The bitcoin proxy Microstrategy rose 9% on Thursday while bitcoin itself had a hissy fit, a bounce, and in the end basically didn’t move at all to now still trade at about $29,000.
Is this a sign of a decoupling and more crucially, is it a sign that in the months ahead we might crave a coupling again?
Back in 2018 when the dollar was strengthening following a bull run in both bitcoin and stocks, both assets had a not so good year, but stocks got over it by autumn to then bull again.
Bitcoin instead entered an endless sideways with it taking another year for it to start moving up.
Yet the 2020s are a bit different for crypto as there is now a crypto stocks scene. There are now countless of ETPs, even some ETFs, and numerous publicly traded crypto businesses.
That affects bitcoin itself because miners for example can raise funds from the public market, instead of from OTC-ing some of their bitcoin.
Yet those miners also have to take into account the interest of shareholders. And so DGHI, for example, has began a stocks buyback, increasing their share price by 12% in the past five days.
Following a plunge of 80% in Microstrategy’s stock price (MSTR) from above $1,000 to now $200, investors may well consider that in the worst case, MSTR will pause some of their bitcoin buying and use the profits to buyback stocks instead, or do a 50/50.
Because this is a profitable company and more than that, their 130,000 BTC holdings are worth close to twice its total market cap.
The market cap of MSTR is currently $2.4 billion, while its bitcoin holdings are worth $3.7 billion.
So the market has gone out of whack, giving MSTR an EPS of -54. That’s not sustainable.
Arguably in bitcoin too the current price is about 25% below production which we estimate to be at about $40,000.
Some miners are still fine obviously, some don’t even pay for energy at all in their dorms, but once price goes below production you’d expect some of the supply to be taken out of the market.
That’s what in part creates that year long floor. Miners just stop selling. Then the moon is due to miners selling their reserves far too quickly, with those reserves depleted by summer-autumn 2020 in this run.
In the downside they’re also relentless once the market turns and the price is above cost. They run for the exit like chickens, seemingly unaware it’s their own product, and so we get a sharp fall to that cost of production level and then endless sideway.
Which means if there is a decoupling, we will be craving for a coupling again. Because a decoupling will mean bitcoin sideways while stocks don’t at this stage of the cycle.
At least that’s what it has meant in previous cycles. Now, even JP Morgan is saying bears got a bit too exuberant, but is anyone really listening?
“The supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day,” Zhu Su said earlier today.
That’s not as a matter of fact however, and if he was wrong once, he can be wrong twice, because if we are in a bear, then it has not even began.
If we get a year long sideway at $30k or $15k, then you can say the supercycle was wrong. Currently we’re only at the point where you can say this is exactly the point where this matter starts to be decided.
Because so far all is still very normal, and we’re still at just a year ago prior to bitcoin running to $70k after it crashed from $60k.
The market doesn’t quite think that will repeat and the mood is a bit different, but JP Morgan opining on this space – beyond the ‘buttcoining’ sort – is new, and corporate investors at some scale are new, so does it matter what they think?
In stocks it clearly does. MSTR is just out of maths and so it might not care anymore if bitcoin has downsides or sideways. That’s because investors there are being punished basically for using a very unsophisticated algorithm where MSTR tracked bitcoin to the dot without taking into account MSTR related factors.
It’s a new thing so they’re learning valuation, and finally they’ve stopped being extremely slow learners and so we get a move.
But does this then feed into bitcoin? If we’re having some excitement in bitcoin stocks, is it inevitable that will leak to bitcoin?
That’s the big question and it has only one answer, in our view anyway. Within a minimal timeframe of preferably four years, the best time to buy some is probably now, and the second best, or better time, is this Christmas day itself.
Now, because obviously you never can be sure of, for example, whether bitcoin has been on a year long sideway to break $100,000. That’s a big number and so if it crosses it, then it obviously will be seen as a year long sideway as it makes complete sense.
The price has fallen to cost of production and maybe even below that, so around these levels it has always been a reasonable time to buy.
But it may -50% again, in some months, and if it does that presumably will happen by Christmas day, so making that potentially a better time to buy, but since we can’t predict the future, some now, some then.
And we can’t predict the future because we’ve never had a considerable crypto stocks market. So if stocks start moving once they’ve eaten up all the bear narratives and realize we’re both growing and projected to have decent growth even next year, then can bitcoin really be left sidewaying this time if bitcoin stocks move?
That’s a question we don’t have to answer with our strategy as it’s a don’t care strategy, but where facts are concerned all we know currently is that the question of a – we wouldn’t call it a supercycle, more a normalization of bitcoin as an asset class – has not quite been settled.
And we also know that, regarding a potential decoupling, this was obviously due to eth having a non consequential glitch, and until such crypto specific factor is consumed, you can’t really tell.
Rationally speaking however, if MSTR makes profits and their stock is doing great, they buy more bitcoin. If they making profits and their stock is out of whack, they might buy their stock instead.
If DGHI is making profits and their stock is great, they might raise from the stock market and hodl their corn. IF they making profits and their stock isn’t doing great, they’ll prioritize their stock obviously.
So if stocks are doing great, demand for bitcoin increases, because MSTR buys it and DGHI holds it. If they not doing great, then some demand is taken out.
If they’re not in profit at all, then at least it’s a coupling down, more so than otherwise with other factors potentially cancelling that.
Which may well explain why there has been a coupling, and may well explain why there could be a decoupling at least temporarily until stocks recover, and then logically should lead to a coupling again, but who is to say anyone cares about logic in the market and so we’ll have to wait and see what happens this time to better determine the effect of crypto stocks, and thus the stock market more widely, on crypto.