Fed Cuts Rates, Trump Becomes First President to Make Bitcoin Transaction, Trump Family Launches DeFi Platform, Bhutan Mines 13,000 Bitcoin
News Block #54 (09/19/2024)
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A New Fed Cutting Cycle Has Finally Begun
On Wednesday, the Federal Reserve cut rates for the first time since March 2020 by 0.50%.
This cut comes after the Fed hiked rates eleven times since March 2022, one of the fastest hiking cycles in history. In the end, the Federal Funds rate went from zero to 5.4%.
But now – a new Fed cutting cycle has begun.
On Wednesday, the market briefly rallied on the belief that a rate cut means asset prices will soar. The idea is that since it’s a little cheaper to borrow, more people and corporations will take out loans. In a credit-based economy, more loans mean more money flowing into the economy and financial markets. The more money that flows into houses, stocks, bonds, you name it, the higher their prices go.
But is this what we should expect to actually happen?
Many expected that the Fed hiking rates would cause a deep recession, but that never transpired. Some, like Lyn Alden, have theorized that this is because so many individuals and corporations took advantage of the low rate environment for so many years. Who cares if rates spike if you locked in a 30-year mortgage at 2.5% or your corporation has low-interest rate loans termed out all the way to 2030?
If hiking rates didn’t have much of an impact on things, perhaps cutting rates won’t either. Even the Wall Street Journal says that bringing rates down to a level at which households and businesses would really feel the change will “require a lot more than one or two rate cuts.”
The Atlanta Fed estimates that rate cuts will not really stimulate the economy before they are brought down to around 3.5%.
That being said, it isn’t size of the initially rate cut that really matters, it’s the trend.
What the Fed is signaling to markets here is that it’s becoming more accommodative. This comes after central banks around the globe have already begun cutting rates, including the Bank of Canada, Bank of England, and European Central Bank.
Generally, central banks cutting rates means that global liquidity conditions are improving, and if there is one thing that Bitcoin loves…it’s liquidity. Historically, Bitcoin’s price has closely tracked different measures of global liquidity.
Natalie recently had two guests on Coin Stories, Jim Bianco and Mark Moss. Both gave valuable insights about the current macro backdrop and how rate cuts could impact Bitcoin. I recommend you give them both a listen.
Although we probably won’t feel the effects of these rate cuts for several months, the message is clear…central banks are letting their foot off the brake, and whenever that happens, Bitcoin tends to accelerate.
MicroStrategy Buys Another Billion Worth of Bitcoin
MicroStrategy is one company that has contributed to accelerating Bitcoin corporate adoption more than any other, and they were at it again this past week.
The first piece of news was MicroStrategy's announcement that it had bought another 18,300 bitcoins for $1.1 billion.
Then, the company kept the momentum going when it announced another $700 million convertible debt offering, which was actually upsized to $875 million due to strong demand. But this time, these funds won’t only be used to buy Bitcoin. More than $500 million of the funds will be used to pay off some of its existing debt. Why?
Well, MicroStrategy had $500 million in secured debt with an annual interest rate of 6.125%, by far the highest rate among its outstanding debt.
What makes it a secured loan versus an “unsecured loan is that the bitcoin bought with these funds is used as collateral for that debt.
MicroStrategy likely wants to pay off this debt for two reasons…
Firstly, the interest rate on the new convertible debt is only 0.625%, much lower than the 6.125% they’re currently paying on the other loan. By paying off the more expensive loan, MicroStrategy will reduce its annual interest payments by nearly $25 million. Instead of having to make these interest payments, MicroStrategy will now have more cash on hand to stack more Bitcoin.
Secondly, once they pay off this debt, the Bitcoin they bought with it will become “unencumbered.” This means that MicroStrategy will gain full control over Bitcoin and that it will no longer be tied to any debt. In a secured debt agreement, the creditor can technically seize the collateral. Once MicroStrategy pays this off, that will no longer be the case.
Before these actions, 78% of the company’s Bitcoin was unrestricted. Now, that number is higher.
This just goes to show you how far ahead MicroStrategy is compared to other companies when it comes to understanding the real game everyone is playing, whether they realize it or not: “How much of the 21 million Bitcoin pie can I own?”
MicroStrategy is using leverage intelligently to stack more Bitcoin by actively managing its existing debts, decreasing its interest expenses, and ultimately increasing its Bitcoin holdings.
It’s only a matter of time before other companies catch on to MicroStrategy’s brilliance, but until then, the company will continue to enjoy its first-mover advantage.
A smaller publicly traded Bitcoin miner, Cathedra Bitcoin, recognizes this and has decided to pivot the direction of the whole company on this basis. In a memo, Cathedra noted that bitcoin mining has not been a good way to increase their bitcoin holdings, citing that 9 out of the top 10 publicly traded bitcoin miners hold less bitcoin per share than they did three years ago. They will now diversify their revenue streams to change this.
The company wrote, “Bitcoin was among the top performing assets of the last decade, and we expect comparable performance in the coming decade. Accordingly, our primary goal is to accumulate bitcoin on behalf of our shareholders, and in recent months we have heard repeatedly from many of our largest shareholders that growth in bitcoin per share is the most important performance metric to them. Going forward, we will make all capital allocation decisions with the intention of maximizing our shareholders’ per-share bitcoin holdings.”
This underscores how companies and investors are beginning to see 'Bitcoin per share' as a new and relevant metric for measuring an organization's performance and growth.
We seem to be at an inflection point in corporate Bitcoin treasury adoption, and right now, the companies that are acquiring Bitcoin will likely outperform their competitors who fail to recognize how Bitcoin can bolster their balance sheets and supercharge their businesses.
