1. Overview - September brought a 50bps rate cut from the Fed that provided a much-needed shot of energy to digital assets. Bitcoin is up 10% since the rate cut was announced and up about 20% from the month's low of $53,300. If past cycles are any indication, things are about to get good. October through December was a great time to hold after previous halvings. 2012, 2016, and 2020 saw an average return of 78% during those months. With global liquidity easing and bitcoin being a widely accessible asset, the outlook for bitcoin and the broader crypto market appears strong for Q4.2.
2. Liquidity - Like many in the broader investment community, we believe that improving liquidity conditions in the U.S. and globally are paving the way for a rally in risk assets. The data out there is abundant, and it gets analyzed from all angles, whether you create your own index or look at central bank rate cuts. We prefer to look primarily at the year-over-year change in the M2 money supply in the US. As a reminder, the M2 money supply includes a broad range of extremely liquid assets, namely currency, savings & checking deposits, CDs, and money market funds. These are funds that people can use immediately to buy goods, services, and assets. Goods and services are first on the list as those items necessary for day-to-day living needs. After that, the rational person would spend their excess liquidity on assets. The more excess liquidity, the more money that can flow into assets. And if the assets are scarce (like bitcoin!), this influx of excess liquidity can have a pronounced effect on the price of said assets. In fact, the effect has had a strong positive correlation to digital asset prices.
Looking at the charts above, you can see the strong relationship between profound changes in the money supply and the price of bitcoin. In March 2020, amid the COVID panic, the US government crashed interest rates to zero and gave out stimulus checks to individuals and businesses. Bitcoin crashed to $5,000 at the onset of the panic. By the time the excess liquidity had found its way through crypto, we were almost to $70k btc.
Since then, the money supply has contracted, and the fed funds rate went from 0% to 5%. Despite these austerity measures, bitcoin returned $70k this year. And now we are in a place where favorable monetary conditions are appearing at a historically sweet spot for bitcoin six months post-halving.
As interest rates continue to come back down and the monetary supply expands at a more rapid pace, the need to seek out assets to protect one's net worth will be important for investors. Not only is bitcoin the hardest asset out there but access is not like it was four years ago. In 2020, you need a deep level of crypto knowledge to buy spot bitcoin and ethereum. Now, investors can simply press a button on their brokerage website/app and get spot exposure to the two largest crypto assets. The amount of capital that retail can easily allocate gives bitcoin an asymmetrical upside that has been present so often in its short history. It looks like the timing is right once more. At DAiM, we’re taking advantage of it.
3. AI - As our clients are aware, last month we made an allocation to Fetch.ai (FET). Bryan was recently on X / Twitter Spaces discussing Fetch.ai and the future of AI crypto. The space was hosted by Jon King. Jon is the creator of Chart Wizards and a long-time client. Bryan has also been on Spaces with Jon King and Peter Brandt. He was gracious enough to have Bryan back on to talk about the fundamentals of FET and AI tokens while Jon let us know what the charts say. Here is the link to the recording. If you like technicals, it’s worth following Jon King on Twitter and subscribing to Chart Wizards.
4. DAiM Performance