Bitcoin Rallies As Liquidity Improves, SEC Finally Approves Options Trading for IBIT ETF, NYDIG Founder Says Bitcoin is Protected by the First Amendment
News Block #55 (09/26/2024)
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Bitcoin Rallies As Liquidity Conditions Improve
You may have heard Bitcoin described before as a “liquidity sponge,” given how closely its price seems to move with changes in global volumes of financial flows.
When central bankers and governments open the floodgates and liquidity pours into the market, Bitcoin seems to ride that wave harder than any other asset.
This held true over the past week after the Fed decided to cut interest rates by 50 basis points. Fed Chairman Jerome Powell said, “The time has come” for the Fed to adjust its monetary policy, making borrowing cheaper for households and businesses. And more borrowing means more money—aka liquidity—entering the system.
Since the Fed announced the rate cut, Bitcoin has risen faster and higher than any other asset. It’s up more than 6%. The next highest is gold at 3.3%.
Hard money appears to be sniffing out more currency debasement coming down the pipeline. Historically, Bitcoin has been a great barometer for the pumping or draining of liquidity in the market. When liquidity rises, Bitcoin tends to thrive. When liquidity falls, Bitcoin tends to suffer.
Sam recently collaborated with Lyn Alden on research that dove deep into the relationship between Bitcoin and global liquidity. They found that Bitcoin has moved in the same direction as global liquidity for 83% of the time in any given 12-month period since 2013, higher than any other major asset class.
Even though I see Bitcoin as risk-off – the market at large tends to still see it as the opposite – and risk-on assets do well in pro-liquidity environments because many investors are more willing to go for high-risk, high-reward investments. When liquidity tightens, investors dump risk-on assets and flee to safety in assets like bonds and gold.
This is why stocks and Bitcoin have historically been more closely tied to liquidity compared to bonds and gold.
But with stocks – other factors outside of liquidity drive their performance – things like earnings and dividends. On top of that, stocks enjoy passive inflows from retirement accounts which can buffer valuations even when liquidity declines. Therefore, stocks are less directly tied to liquidity conditions compared to Bitcoin.
Jack Mallers has described Bitcoin as a pure expression of currency debasement, which this research supports. Because of this, Bitcoin can be thought of as the last functioning smoke alarm in the system, as Luke Gromen likes to put it.
Today, central banks around the world are cutting rates. Just this week, China’s central bank unveiled the most aggressive stimulus package since the pandemic. All of this points to liquidity going up, and given what we know about Bitcoin (including the fact that it’s a truly global asset, available everywhere 24/7), it’s likely to go up with it.
In the end, I’m not sure if there’s anything more bullish than knowing that Bitcoin benefits more from central banks printing money than any other asset. If there’s one thing I feel certain about, it’s that those in charge will continue to debase their currencies, and this will only serve as a tailwind for Bitcoin’s price moving forward.
SEC Approves Options Trading for Bitcoin ETF
There was another development this week that could increase liquidity in Bitcoin beyond the Fed cutting rates. On Friday, the SEC approved options trading for BlackRock’s Bitcoin ETF. This approval has many people excited. Why?
Institutional investors often use options to manage risk. Let’s say a firm wants to make an allocation to Apple, say $1 million worth. A common strategy is to simultaneously use a fraction of that amount to buy some put options on the stock to hedge their position to protect themselves against any downside. If Apple’s stock goes down, the value of their put options goes up, offsetting the loss.
For this reason, some people believe that the lack of options available has stopped some institutional investors from making large allocations to the Bitcoin ETFs or has prevented them entirely from pulling the trigger. But now that they will have options available to hedge their position, people believe this could change things and lead to more institutional adoption.
But there’s one other dimension to these options to consider, and Bitwise’s Jeff Park explained it well in an informative post:👇
Do you remember the whole Gamestop fiasco? An army of retail traders bought up a bunch of call options, causing the stock price to shoot up, and then some hedge fund short sellers were forced to buy back their borrowed shares to cut their losses, which only caused the price to shoot up even more. This was the epic short squeeze, and there was a whole Netflix movie made about it.
