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The Institutionalisation of Bitcoin 17 December 2020 The institutionalisation of Bitcoin Verbier If 2020 has been the year of Covid-19, it has also been the year of Bitcoin. Indeed it is the year when Bitcoin has come of age. This report is intended for [email protected]. Unauthorized distribution prohibited. GREED & fear is not only talking about price performance, though clearly that has been impressive with Bitcoin up 474% from the March low and 214% year to date (see Exhibit 1), including a 9.2% gain yesterday while GREED & fear was writing this! Rather what GREED & fear means is that this is the year Bitcoin has become investible for institutions with custodian arrangements available and with prominent investors and indeed institutional investors declaring that they have bought it. In this respect, Bitcoin has now become part of the system with opportunities also for retail investors to buy into it via quoted vehicles, be it the Greyscale Bitcoin Trust in America or the recently launched VanEck Vectors Bitcoin ETN traded on the Frankfurt exchange. Exhibit 1: Bitcoin price Source: Bloomberg This is important since, before such arrangements were in place, there was always the risk that Bitcoin accounts could be hacked. The other risk, of course, was that Bitcoin would be declared illegal because it was used for nefarious purposes, such as illegal narcotic transactions. Still an asleep GREED & fear has only just been made aware by a friend of the most remarkable development in this area, though it happened four months ago. That was the announcements in mid-August and September by the Nasdaq-listed MicroStrategy, a business intelligence software company, that it had invested in the Bitcoin equivalent of US$425m (US$250m in August and US$175m in September), amounting to almost 100% of its own treasury funds, to hold on its balance sheet. The aim is to make Bitcoin “the primary treasury reserve asset on an ongoing basis”, along with cash and short-term investments, according to the company’s official US Securities and Exchange Commission (SEC) approved Form 8-K. MicroStrategy invested a further US$50m in Bitcoin in early December, with a cumulative holding of 40,824 Bitcoins. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts at the end of this report. 1 *Jefferies Hong Kong Limited This marks a watershed moment in GREED & fear’s view since the auditors approved MicroStrategy putting Bitcoin on its balance sheet as did the SEC. Now it is true that the far more famous Square also announced in October that it was investing US$50m in Bitcoin but that only amounted to 1% of the Silicon Valley company’s assets. Such a small investment probably did not even have to be reported but in MicroStrategy’s case that was certainly not the case. GREED & fear must admit to never having heard of MicroStrategy previously. But the company seems to have been investing in technology and software for 31 years. Since announcing its investment in Bitcoin, the company’s market capitalisation has risen by 131% to US$2.77bn (see Exhibit 2) and the value of its Bitcoin holding has almost doubled to US$917m. Intrigued by the motivation behind this investment, GREED & fear decided to do something GREED & fear seldom does. That was to listen to a “podcast” featuring an interview with the highly articulate CEO and co-founder of MicroStrategy, Michael Saylor. He is, by the way, no fast money operator since he has been a public company CEO for 22 years since MicroStrategy’s listing in 1998. Exhibit 2: MicroStrategy market cap 3,500 (US$m) MicroStrategy market cap 3,000 2,500 2,000 1,500 1,000 500 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Source: Bloomberg The most amazing revelation is that he only started to look at Bitcoin in 2019, which is a lot later than GREED & fear. He made the decision to invest the company’s funds in Bitcoin as a store of value in the spring after seeing the monetisation triggered by the Federal Reserve’s extreme policy response to Covid-19, and then was able to convince his fellow directors and get the lawyers and auditors to execute the process in a period of only ten weeks. Saylor views Bitcoin as the “ideal Treasury reserve asset”. But, more worryingly to people like GREED & fear who own gold, Saylor argues that Bitcoin is “destroying gold’s value proposition” because Bitcoin has “dematerialised gold”. GREED & fear has to admit that this argument has some real merit. GREED & fear has commented before on several occasions that ownership of gold and Bitcoin are not mutually exclusive and appeal to different generations (i.e. boomers