Here is the link from yesterday’s podcast:
I feel the new Sunday schedule for the podcast is great, since I’m able to put 1 hour episodes together and cover everything notable going on in the markets each week. If you like the podcast, please give the Spotify Page a follow, it really helps the podcast out. You can also find it on YouTube, although I find most listeners get it on Spotify since its a more audio-friendly app. This is last week’s episode on YouTube just incase anyone missed it:
Friday’s trading session was a bloodbath across all asset classes, from stocks to bonds to oil to gold, but the biggest damage was done to the crypto currencies and crypto-related stocks. Its been a while since I’ve talked about Bitcoin or cryptos in general since they have basically lost all of their shine (rightfully so) this year, but I think last week’s action should open people’s eyes as to why Bitcoin simply does not work in any case scenario.
For one, Bitcoin trades as a risk asset which is noticed in its very high correlation of the QQQ ETF. Looking at a chart of Bitcoin, QQQ, and TQQQ which is a levered ETF on technology stocks, Bitcoin and TQQQ trade identically to one another, with Bitcoin being even more volatile to both the upside and downside.
Now, while I’ve heard some clueless investors on CNBC, namely Tim Seymour and Brian Kelly claim this, it is asinine to make the claim that Bitcoin is a safe haven asset. The NASDAQ is not a safe haven asset, and neither is a triple-levered tech stock ETF such as the TQQQ. Since Bitcoin is almost perfectly correlated with the TQQQ, it is a high-risk asset. I’ve even heard Tim Seymour say that Bitcoin is a safe haven risk asset…truly unbelievable.
Now if you are looking to own a risk asset, you would be much better-suited being in the QQQ since it holds real assets with real fundamentals. It does not have as much headline risk, does not have a swarm of fraudulent scammers using price manipulation schemes, and is much more regulated and safeguarded to be much more suitable for investors. So there is no reason to own Bitcoin as a risk trade, and no reason to own it as a safe haven.
Now if an asset is not a conservative enough investment class to be considered a safe haven, it definitely cannot be classified as an inflation hedge. Now certain risk assets certainly can be classified as inflation hedges, but not investments with the high degree of volatility that Bitcoin has. But what is an inflation hedge by definition?
In its purest sense, an inflation hedge is an asset that will have its price increase purely to do a broad rise in prices across an economy. Take for example oil. If I foresee there being high future inflation, it would be reasonable to expect oil prices to be higher as a result. Therefore, if I know I am going to need oil to drive my car, to hedge against the risk of that future inflation I could buy the oil now and store it for future use, this way I escape future price increases. Businesses will sometimes do this by investing in their inventories. If you are an aviation manufacturer and require certain materials for your industrial production, you may choose to buy an excess supply of materials to hedge inflation if you are worried about future price increases. So in the purest sense of the term, an inflation hedge is the purchase of a commodity in the present to store for future use. That is where the term ‘store of value’ is derived.
So its clear why Bitcoin can’t be considered an inflation hedge. It is not a store of value even if Bitcoin hodlers claim it to be one. People do not need Bitcoin for anything. They don’t need it to transact with, even over different boarders. Bitcoin maximalists would argue with me that isn’t true. Here is my pushback on that; Bitcoin may be a fast way to transact with people internationally, but it is far more expensive to do the transactions with Bitcoin. (By the way, there are over 20,000 cryptocurrencies out there that can be used for the same exact thing, so the scarcity argument of Bitcoin makes absolutely no sense either). The fees on Bitcoin transactions are still very high compared to other transaction intermediaries such as international banks or Western Union. Not only are the transaction fees high, but the high volatility in Bitcoin subjects risk to people who are transacting in it as well. You may ask a vendor in another country for a payment in Bitcoin, but by the time you actually receive the funds the price of Bitcoin could have dropped anywhere from 1-10%, or even possibly crash completely. Lastly, it is very expensive to buy the Bitcoin in the first place by paying the high markups, like the ones charged on Coinbase, FTX or other crypto trading platforms.
The other problem with Bitcoin and other crypto ‘currencies’ - They do not function as money because they do not work as a medium of exchange, store of value, or unit of account.
Unit of Account - the ability to use a commodity or unit of money as a measurement against the cost of goods/services
Medium of Exchange - the ability to exchange freely through transferability, portability, and divisibility, ***ESPECIALLY OVER A LONG DURATION OF TIME. Meaning, for something to be a medium of exchange, it must be reliable enough in price terms to stay stable and thus be loaned and borrowed over long time periods. Bitcoin is not stable enough to be loaned out in its own denomination.
Now even if you think that the crypto industry is going to disrupt fintech and the financial industry moving forward, you can’t possibly deny the immense amount of risk inherent in the space. I would argue that a lot of crypto technology has already been accepted and applied in the financial world, yet the price has gone down since most of this institutional adoption has taken place.
