“But, rest assured, this will be the sixth time we have destroyed it [Zion], and we have become exceedingly efficient at it.” – The Architect, The Matrix Reloaded
The past week saw several dour crypto prognostications from market pundits and traditional market investors. First, in a piece titled “The Financial Market Surprises of 2023,” Standard Chartered warned that bitcoin could drop to $5,000 in 2023. Second, CNBC commentator Jim Cramer urged viewers to exit crypto, noting that XRP, Dogecoin, Cardano, and Polygon could possibly fall to zero. Third, famed emerging markets investor Mark Mobius warned that bitcoin could crash another 40% to $10,000 amidst continued rising interest rates.
If all that sounds apocalyptic, it is because it is, to us. Bitcoin has already fallen nearly 75% from its all-time high, on par with previous cycle drawdowns, plus it has fallen through its previous cycle high ($19,891.99 set in December 2017), something it has never done in its history. While not a comment on any specific crypto project, falling to zero in the case of Cramer’s comment, which amounts to killing off a cryptocurrency entirely, is something nearly impossible to do. Some of the oldest coins, ones with little to no development and economic activity, like Peercoin, Namecoin, Quark, and Feathercoin, continue to run as networks and trade on exchanges. While bitcoin may indeed fall further in price, given where we just came from in terms of the calamitous market events and price declines, doubling down on a pessimistic outlook seems to be looking in the rearview mirror rather than looking forward with an honest understanding of previous cycles.
Our analysis shows that predicting Bitcoin’s death has never been a profitable endeavor and if anything, predictions of its demise appear to be a contra indicator with the frequency of “obituaries” clustering around previous cycle troughs. The website 99bitcoins.com has chronicled 467 times in the media that Bitcoin has been declared dead, first starting at the end of 2010 when bitcoin was just a few cents, to the most recent at the end of November in a post by the European Central Bank.
Looking at the full time series of obituaries it is clear to us that predicting Bitcoin’s death at any time has been bad advice, purely for the simple fact that Bitcoin has never died. A more interesting area to explore we think, however, is the potential for investment signals to be informed by data from previous cycles. Our examination of previous cycles seems to indicate that obituaries appear to be clustered around cycle lows. Our best guess as to the reason for this is an availability bias, the heuristic that what can be immediately recalled, the recent price declines, are projected into the future.
The 2011 cycle can be described as having had very few obituaries written with most of those on personal blogs. The one notable exception was “The Rise and Fall of Bitcoin” written in the technology authority, Wired magazine, which still has value to a reader today. This article was published right at the bottom of the cycle. So, while the 2011 cycle bottom was not marked by a large cluster of obituaries, certainly the heaviest of them, the Wired obituary, stands out.
The 2013 and 2017 cycle bottoms look similar with large clusters of obituaries being written around the time of the price trough. Again, our best guess as to the reason is availability bias on behalf of the authors of those articles. If we were to devise an active strategy around this phenomenon, it would be to buy when the night appears to be the darkest from a public media perspective.
Which brings us to the current cycle which peaked in 2021. Looking at the frequency of obituaries written this cycle, we have yet to see the same volume of obituaries written or a big cluster signaling a bottom compared to the 2013 and 2017 peaks. Certainly, The Economist cover story is notable, as was the Bloomberg Businessweek magazine cover “In Ruins.” Perhaps the media has wised up to the fact that Bitcoin is here to stay or perhaps we have yet to see the moment that will incite journalists to declare its death. Certainly, the events around the collapse of LUNA/UST and 3AC in May and June and then again with Alameda and FTX in November were fodder for that type of journalism. Regardless of whether obituaries will mark a cycle bottom or not this time around, it has paid to be positive on the asset, especially after precipitous declines like the one we have just experienced.
Amidst the market volatility induced by the collapse of FTX and Alameda in November, bitcoin futures on the CME traded at a steep discount to spot price. The “basis”, the difference between futures and spot prices, measured here in annualized percentage terms on a rolling 1-month basis, can be indicative of investor positioning, funding rates, and margin costs, or dealer inventory. Our interpretation of the extreme disconnect between futures and spot prices is the dour outlook expressed by traders, a sign of bearish forward positioning. Given the normalization of the basis, it appears as if traders have softened on their bearish stance as bitcoin prices have leveled off and FTX-related financial contagion has yet to spread beyond a few affected firms.
One way investors can take advantage of dislocations without expressing a directional market view is to buy futures and to short spot bitcoin against it. Given that the FTX collapse embroiled a number of bitcoin lenders and market makers, one reason we think the basis collapsed to such levels and has persisted for so long has been the difficulty to locate a borrow on the short spot leg of the trade. Bitcoin borrows have been tough to come by and if they could be found were costly in terms of collateral requirements and costs. FTX was also a venue for offshore trading of perpetual swaps and futures and its collapse removed significant liquidity from the market. We do think that increased borrow costs and collateral requirements are here to stay, a byproduct of the damage sustained in the market this year, but perhaps the normalization of the basis is a sign of the internal structure of the market returning to some level of normalcy.
Last Friday, Binance Labs, the VC and accelerator arm of Binance, announced it had invested $4.5M in Ambit Finance to create DeFi applications for the BNB Chain, the blockchain created by Binance. The announcement was noteworthy for two reasons. First, the Ambit team includes members from the Anchor Protocol leadership, which was the app paying economically unsustainable rates (19.5%) to UST holders on LUNA. Second, Ambit is seeking to create a “yield-bearing BUSD-based stablecoin designed to provide sustainable yield throughout all market conditions.” BUSD, Binance USD, is an off-chain reserve-style stablecoin issued by Paxos and authorized by the New York Department of Financial Services. While there are no details about how a yield-bearing stablecoin might come to be, either technically or regulatorily, the yield aspect certainly invokes questions about US securities laws. On top of that, the guarantee that it would be able to generate yield through “all market conditions” is an assertion a bit too strong to comport with free market actualities. While we understand that investors liked the tech behind Anchor Protocol, our hope is that the crypto industry is not so eager to repeat the painful mistakes of the all too recent past.
Bitcoin staged a late-week rally on little fundamental news, taking the price through the $17K level, and ending the week up 1.7%. Equities fell on the week with the S&P 500 down 2.7% and Nasdaq Composite down 3.5%. Gold declined slightly this week, down 0.7%, and oil, which is now down on the year, fell 12.0% on the week. Bonds were mixed on the week with Investment Grade Corporate Bonds up 0.8%, High Yield Corporate Bonds down 0.8%, and Long-Term US Treasuries up 3.2%.
Green Eggs and Ham. DeFi: The Good, The Bad, and The Ugly - Allen Farrington and Anders Larson
Regulation and Taxation:
Brian Quintenz - a16z crypto's New Head of Policy - a16z Crypto
Binance Proof of Reserves Report - Mazars
Dec 13 - Investigating the Collapse of FTX, Part I - House Financial Services Committee
Dec 13 - November CPI Reading
Dec 14 - Next FOMC rate decision
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