DAIM Issue 14 - In It Together

September 26, 2022

September 21, 2022


1) Forecast

2) Hibernating Bitcoin

3) In It Together

4) New At DAIM

 

  1. Forecast - Negative news and reports make it tough to get excited about investing, but the best work is done by strategically deploying capital when others are running. Inflation continues to run hot and all indications show that another 75bps hike is on tap (with some probability of a 100bps increase) and strong conviction for at least one follow up of 75pbs.

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    On the crypto side, the Ethereum merge has come and gone, and network usage has not increased. Don’t expect that the change to Proof of Stake will automatically translate to increased usage and an elevated price. While new ETH issuance is now down drastically due to the mechanics of Proof of Stake, supposed supply constraint won’t have a meaningful effect on the price until demand picks up. If demand goes down the supply could increase. Either side of the demand pull could take a while to play out.

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    For the time being, we’re sticking with our 20-30k range for Bitcoin with a possible visit down to $15k. This is a great time to accumulate Bitcoin. If you loved Bitcoin at $60K you should love it at $20K. Don’t over think things here.


  2. Hibernating Bitcoin - We’ve lost count of how many times detractors have killed Bitcoin, and yet here we are. It’s safe to say that by now Bitcoin has cemented itself as a macro asset with its own cyclical nature. So what can we infer from Bitcoin’s cyclicality? Rewarding things actually. In its brief and volatile history Bitcoin has shown to have drawdowns and rallies that put conventional investments to shame. The last three cycles have had drawdowns of at least 70%. Despite all of that we are still up 20x from the first cycle peak. Are these cycles random? It’s possible given we are only dealing with 10 years of data, but we think it’s reasonable to look at these cycles in the context of Bitcoin’s halvings.

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    Halvings refer to Bitcoin’s block reward that goes to the successful miner that is the first to validate a block. The first block reward was 50 BTC and the reward gets cut in half about every 4 years, hence the term “halving”. The current reward is 6.25 units and in 2024 the reward will be halved again down to 3.125. From the chart you can see cycle peaks tend to happen closer to the preceding halving than the succeeding one. With increased adoption we see demand intuitively rising and the halvings continuing to be meaningful catalysts by constraining supply. When the reward halves, there is less newly mined Bitcoin that could be sold thus intuitively creating a constraint on supply. As buyer demand increases, price movements can be dramatic.

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    Does the long duration until the next halving mean we should stay away from Bitcoin and wait until the next halving nears? We don’t think so. Now presents a great opportunity to accumulate BTC (stack Sats). If you can commit to a Dollar Cost Averaging strategy, that would be beneficial. You don’t have to necessarily buy but having cash on hand at an exchange or held in a custodial wallet through stablecoins will present a significant advantage. The economy may be in a technical recession so there could be downside ahead but waiting too long and trying to time the bottom with money tied up in the legacy financial system could backfire. These relationships aren’t governed by mathematical laws and can change on a whim. The cycles could easily shorten and leave you on the sideline. Being invested is paramount. In particular focus your eyes on the chart below in the row that shows - Days from Peak to Trough and notice the past two cycles have had similar durations and compare it to how many days we are in now. One would be surprised how quickly you could run out of time and miss the biggest moves, which usually happen in the beginning.

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  3. In It Together - Digital Asset investors are not alone in their misery. Take a look at year to date (ytd) investment returns, courtesy of BlackRock. Through August 31st, commodities, due in large part to a global energy crisis, are the only asset providing a real yield. So how should you position a portfolio in this kind of an environment? Having an overweight to cash is a good bet given the uncertainty in markets right now. Using dry powder to take advantage of discounts should be the focus over being fearful. Time in the market has always trumped timing the market and that goes for holding through recessions as well. Make sure your portfolio is well diversified with broad exposures to many asset classes and focus on the long term. The more assets classes you have exposure to the more likely you are to have assets that are negatively correlated. This can help you rebalance through tough times. Today, for example, a forward thinking investor could benefit by taking profits in commodity linked assets and buying low on Bitcoin. The classic buy low sell high has never failed investors. It's just easier to do in theory than in practice.

  4. New At DAIM - We are managing a new blended portfolio of equities and cryptocurrencies for qualified clients looking to invest $1M or more. The portfolio will consist of the Nasdaq 100, an index of 2000 small cap stocks, and our crypto Model Portfolio. When incorporating cryptocurrencies with these types of indexes, one can create a new and very comprehensive investment portfolio. More here.

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