To keep track of all the developments in Bitcoin corporate adoption, make sure to check out bitcointreasuries.net brought to you by friends over at Coinkite. It has all the data, graphics, and charts you need to stay up to date on this evolving landscape.
The Kingdom of Bhutan Has Mined 13,000 Bitcoin
In 2024, It’s not just corporations that are competing for their share of Bitcoin’s 21 million, it’s also nation states.
Two nation-states that are leading the way in terms of Bitcoin adoption are El Salvador and the Kingdom of Bhutan, and both were in the news this week.
Bhutan has been mining Bitcoin since 2023 when Bitdeer announced a partnership with Druk Holding & Investments, the Kingdom's sovereign wealth fund, to launch a $500 million mining project to take advantage of the country's excess hydroelectric power. The project seems to be going quite well.
Arkham Intelligence revealed that Bhutan now holds approximately $780 million worth of Bitcoin, making it the fourth largest holder of Bitcoin among nation-states.
For a country as small as Bhutan, their holdings represent nearly a third of their GDP.
Arkham went on to add that one key difference between Bhutan and other nation-states is that they didn’t seize their Bitcoin holdings through law enforcement actions; they mined them. Given the project's success, Bitdeer said it is working to expand the operations to 600 MW by 2025.
It’s exciting to imagine how embracing Bitcoin can change the trajectory of a small nation like Bhutan, but we don’t really have to imagine it, we can just look towards El Salvador.
Since adopting Bitcoin as legal tender, El Salvador has enjoyed a complete transformation of its reputation on the global stage. Where it was once only known for its high crime rates, high debts, and corruption, El Salvador is now seen as a forward-thinking nation embracing innovation.
Since then, El Salvador has seen its debt-to-GDP ratio fall to 77%, its lowest since 2019, and total debt has fallen by nearly $6 billion. The investment world is liking this progress, as El Salvador’s sovereign bonds have been some of the best-performing bonds in the world. They continued to soar this week after President Nayib Bukele said that the new 2025 budget would feature zero deficit.
That’s right – no debt.
This is in stark contrast to the United States, whose budget deficit was $90 billion higher than expected in August and has now reached more than $2 trillion over the last year.
It seems to me that El Salvador has really turned things around since adopting Bitcoin as legal tender, but not everyone agrees.
For years, El Salvador has been in negotiations with the IMF to obtain new funding, but the IMF has withheld the funds, why? Bitcoin.
An IMF statement in August read, “On Bitcoin, while many of the risks have not yet materialized, there is joint recognition that further efforts are needed to enhance transparency and mitigate potential fiscal and financial stability risks from the Bitcoin project. Additional discussions in this and other key areas remain necessary.”
All in all, I think it's pretty clear that, just anecdotally, El Salvador is in a better position post-Bitcoin adoption than it was before. The fact that the IMF doesn’t like it is actually a sign that they’re doing something right. The IMF’s goal is to enslave nations in more debt, not for countries like El Salvador to reduce their debt and adopt a form of money that gives them more freedom.
Nation-state adoption might appear far off to those not paying attention, but it’s important to remember that it’s already happening at the margins. Small nations like Bhutan and El Salvador are benefitting from adopting Bitcoin, and it will be fun to see what other nations will be next.
Trump Becomes First President to Make Bitcoin Transaction
Alright – let’s end this News Block by turning our attention to the world of politics.
Former President Trump went viral on Wednesday when he became the first U.S. President to officially make a Bitcoin transaction. It happened at PubKey in New York City when he used Bitcoin to buy a cheeseburger.
It was only a little over a month ago when former President Donald Trump stood on stage at Bitcoin 2024 in Nashville and announced that, if elected, he would create a national Bitcoin stockpile and make the U.S. the world’s “Bitcoin superpower.”
Fast forward to today, and Trump has many Bitcoiners face palming.
On Monday, Trump joined a Space on X, along with several family members including his sons Donald Trump Jr. and Barron, to announce the launch of World Liberty Financial, a new crypto defi platform that will have its own native token, $WLFI.
There aren’t many details about the project, but we do know that only accredited investors will be able to participate, and 20% of the token supply will be allocated to the founding team.
To say this is disappointing is an understatement. I simply do not understand the thinking here. Why open yourself up to regulatory risk by issuing a token with an SEC that is sending enforcement actions left and right to crypto founders?
The Trump’s argue that this is about decentralized finance but this is a meaningless term when the underlying foundations are not decentralized. As SEC Commissioner Hester Peirce described it, these projects are D.I.N.O, “Decentralized in Name Only.”
I suggest Trump simply sticks to Bitcoin before this all backfires terribly. I also recommend that those advising him read Allen Farrington and Anders Larson’s “Only the Strong Survive.”
In the piece, they describe how the concept of DeFi is admirable, to build financial and market infrastructure that “no individual or entity can maliciously or politically affect market activity, be this in the form of agitating to advantage themselves or to disadvantage others,” but that the current iteration of DeFi is built on centralized, unsound foundations.
In the long run, any form of DeFi that gets built to last will occur on the most secure and decentralized protocol and that protocol is Bitcoin. I highly doubt that World Liberty Financial will be remembered a few years from now, whereas Bitcoin will be read about for generations to come.
Until next week, keep stacking.
- Sam & Nat
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NEW: Jim Bianco: Fed Rate Cuts, ETF Outflows, and How Bitcoin Gets to $1 Million
In this episode with Jim Bianco, we discuss:
- Fed rate cuts this week
- 25 or 50 bps, is there a big difference?
- Will we soon have to go back to ZIRP and QE?
- Bitcoin ETF outflows
- Jim says THIS needs to happen for Bitcoin to get to $1 million/coin
Make sure to listen to my latest Coin Stories episodes, including Mark Moss, Bitcoin Mechanic, and Nick Neuman
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