addition to traditional assets such as stocks and bonds. Here is a quote from Fundstrat's digital asset strategist David Grider :
"We believe the conditions remain in place for a continued rally in bitcoin and crypto more broadly over the next 6-12 months. Institutional and corporate buying, regulatory de-risking and retail stimulus demand are factors that have led to an increase in positive momentum, which we believe can continue."
We have talked about the risks here and here. So if regulatory risks are falling, as Grider opines, and the asset is growing, making it somewhat easier for larger investors to own, we have the prospects for increasing demand in the face of limited / fixed supply. All while inflation has a good chance of being a major theme for investors in the years ahead. By the way, Anthony Scaramucci’s firm, SkyBridge Capital recently launched a bitcoin fund and has already invested $182 million.
Now, I am not a fanatic like some are when it come to bitcoin. There will come a time when it makes sense to sell and Gabby can get her Legos. My hope is that she is too old for Legos when the time to sell comes.
Anything can happen, anything happens all the time.
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*As a reminder, nothing in these pages should be considered investment advice.