A Decade Of “Down” — Will Bitcoin Save Us?

It’s no secret in investing that timing is everything. While this is true across many walks of life there are few examples of it playing out in such a drastically important way than in the markets. You may have the right idea of market direction with the right idea about price targets but if your timing is out just by a little bit, it will all be for nothing.

Understanding the differences in your short term and long term expectations is an important aspect of how you approach the markets. Framing your shorter term trading in the light of your long term ideas and expectations is critical. If you think that the price of Bitcoin will be higher in 6 months or 12 months than it is right now, yet you are adding excessive short positions (more than just covering at key resistances) than you are fighting with yourself. Another example of this is if you expect the price of Bitcoin will be lower of the next 6 or 12 months and you are unwilling to sell your Bitcoin positions at a profit or add to long-term short positions because of your emotional attachment and fear of missing out, then again you are fighting with yourself.

Macro Backdrop

As global central banks take back their plans for tighter monetary policy and with the Federal Reserves dovish pivot in recent months the fuel for a rebound in public equities and a move back into “risk-on” sentiment continues to strengthen in the markets. There are many that still remain skeptical of the recent rally which followed both equities and Bitcoin itself. Given historically low yields across fixed income counterparts coupled with a weakening global economy, the stage is set for growth assets to outperform, which could, in turn, prove supportive for Bitcoin and crypto assets.

It is these same themes that darken the long term outlook, especially if crypto assets prove to be highly correlated to similar alternative assets (equities etc). Investors are pushed further out on the risk curve when rates and yields are low. We have talked in the past about institutional investors such as pension funds with target returns of 7–8%. How are they going to achieve those returns? Sovereign bond yields are near historic lows creating a drag on portfolios with a target return in that range. Even overweighting stocks is unlikely to get you there. But what about Bitcoin? I believe that as we enter this next decade the case for Bitcoin strengthens. It is not just a hedge against inflation of major global currencies burdened by terrible debt and poor economic outlooks. It can also serve as a hedge against underperformance.

How Is Bitcoin Currently Viewed?

As much as a lot of the community would like Bitcoin to be considered “digital gold” most large investors certainly don’t see it this way at the moment, and it is currently viewed much further out on the risk curve than traditional safe-haven assets (physical gold, treasuries, bonds). On top of that (and concerning for me IF your use-case is a hedge against traditional markets) the short term correlation between BTC and US stocks generally is quite tight when volatility strikes off, which Bitcoin selling off in sync with the equity markets.

As institutions slowly wade into the crypto market we will slowly see the volatility of crypto assets suppressed, in turn boosting Bitcoin’s appeal as a safe haven. However, this will be a slow process, one that we are not near seeing completed just yet.

Payment adoption

In the first quarter, we saw a gradual yet significant increase in the total number of Bitcoin payments, rising roughly +40%. This is impressive growth especially when you take into account the fact that lightning network transactions are excluded in this figure.

What Does It Mean For Bitcoin?

In the most recent World Economic Outlook report the International Monetary Fund (IMF) lowered it’s forecast for world output to 3.3% in 2019 — a significant decline from it’s October forecast. The revised projection includes a reduction in growth expectations for roughly 70% of the global economy.

“Although a 3.3 percent global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential.” – International Monetary Fund (IMF); World Economic Outlook (April 2019)

China and India lead growth projections according to the IMF at 6.2% and 7.4% respectively. The basket of advanced economies sits at 2.1% with the USA leading the charge at 2.5%.

This weaker economic backdrop and the move back away from tighter monetary policy is supportive of risk assets (which we speculate Bitcoin is under) in the intermediate term as investors seek attractive growth prospects. Global sovereign bonds are falling substantially with yields on the 10-year U.S. treasuries now 2.5% down from 3.2% six months ago. Lower bond yields push investors further and further out on the risk curve as they search for higher returns to achieve their targets.

Will Bitcoin Save Us?

One of my biggest concerns for the adoption of crypto assets into institutional portfolios is the branding that comes with it. Funds such as pensions are conservative in nature, and if the “word get’s out” that they have been investing in highly speculative assets I am afraid they would be negatively affected, therefore reducing the attractiveness crypto assets could provide.

That being said, the opportunities the crypto market offers these more conservative institutions with long time horizons (endowments, pensions) are substantial. Many public and private pension funds use discount rates between 7–8% to calculate their future liabilities as we talked about earlier. A world of under 3% yields on Treasuries (plus the scary amount of government debt) is not enough to satisfy their requirements.

This one of the key reasons that technology and emerging markets stocks have performed so well in recent months.

Investors are seeking growth.

Are they going to find it in Bitcoin?

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