Market Lab Report - Bitcoin's Warp Drive While Banks Warp

Market Lab Report / Dr. K's Crypto-Corner

by Dr. Chris Kacher

Bitcoin's Warp Drive While Banks Warp

Warped Ecosystem

As interest rates continue to fall, UBS is now charging clients in the EU -0.75% for bank deposits above 250,000 EUR. Having to pay banks for the privilege of holding your money warps the financial system. This motivates the trillions in dollars, euros, and pounds to seek safe harbor in higher yielding instruments and hard assets. Banks are starved for such higher yielding instruments while their customers grow increasingly despondent especially in the EU where banks get penalized typically 0.5% for holding cash thus are starting to shift this penalty onto their customers.

Blockchain is bridging this gap by supplying the markets with tokenized assets whose underlying value could be the asset itself in the case of hard assets, or the underlying value could span a range from project finance merchant banking which could include construction equity to ship building. Onerous regulations have choked off the capital to fund many such projects to the tune of hundreds of billions. This is yet another use case for ethereum.

Taper Tantrum Replay

In 2013, we saw 10-year Treasurys shoot higher when the Fed started to give the market less of its mother's milk in the form of less QE, a situation referred to as markets having a taper tantrum.


The situation was eventually resolved to renewing QE which of course sent stock and bond markets higher. Despite the taper tantrum in 2013, stocks did well.


We are seeing a similar situation today with various central bankers saying the Fed could have the option to slow QE earlier than expected depending on how the roll out of the vaccination goes together with signs of a stronger-than-expected economic recovery. Chicago Fed President Charles Evans recently said, "It could be the case that things are going a lot better, and we do end up doing some type of tapering" in late 2021 or early 2022. This has pushed the dollar and Treasury yields higher.

That said, a steepening yield curve is indicative of higher inflation ahead as a consequence of the upcoming stimulus package. So the 10-year yield is jumping higher is actually a sign of more QE to come, not less.

The recent strength in the dollar as a consequence of rising rates is more likely a short term dead bat bounce since more QE will push the dollar lower.

Despite what Evans said, keep in mind the Fed is a political body first and foremost, thus, we have heard this broken record over and over since QE began in late 2008. Before COVID, the Fed had no choice but to accelerate QE in early 2019, thus markets since hitting a major low in Dec-2018 had been on the rise. COVID accelerated this acceleration with more money printed in 2020 than in all the prior years combined. Nevertheless, such talk of slowing QE has sent the U.S. dollar and Treasury yields higher. But this has happened before numerous times.


That said, the Dems want to prop the U.S. dollar as the world is starting to lose faith in its status as the world's reserve currency. At the same time, Dems want to print more stimulus to help the people. They cant have it both ways. No government has ever had it both ways. By the time debt reaches current levels, the path has always been towards more devaluation until the reserve currency loses its status. The new reserve currency is typically decided by war.

Still, as I have mentioned, the world has never had such powerful, exponentially growing technologies at hand. Blockchain, AI, and VR, among others, will create vast wealth which could create a "hard landing" instead of war. The transformation away from fiat into bitcoin, the key store-of-value, will not come smoothly as the U.S. government will not give up its reserve currency status without a fight. But they may have no choice. Meanwhile, ethereum will continue to upend legacy banking systems as it is a monumentally superior protocol in terms of the dramatic efficiencies and cost reductions it creates. Decentralized finance is just beginning. And for those who insist governments will stand in the way via onerous regulations, try standing in the way of decentralized autonomous organizations and decentralized applications which exist all to themselves, controlled by no one. They are like positive viruses in the internet's ecosystem that survive and thrive by way of their economic utiliity. Think peer-to-peer file sharing which still grows despite courts trying to end the technology.

Was That The Top?

With bitcoin having recently corrected, CNN declared bitcoin to be officially in a bear market when bitcoin lost more than -20%. It actually dropped nearly -30% peak-to-trough. This is illustrative of the cluelessness of mainstream media. All the talking heads including professors from various universities come down from their ivory towers who didn't make a dime on bitcoin all these years and find yet another reason why bitcoin has no value, is used primarily for money laundering, and is the biggest Ponzi bubble of all time.

Nevertheless, it's no surprise bitcoin and ethereum have been making major advances in price overall month-to-month. But the question has been how much higher can this go? My metrics continue to show big buying pressure ahead from numerous factors such as:

• Institutional and HNWI buying including MassMutual, One River Asset Management, Paul Tudor Jones, et al
• Supply shortage of bitcoin
• S2F (stock-to-flow) for both bitcoin and ethereum
• Since bitcoin has existed, there has been a strong correlation between the price of bitcoin and the number of its active addresses which hit new highs a bit before bitcoin broke above $20k. This is Metcalfe's Law in action which says the value of a network grows with the number of its users squared.
• This also applies to the price of ethereum and the number of its active addresses.

•  But ethereum's market cap is growing faster than bitcoin as are the number of its active addresses. The blue line below shows the price of ethereum. You can see there is strong correlation between both coins in terms of the number of active addresses which strongly correlates with price.

The bitcoin rally addresses the fear of unchecked spending as the reality of a White House run by Democrats takes hold. Some renowned investors with long term track records for zigging when others zagged predict a potential end to the U.S. dollar as the world's reserve currency. All good things must come to an end. Maybe yes, maybe no. As I've written, the exponential growth of key technologies will create vast wealth as well as have transformative implications as any technologically clueless and typically aging politicians are replaced by those with at least a general understanding of how blockchain, AI, and VR among others will evolutionize the world. As Vitalik Buterin, the creator of ethereum has tweeted, many who hold political power are septuagenarians.

As for bitcoin, what is overbought can become more overbought, leaving sellers behind. Of course, one should always remain aware of sudden profit taking which has often quickly sent bitcoin lower by 30-40% if prior bull markets are any guide. But given the acute supply shortage of bitcoin with majors including PayPal, Square, and Grayscale buying up bitcoin, corrections may be contained to under 25%. The major cryptocurrency exchange eToro just reported they are having a bitcoin supply crisis so they must now limit bitcoin sales due to unprecedented demand. Also just in: Exchanges could be out of ETH within 48 hours. Demand has sky rocketed. Exchange reserves fell 20% from 10M to 8M in the last few hours. But vet this data in the coming hours because it could be a non-issue. Statistics are often misinterpreted without proper context when they are first reported.

But it's never all roses. There are two issues that may keep bitcoin in a trading range for the next few to several days. First, buyers of the Grayscale ETN GBTC will not be able to unlock their positions until Feb 3, thus Grayscale's buying of bitcoin will be more limited until then. Second, stablecoin USDT's funding rates are elevated. These rates tend to get to such levels when bitcoin has been overbought. But of course, as we know, overbought can become more overbought especially for the bullish reasons cited.