During that drama, regulators tried to stop it from continuing. The Gamestop army learned about the risk of centralized institutions the hard way. The regulators first tried to stop the volatility through a series of trading halts, and then brokerages like Robinhood even restricted their users from buying Gamestop stock. Gamestop was halted by a legacy backstop.
In addition, just this past summer, Gamestop–the company—responded to another short squeeze by issuing 5 million new shares. This increased the supply of the stock, dropping the price and killing the short squeeze’s momentum right in its tracks.
Jeff’s point is that these tactics are impossible with Bitcoin. No company can issue more Bitcoin if its price suddenly spikes. And if Bitcoin’s volatility rapidly increases, the market can do nothing to stop it from trading.
Wall Street is about to find out what happens when a fixed-supply, decentralized asset meets regulated leverage for the first time, which, as Jeff puts it, could be “unbelievably fantastic.”
Bitwise CIO: “The Most Powerful People in Finance are Allocating”
2024 has been a year in which Bitcoin is growing up. The Bitcoin ETFs have ushered in a new era in which Bitcoin is becoming broadly accepted by Wall Street.
Just last week, we learned that BNY Mellon—one of the oldest banks on Wall Street—has likely been granted approval from the SEC to custody of Bitcoin on behalf of its clients.
We got some more anecdotal evidence of tradfi embracing Bitcoin from Bitwise CIO Matt Hougan, who recently gave a presentation at the Barron’s Advisor 100 Summit. This summit features the top-ranked financial advisors in the U.S.
Hougan mentioned that each year he asks the room what percentage of them personally own Bitcoin. Last year, he estimated 10 to 20% raised their hands. This year? He estimated that 70% of the financial advisors raised their hands! 70%!
Hougan went on to say that one thing he’s learned from working with advisors is that they always allocate to their personal accounts first. Client allocations typically follow about 6 to 12 months later.
Financial advisors manage tens of trillions of dollars in assets. If Hougan's prediction is true, then it’s only a matter of time before these advisors begin to educate their clients on how Bitcoin can help them reach their financial goals.
As Hougan says, “The most powerful people in finance are allocating to Bitcoin,” and if there is one thing I’ve learned talking to a lot of people in Bitcoin, it’s that the more knowledgeable one gets about Bitcoin, the greater their allocation to it becomes.
I don’t know if anyone is prepared to see this dynamic play out in financial advisory firms all across the country.
NYDIG Founder: “Bitcoin’s Protected by the First Amendment”
Despite the growing acceptance of Bitcoin on Main Street and Wall Street, Bitcoin still has its detractors. This week, comedian Bill Maher claimed on his show that crypto accounted for 8% of the world’s electricity use and that it is sucking away all the progress made by green energy policies.👇
The Internet was quick to correct him. His tweet was “community noted,” and his misinformation was called out.
Ignorant celebrities are one thing, but ignorant politicians and regulators are another entirely.
In recent years, Bitcoin has faced some hostility from elected officials and regulators in the U.S. NYDIG Founder and Executive Chairman Ross Stevens wrote a fantastic article that I recommend everyone read. The article calls out these individuals for failing to consider the First Amendment implications of targeting Bitcoin.
Stevens writes, “Bitcoin implicates the First Amendment. As a system for collecting and communicating information ranging from payment data to art, bitcoin is speech. As a statement of protest against the government’s monopoly over money, bitcoin is expressive conduct. And as a collection of individuals that share bitcoin’s hard-coded principles of individual liberty, anti-censorship, and anti-debasement, bitcoin is an expressive association. Bitcoin is free speech protected by the First Amendment and therefore regulating bitcoin has clear constitutional implications.”
Bitcoin is a peaceful protest against the manipulation of money, one of the biggest problems facing the world today. Instead of carrying picket signs or marching in protests, we protest the current system every time we stack more sats. And we will continue to do so until we have a more ethical monetary system underpinning our economy and society.
Until next week, keep stacking.
- Sam & Nat
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NEW: Greg Foss Comeback Conversation: Bitcoin Price Moves, Macro Outlook, Life Lessons and Losses
In this episode with Greg Foss, we discuss:
- Greg's time away from the public Bitcoin space and lessons learned along the way
- Bitcoin progress over the last year and where we may go next
- Bitcoin price a reflection of fiat debasement
- Macro outlook and reaction to Fed rate cuts
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