Bitcoin Blooms in the Autumn

ATOMIC 101;

After a hot and dry summer on the blockchain, autumn is here. This is historically the season when Bitcoin blooms, with the highest average return by far, whether measured by median or mean.

ByteTree ATOMIC

Analysis of Technical, On-chain, Macro, Investment Flows and Crypto Stocks.

Highlights

That said, the fourth quarter hasn’t always been kind to Bitcoin, as in 2018, it fell 44%.

Bitcoin Returns by Quarter USD %

At least Q4 2018 marked the end of a brutal bear market, in which the price of Bitcoin fell 83.2% from $19,041 to $3,156. The other bear year was 2014. Notice how October was not that bad, even in the bear years. And more often than not, it has hosted some spectacular rallies.

Bitcoin Performance in October, November and December over the past 10 Years

Seasonality is never something to bet the ranch on, but this October could be a good one. 2024 is a halving year, just like 2016 and 2020. Both times saw a summer lull followed by an autumn surge.

Putting ten years of Bitcoin daily performance together, we can see what a hypothetical average year looks like. Bitcoin peaks in March and takes the summer off. The good news is that Uptober is just days away. Fingers crossed.

Bitcoin Seasonality

Technicals

The 200-day moving average has flattened, but the short-term trend is fighting back. The chart doesn’t look that good, but Bitcoin is putting up a fight that keeps on smacking into resistance. With halving in April, the new supply is much lower than ever before, but still, it seems the selling pressure exceeds the inflows. For a breakout, Bitcoin needs a catalyst.  

Bitcoin 4/5 ByteTrend Score

I have long argued that the big money will come when mainstream investors board the train. However, to motivate them, they need to see excess returns without additional risk. Currently, the S&P 500, and big tech in particular, has made life easy for asset managers as the index has done a good job while they simply watched. But if that were to stall, and Bitcoin proved resilient, then money would shift across. How much are we talking? The Magnificent 7 (Apple, NVIDIA, etc.) are worth $14.4 trillion, and the NASDAQ, $23.6 trillion. Just a small piece of that, less than a percent, would see Bitcoin blast to new highs.

The chart shows that Bitcoin and the Mag 7 have delivered similar and correlated returns since 2019, as shown by the purple line. It started at $100 and is now $117, so Bitcoin is slightly ahead. Bitcoin is obviously more volatile and therefore deemed to be riskier.

Bitcoin and the Magnificent Seven

But now that options have been approved for the Bitcoin ETFs, Bitcoin’s volatility will continue to fall. Bitcoin volatility has already fallen a great deal over the years and is now in line with a cyclical blue-chip stock. As it falls further, it will be deemed to be less risky, which will draw in more institutional investors, which will, in turn, drive the price higher. This is a positive feedback loop, or what George Soros would call Reflexivity.

Bitcoin Volatility to Keep Falling

Investment Flows

The other piece of good news is how the Bitcoin ETF flows have turned positive after a two-week stall. iShares Bitcoin (IBIT) grew by $300 million this week, and I only include up to Wednesday. With Grayscale (GBTC) outflows slowing, the money is returning.

Bitcoin Held by ETFs

Let’s not forget MicroStrategy (MSTR), which now holds 252,220 BTC, which is 1.27% of the total supply (19,759,125 BTC). Michael Saylor has been making the most of the company’s 137% premium to issue convertible bonds, which deliver cheap financing, to accumulate more Bitcoin.

MicroStrategy Bitcoin Holdings

I have always been uncomfortable with MSTR’s premium because you can just buy Bitcoin for no premium. I would think the MSTR is fuelled by the Bitcoin ETF ban in places such as the UK. If this ban were to be lifted, I would think the premium would come under pressure. That said, I believed GBTC becoming an ETF in the US would have a similar effect, but it hasn’t.

The bulls think MSTR sits in a special place because it can issue debt to buy Bitcoin, and the ability to control a large stash will be valuable. But I keep coming back to the simple point that the MSTR Bitcoin per share only increases with debt issuance, not with equity issuance. And too much debt is a risk. MSTR tracks Bitcoin, but there is no alpha.

MicroStrategy Bitcoin per Share

In any event, while Bitcoin’s spirits are high, the premium has no catalyst to decline, making it a reasonable Bitcoin proxy for the time being.  But when (if) the UK’s FCA changes the rules, the global shadow ban on Bitcoin will be lifted. That will be Christmas for Bitcoin, but I cannot see how that would be good for MSTR’s premium.  

On-chain

The Bitcoin Network Demand Model scores 2 out of 4 and remains stable. The level of fees is easing back, which is great for network competitiveness, but fees and the price have been closely linked. The number of transactions has fallen, and fees are down.