and millennials). But gold bugs have to face up to the real risk that risk averse capital, which would have otherwise gone to gold to hedge the obvious ongoing fiat paper currency debasement in the G7 world, will now go to Bitcoin. In fact that process has already begun. Meanwhile the brutal fact is that since the policies of extreme currency debasement began in America, which GREED & fear will take from the commencement of quanto easing under Billyboy in late 2008, Bitcoin has outperformed gold by 177,000-fold (see Exhibit 3). It is also the case that the supply of Bitcoin is shrinking, under the quantitative tightening dynamic, which is certainly not the case with gold. 17 December 2020 2 Please see important disclosure information at the end of this report. Exhibit 3: Bitcoin price/gold price 16 Bitcoin price / Gold price 14 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Bloomberg This does not mean that GREED & fear is going to give up on gold. And the yellow metal should rally again if the Fed stays doveish in the face of the dramatic cyclical recovery that is coming on the other side of the pandemic, in line with GREED & fear’s base case. But GREED & fear is now going to do what GREED & fear should already have done since owning Bitcoin was first recommended here back in June 2019 (see GREED & fear - The dollar spasm, 27 June 2019), and since it became evident that institutional acceptable ways of owning Bitcoin were becoming available. That is to introduce an investment in Bitcoin in GREED & fear’s long- only global portfolio for US dollar-denominated pension funds, established at the end of 3Q02. The 50% weighting in physical gold bullion in the portfolio will be reduced for the first time in several years by five percentage points with the money invested in Bitcoin (see Exhibit 4). If there is a big drawdown in bitcoin from the current level, after yesterday’s historic breakout above the US$20,000 level, the intention will be to add to this position. Meanwhile there is no need for GREED & fear to apologise for the original investment in gold when this portfolio was launched at the end of 3Q02. It was made at the price level of US$323/oz. Exhibit 4: Recommended long-only asset allocation for US-dollar-based pension funds Weight (%) Investment type 45% Physical gold bullion 30% Asia ex-Japan equities, weighted according to the long-only thematic portfolio 20% Unhedged gold mining stocks 5% Bitcoin Source: Jefferies Returning to the more mundane subject of Federal Reserve mumbo jumbo, the latest Fed FOMC meeting on Wednesday indicated a slightly less doveish outlook as a consequence of the vaccine news. But GREED & fear is only talking about at the margin. The 2% inflation target is still projected not to be reached until 2023 while most Fed governors assume shot-term rates will remain near zero for at least three more years. GREED & fear repeats the point that by far the most important issue for financial markets in 2021 is how the Fed responds when presented with evidence of cyclical recovery, as pent up demand is unleashed on the other side of the pandemic. GREED & fear’s base case is that the Fed remains doveish even if only because the system cannot afford higher rates. But it will be hard for Pivot to admit to this. The goal of the Fed’s new forward guidance is seemingly to avoid the kind of market backlash that occurred in 2013, according to a Wall 17 December 2020 3 Please see important disclosure information at the end of this report. Street Journal article today (“Fed Reinforces Stimulus Will Be Open-Ended to Spur Recovery”, 17 December 2020). So far as GREED & fear is concerned, any hint of tapering will lead to a taper convulsion, not a tantrum. Investors everywhere need to understand this. Back in Asia, sentiment amongst foreign investors towards Korea turned much more positive this quarter as the focus turned to owning cyclicals. This was reflected in foreigners turning largescale net buyers of equities after having been net sellers for the preceding six quarters. Foreigners have bought a net W4.1tn worth of Korean equities so far this quarter, after selling a net W34tn in the previous six quarters (see Exhibit 5). The ironic point to GREED & fear is that foreigners entered the market after retail investors had been active buyers all year, a point which has been highlighted in recent months by Peter Kim, investment strategist at Jefferies’ new Korea research partner, KB Securities. Domestic retail investors bought a net W58.8tn in the first three quarters of 2020 and a further W5.4tn so far in 4Q20 (see Exhibit 6).
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