El Salvador, Inflation, and MicroStrategy
Hartmann Capital Newsletter, Friday 18th June, 2021
Welcome to the Hartmann Capital Weekly,
As both the market and our firm are maturing, a monthly update simply cannot cover all that is happening in this rapidly evolving asset class. As a result we hired a Head of Communications last week and will be providing both weekly deep dives as well as newsletters to keep you informed on both the markets and our firm.
Should you wish to just receive our monthly deep dive analyses, as I know we all get busy, you can adjust your subscription status at the bottom of the newsletter on whether to receive weekly, monthly, or both.
All the Best,
Felix Hartmann, Managing Partner
Hartmann Capital Weekly written by Head of Communications, Rasheed Saleuddin, PhD, CFA
In this issue
Bitcoin becomes legal tender in El Salvador
The Fed speaks: Is inflation going to be a problem?
Paul Tudor Jones doubling down on BTC with 5% position as inflation bet
Michael Saylor and MicroStrategy raising capital for new Bitcoin purchases
This week’s blog: “Value + Catalyst = Risk-Adjusted Alpha”
Hartman Capital’s new Head of Communications
Market by numbers
Though down on the week, the major crypto assets stabilized to remain up on the year.
Bitcoin becomes legal tender in El Salvador
Fears of a prolonged bear market in crypto were temporarily swept aside last week by several bits of very good news for cryptocurrencies, particularly Bitcoin.
The most bullish news actually arrived last week: The adoption of Bitcoin (BTC) as legal tender in El Salvador on June 8th.
Under the new law, set to go into effect in 90 days, citizens will be able to settle transactions with merchants in Bitcoin on the Lightning Network, and can choose to pay or receive BTC or tokenized USD. The El Salvador government will provide a swap facility between the two options. The move is very controversial for a variety of reasons, but it cannot be denied that it is a huge first step towards Bitcoin’s acceptance and adoption by all governments. In a sovereign nation, Bitcoin is at the same level as the US dollar.
As legal tender, Bitcoin capital gains cannot be taxed. This makes paying in crypto more frictionless than in, for example, the US, where paying in BTC is a tax event.
For those interested in understanding more about this historic event, we recommend listening to Nic Carter on Bankless here.
Fed foresees rate increases earlier than expected
It was bound to happen, and the market was mostly ready for it. Inflation had been creeping up, of course. But it appears the Fed has new worries. Though the Fed insists that inflation, currently running at 5%, will be transitory, Fed Chair Powell guided the market to expect two rate hikes by the end of 2023.
The rapid improvement in US economic conditions is driving expectations for small rate increases in the future. On the other hand, commodity price inflation already looks to have abated, and most observers believe that the inflation surge will be temporary.
Reading between the lines, however, the Fed seems to be worried about the potential for spiraling wage inflation, with the Chairman saying he expects
“a labor market with ... rising wages across the spectrum.”
Wage inflation is worth watching. Rapidly rising wages quickly feed back on themselves. Though food and energy shocks were key drivers of the US inflation of the 1970s, rapid increases in wages drove core CPI higher in the 1970s, to 12.2% in 1974 and 13.3% in 1978.
Persistent inflation should be beneficial for fixed supply and productive crypto assets priced in USD, such as Bitcoin. On the other hand, higher rates might lead to less demand for speculative assets, so a negative for coins with no immediate economic value.
Paul Tudor Jones doubling down on BTC with 5% position as inflation bet
One investor who believes inflation is back is Paul Tudor Jones. The famous and wealthy hedge fund manager had already put 2% of his funds in BTC, but revealed this week that he had more than doubled the allocation to 5%. While he said in an interview on CNBC on Monday that the market outlook was uncertain, he was confident about his exposure to inflation-proof assets:
“The only thing I know for sure is I want to have 5% in gold, 5% in Bitcoin, 5% in cash and 5% in commodities.”
MicroStrategy (MSTR) raises funds to buy more Bitcoin
Michael Saylor must be considered the original laser-eyes Bitcoin maximalist. He has already turned his SaaS company into a Bitcoin hedge fund of sorts, having used the proceeds from two bond issues to buy Bitcoin for MicroStrategy’s balance sheet.
While still focusing on the company’s core business, it’s no secret that his goal is to turn MSTR into a leveraged Bitcoin ETF. In his own words,
“Your ETF won't be able to buy billions of dollars at low interest rates and leverage up. So to the extent that the investors feel the management team knows how to manage leverage and manage the core business, then we should get a premium against an ETF.”
Adding to the positive energy surrounding El Salvador, Michael Saylor made the news twice recently by announcing a new $500 million bond issue, to be used solely to purchase Bitcoin, and a $1 billion equity shelf offering that could be used to buy even more Bitcoin.
The bonds, carrying a 6.125% coupon and due in 2028, were 4x oversubscribed. The new shelf offering allows MSTR to issue new shares on demand. The bond proceeds alone could take MSTR well above the 100,000 BTC mark at today’s prices.
As a comparison, the largest investment trust, Greyscale’s GBTC holds 655,785 BTC.
Value + Catalyst = Risk-Adjusted Alpha
This week’s blog describes in detail four trades that have brought risk-adjusted alpha to investors. We show that identifying value in these markets is not always enough. It is especially important with short trades that there be a near term catalyst that will force others to agree with our thesis, and bring the price back in line with our valuation.
Announcement - Hartmann Capital brings on a Head of Communications
We are excited to announce that Rasheed Saleuddin, PhD, CFA has come on board as Head of Communications for Hartmann Capital. Rasheed is also an academic at the University of Cambridge’s Centre for Alternative Finance and writes occasional research pieces for the crypto investment portal, Messari.io. He previously founded and ran a structured securities hedge fund at Canadian manager, West Face Capital.
Disclaimers:
This is not an offering. This is not financial advice. Always do your own research.
Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.