Bitcoin Average Transaction Fee

In years past, fees were one of the most accurate forecasters of the Bitcoin price as they were a clean measure of demand. They are still linked, but these days, the network is more resilient than in yesteryear. Perhaps we can call that progress.

Bitcoin Weekly Fees ($)

Nowadays, the most important on-chain measure is the monetary network, which is growing again after a summer lull. As the money comes rolling in, there’s only one way for the Bitcoin price to go, and that’s up.

Bitcoin Fair Value

Yet things keep changing on the blockchain. With greater adoption of software upgrades such as SegWit, the blockchain has become more efficient, and fees have cooled. This compresses the size of each transaction, allowing more transactions to fit in each block. There was a craze in ordinals earlier this year, which are effectively tokens on Bitcoin’s blockchain. That means that a transaction can take place on the most secure and decentralised blockchain, Bitcoin, as opposed to Ethereum, which some say is controlled by Blackrock.  Such as…

Ordinals with Gold

Jeremiah Josey of The DEFI Gold Ecosystem got in touch to tell me how he uses Bitcoin ordinals to enable transactions for his gold tokens. These aren’t gold tokens as such but a promise of gold that is still in the ground, which will be mined in due course. In other words, clients become gold streamers who fund the mining process in exchange for the delivery of cheap gold at a later date. The usual mining risks apply, such as solvency, price and operational challenges.

Josey used tokens to embrace their natural advantages. There are exchanges where they can be traded, which provide a data feed that can find its way around the world. Interestingly, he didn’t want the tokens to sit on Ethereum or other platforms but on Bitcoin as ordinals. This would give them the same security as Bitcoin, which is fully decentralised.  

Hypothetically, a mine could have a token, and just as a company’s bond price reflects credit risk, its streaming token prices would reflect operational risk. If that risk was low, the tokens for that mine would appreciate and be as good as gold itself. For those mines that never quite deliver, the tokens would slump and become illiquid. If this data became widespread, it would add a new dynamic and greater transparency to analysing the gold mining industry. I am in no way endorsing the project, but I was interested in the concept as it is another interesting application in this space.

Macro - Printer Go Brrr…

Bitcoin likes a weak dollar, and, using aggregate purchasing power data, it appears to be overvalued. Historically, that has happened when monetary policy has been tight. Today, we have a rich dollar, and the rate cuts have begun. In 1985, 1990, 2001, and 2008, lower rates saw the dollar sink, especially when the valuation was high. The US dollar faces a double death, which will be support for Bitcoin, just as it was during the surges of 2013, 2017 and 2020. Bring on the surge.

The Dollar Valuation by PPP with Rates

Bitcoin also likes a vibrant economy and high liquidity in financial markets. I can’t be sure about the economy, but the printing presses are whirring not just in the USA but also in China. Notice how the money supply has been flat for three years since the pandemic helicopter drop.

Global Money Supply – Since 2003

I would add that the 20-year chart is at the bottom of the range, as it is near the lower green line. If it were to rally to the upper band by 2030, that would imply a 12.5% IRR from here. Bitcoin would return a multiple of that under such circumstances. The good news is that we’ve just had the breakout. More money is coming.

Global Money Supply – Since 2022

But it’s not just Bitcoin that likes freshly printed money. There’s also gold for the more conservative investors and ByteTree’s preferred place in the middle, BOLD.

BOLD

Gold has been doing so well recently that it’s not far behind Bitcoin, which is remarkable. But for the reasons I have laid out, I would think it’s now Bitcoin’s turn to grab the baton after a period of consolidation since the spring.

BOLD ETF – Listed on 27^th April 2022

While BOLD hasn’t outperformed Bitcoin over the period, it has kept up and is slightly ahead of gold too. But when you look at the volatility, it has been remarkable. The return for the risk taken, the Sharpe Ratio, is off the scale.

This is real-life data from the like-for-like ETFs, and I am pleased to inform you that with assets comfortable above $10 million ($11.1 million today), the fee has been cut from 1.49% to 0.65%.

If you want to learn more about BOLD, please visit the BOLD.Report website and follow our feed on X.com, LinkedIn and other social accounts.

Summary

After the summer lull, Bitcoin is in a much stronger position. The flows are improving, the dollar is weakening, and the money supply is rising. The blockchain could be stronger, but that will come if the other factors can drive the breakout.

Charlie Morris is the Founder of ByteTree and Editor of ATOMIC. Fascinated by the emergence of a new asset class, but unsure how to make sense of it, he started to analyse the Bitcoin blockchain in 2013.

Charlie has 25 years of fund management experience and is a pioneer of multi-asset investing. At HSBC Global Asset Management, he launched the Absolute Return Service in 2002, which grew to over $3 billion. Much of that success came from moving away from the crowd and embracing a wider range of asset classes that traditional investors were not familiar with at the time.

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