All blockchain and crypto-related companies have gotten absolutely clobbered over the past 12 months. We also know companies like Tesla, Block, Paypal, Fidelity, Charles Schwab, among many others have embraced crypto currency usage. There was a mass marketing campaign and movement with non-stop TV ads coupled with expensive Super Bowl commercials to try and FOMO the public into buying cryptos and entering the casino more commonly known as Coinbase. Yet with all of this having taken place over the past year+, the price has gone down dramatically. I’ve always said that Bitcoin has the exact characteristics of a pyramid scheme, and its clear from the price action in the past 16 months that all of the money that has gone into Bitcoin was extracted from small investors and pocketed by the whales involved in the space. More than 60% of all people who bought Bitcoin did so in the past 16 months, and a far bigger percentage of buyers came in the past 3-5 years, yet most of the percentage gains in Bitcoin were already experienced prior to that ‘mass adoption.’
One of the bigger promoters of Bitcoin last year was Chamath Palihapitiya, who notably called Bitcoin ‘Schmuck Insurance’ on CNBC during the height of the meme stock mania in January 2021. Turns out, that is exactly what Bitcoin turned out to be. Schmucks bought the wrong insurance to the inflation problem, allowing bigger whales in the crypto space like Chamath to cash out and get even richer. Meanwhile, those who purchased Bitcoin in January 2021 are stuck holding the bag and are down a minimum of 53% on that ‘Schmuck Insurance,’ yet the very risks they were insuring against have actually been occurring (inflation, market risk, stock market downturn, recession). Thus, the insurance hasn’t worked in the slightest. You would have been better off buying literally any other asset in the market.
Lastly, if we look at the Greyscale Bitcoin Trust we can see the extreme lack of institutional adoption by hedge funds and money managers. The trust trades at a 31% discount to NAV (Net Asset Value), meaning that all of the Bitcoin held by the Greyscale Trust is being dramatically underpriced by market participants. The trust is trading 31% under its intrinsic value, which means that investors have no interest at actually owning Bitcoin on behalf of clients despite getting a 31% discount on the asset. This is a serious lack of institutional adoption. At this point, if institutions have not adopted Bitcoin, I can’t see why they ever will. The only devil’s advocate argument here is that professional money managers are waiting for more regulations on the crypto industry before investing in Bitcoin. Personally, I think that judgement call is a bridge too far. The only institutional adoption is with Wall Street firms allowing their clients to trade it. If there is ever money to be made in charging fees for something, Wall Street will always be there to sell it to their clients. Remember, these same Wall Street firms like Goldman Sachs were selling mortgage-backed securities to investors during the height of the Housing Bubble despite knowing the bonds were worthless.
The key takeaway for anyone who still wants to own Bitcoin, or who still owns it currently, is that you can buy Bitcoin for a 31% discount by owning the Greyscale Bitcoin Trust (GBTC), as opposed to owning it directly on Coinbase or another crypto trading platform.
Monday should be a quiet day for markets to start off the week. We don’t have any notable economic data being released Monday, although we have numerous significant data releases later this week. The Jackson Hole Symposium will also be kicking off on Thursday as the Fed discusses the state of the US economy and addresses investor concerns. Jerome Powell will speak on Friday. Let’s also pay attention to Nvidia earnings, which already has a low bar set regarding investor expectations after the company pre-warned on lower demand a few weeks ago. The semi-conductor space is the leading sector of the cyclical trade, and has a lot of influence on the direction of the overall markets. We also get earnings from some cloud businesses, notably Salesforce, Snowflake & Splunk. Splunk specifically is up 7% in the past 3 months, and could miss earnings as the stock is priced for substantial future growth, and could make for a good short trade here. This is also partly because the cloud giants (Amazon/Google/Microsoft) have been taking more market share in the cloud space in the prior quarter as demonstrated on their earnings calls, meaning the small competitors are probably struggling a bit to keep up. Lastly, I also want to see the strength of the consumer in the eyes of the CEOs of Best Buy, Dick’s, Macy’s and Victoria’s Secret.
Monday
Earnings: Palo Alto Networks
Tuesday
Earnings: JD.com / Dick’s Sporting Goods / Macy’s / Urban Outfitters
Wednesday
Earnings: Advance Auto Parts / Sales Force / Pinduoduo / Snowflake / Nvidia / Splunk / Broadcom
Thursday
Earnings: Victoria’s Secret / Toll Brothers / Best Buy / Dollar General
Friday
Earnings: N/A
TGIM
Ryan Garzone
True North Market Research
truenorthinternationalpartners@gmail.com