To Investors and Colleagues,
If March was not historic enough, April has continued to shatter expectations, models, and what many consider reality:
In a historic supply/demand debacle crude oil plunged from an April high of $30 all the way down to around NEGATIVE $40. While prices have since recovered they remain largely unprofitable for US production at these levels.
With an entire month on lock-down we saw unemployment rise by 30 million Americans (~20% of the workforce) between March 21st and April 25th.
Despite only being on lock-down for ~15 days of Q1, the quarter ended up contracting US GDP by 4.8%, making it the worst quarter since the peak of the Great Recession.
If this rather dark backdrop does not cause pause, this will:
We are in truly uncharted territory with a world in lockdown, civil and constitutional rights being put in question, and markets systemically failing when not propped up by Federal Reserve emergency powers (the propping up itself causing a flawed believe set amongst investors that every problem can be printed away).
This month we want to take a chance to unpack two long term paths Bitcoin is likely to take. They start with the same set up, but take vastly different routes. (Read in full below the fold).
It would also be amiss not to comment on the upcoming Bitcoin Halving. While the Bitcoin Halving is coming up in 12 days and highly significant over the long term, we believe that global macro forces at play currently are more powerful than a 1.7% annual inflation decrease.
We continue to be one of the few funds in the world that remains in the double digit green for 2020, and we like to keep it that way. In a year of uncertainty, we value risk management more than ever. Knowing this, Management added additional capital to their own investment in the fund. We’ll continue to go above and beyond to guide you through these uncertain times. If you ever have any questions, and perhaps need more guidance on how you can personally adjust to these economic conditions, feel free to reach out.
Felix Hartmann, Managing Partner
The Setup - The Dollar Wreaking Ball
To explore the future we must start with the present.
When we discuss the value of Bitcoin, it generally is in terms of US Dollars. BTC/USD is the most commonly traded cryptocurrency pairing.
Generally it is the BTC part of the equation that drives the motion, but for once we argue that it is the USD portion that deserves our undivided attention to understand the future of this currency pairing.
While everyone is worried about the Fed inflating the Dollar with their recent emergency measures, the reality is that for the last 10 years, the Dollar has been in a bull market.
While not noticeable against equities, it is glaringly obvious that the Dollar has been gaining strength when comparing it against essentially any other major global currency. Here for example you can see the Dollar rise against the British Pound, Japanese Yen, Euro, Russian Ruble, Chinese Yuan, Canadian Dollar, and Australian Dollar.
Why is this problematic?
Around 12 trillion Dollars worth of US Dollar denominated debt are held between foreign entities. That could be Japan owing the UK a US Dollar sum, that could be a Middle Eastern loan to an African or Latin American country, etc.
As the global economy contracts, investors sell off their assets and naturally buy into the Dollar. We saw this in March when the US Dollar’s strength spiked during the first market crash of 2020 (we say first, because we don’t believe it will be the last).
As the Dollar strengthens, foreigners watch as their outstanding USD denominated debt grows in relation to their own wealth. A 100mm USD debt held by a European could be paid off with around 66mm Euro around ‘09-’11. Today that exact same debt without any interest added would cost them ~90mm Euro due to the strengthening of the Dollar.
We entered a global deleveraging in 2020, as the ease of credit began to contract. The $12 trillion in credit held by foreign entities, however, need to continue to be serviced. And unlike any kind of domestic debt, which the Federal Reserve could find a creative way to take care off, these foreign entities can only do one thing: Print their own currency, sell it, and buy dollars. This in turn devalues their local currency, and strengthens the US Dollar further.
You’ve created a run on the Dollar.
And that Dollar is turning into a wrecking ball for economies globally, particularly emerging economies that must devalue their own currencies to service their debts. And even those without debts will seek safety in the only strong currency left or the papers behind it that its central bank has vowed to keep buying. The whole world will flee to US Dollars and Treasuries.
Bitcoin is the constant. The Fed’s choices are the variable. Let’s explore the two paths.
Path 1: Devaluing the Dollar
Summary: Fed chooses to stop the damage of the wreaking ball by inflating the dollar. Capital allocators and individuals alike will flee to store of values like Bitcoin and Gold. (Odds: 30%, Function: SoV)
Everyone loves this theory, yet we find it the less credible one (as much as we would like to).
As the wreaking ball does damage globally and causing the first local currencies to collapse, the wreaking ball causes several side effects:
US domestic equities rise as they are the only companies operating in a stable environment, attracting foreign capital more than ever.
Imports become incredibly cheap, while exports decline drastically as USD denominated products are now too expensive and uncompetitive.
This can in effect cause just as much damage to the US economy, even though the stock market may look great, but that has never been a good gauge for economic health as we learned this month.
So whether it is due to international appeal or out of domestic woes, the US may actually be encouraged to implement some SERIOUS devaluation efforts. Rather than a $2 trillion stimulus package, we would be looking at perhaps $20 trillion. It will take a lot to break the ever declining velocity of money and to help provide at least a fraction of liquidity to the $250+ trillion in global debt.
Historic inflation levels would lead to both cash and bonds being uninteresting. Corporate equity (stocks) would seem just as undesirable as the economy is facing historical GDP contractions due to the virus and lock-downs.
A safe haven asset would be needed more than ever. That could be Bitcoin. It has proven that it could survive the March crash and recover faster than any other asset. Short term volatile, yet long term stability and resilience.
In this scenario people would flood into Bitcoin and our previous estimates of $200,000 per Bitcoin would be fairly conservative, as growth in times of decline will attract more money from all over the world than anyone could imagine. Especially when money is printed by the trillions. Those trillions have to go somewhere.
Bitcoin could secure it’s spot as a safe haven asset for good.
From a charting perspective this theory gains legs when Bitcoin manages to break above $11,000, breaking out of its 3 year resistance. Before that we still find ourselves in a macro bear market.
Path 2: The Reign of King Dollar
Summary: As the Dollar strengthens, all global assets decline in one worldwide flight to the Dollar. Bitcoin first declines alongside all global assets. As local currencies around the world begin to collapse, locals need an alternative. Banking and bureaucracy make it hard for locals to get their hands on USD, so Bitcoin becomes an unofficial global currency in various parts of the world. (Odds 70%, Function: Globally Accessible Currency)
Let’s call it as it is. At the present moment (though that could change at any time), Bitcoin has a near perfect correlation to US equities from February until May. Below see Bitcoin in green and the S&P 500 in red.
As a Bitcoiner I don’t like this. As an asset manager, however, there is no good or bad information. Information is simply that: information.
Until Bitcoin properly decouples from equities we can expect it to mirror the stock market with a dash of extra volatility. That’s not a bad thing if you are on the right side of the trade.
In an environment where the dollar gains more strength while the economy is bleeding from the lock-downs and unemployment is sky high, we can expect long continued sell-offs of nearly every single asset the world has to offer, just like we saw in March. Equities, commodities, currencies, crypto, real estate… nothing was spared from the USD rush in March. Wealth effects, both positive and negative cannot be underestimated.
From a charting perspective we see Bitcoin legging down to previous lows or even lower for a brief period. This can be the greatest opportunity if played right and if strongly allocated to.
At the same time as this would happen, many economies around the world would fall into a tailspin, especially outside the first world. As local currencies collapse, people would be liquidating their wealth into any kind of stable currency they can get their hands on. They will also start working for that currency and accepting payment in it. With poor or highly controlled banking infrastructure, many people won’t have access to traditional currencies like the Dollar or Euro. The local government wouldn’t want that, as history has shown. However a currency that knows no borders is different. Bitcoin has found it’s way into the hardest parts of the world to penetrate from China, to Cuba, and even the International Space Station.
This would be the most real sense of adoption and one of the most compelling paths to global adoption, albeit dark without a doubt.
In such an event Bitcoin could quickly rise from the ashes of the global liquidity crisis sell-off, and make itself a name as the money of the people, as most currencies got destroyed by governments. As organic demand drives prices, it would not be long before capital allocators will see this trend and jump in on the action.
Though this path makes Bitcoin live through yet another drop, I believe this path will lead it to much grander success and adoption than we could have ever imagined. It would also be the call to arms to serve the purpose it was created for.
Two Paths, Two Futures
Whether Bitcoin will go into history as a global store of value or as the global currency of the people, may be soon be determined. Which path it will take is still uncertain. For that we will keep a close eye on both the Fed and the charts. We can’t force either path, but merely follow it and be on the right side of the trade. At the end of it all Bitcoin is likely to be much bigger than even we imagined.
One thing is certain though. We are currently living through history. And though many may not know it yet, Bitcoin will end up playing a much larger role in it than most could dare to imagine.
DJI - $23,723
S&P - $2,831
BTC - $8,922
For questions reply via email or write me on twitter @felixohartmann
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.