Bitcoin: The Macro Decoupling

IN THIS PUBLICATION:

• On-chain analytics continue to highlight a healthy and potentially undervalued market.
• Bitcoin has historically decoupled from the S&P 500 71 days after it begins a downtrend.
• The current correction is clearing out the crypto industry of speculative projects and shitcoins.

RECENT HIGHLIGHTS

Crypto markets have, for the first time in a while, moved off of the main stage as traditional markets sail through heightened levels of volatility thanks to the repricing of higher rates (read Roger’s last piece on how we might be facing peak hawkishness) and Putin’s geopolitical moves that have made Jacob a very popular man (tune in later on today on our Twitter profile at midday ET - we’re hosting him live).

Let’s look at some of the most meaningful crypto developments since our last update:

• Facebook’s Crypto venture (initially named Libra then rebranded to Diem), first launched in 2019, is winding down and selling its technology to Silvergate Capital for $200 million.
• Disney named a Metaverse lead, JPM entered the Metaverse with a virtual lounge on Decentraland, Ukraine passed a law legalizing crypto, Fidelity International launched a spot Bitcoin ETP, and Forbes announced a $200 million strategic investment from Binance as part of the SPAC merger with Magnum Opus.

Moving past the headlines, consider this:

• Last year, Bitcoin surpassed American Express in annual transaction volume to become the third-largest network when compared to credit card operators. With $3 trillion worth of payment transactions, Bitcoin delivered more than 2x the volume of Amex in 2021. Sure, the Amex business model is primarily based on the need to virtue signal wealth to non-Amex holders (case in point: when Tim flashes his Amex and pretentiously looks down at my Revolut Metal card. Tim’s Note: for all the Americans reading this that don’t know what Revolut is, it’s not your fault. It’s basically a faux metal debit card with zero points and is mostly used by Zara shoppers on their way to some techno party in Malta), which is why it’s a “niche” business with volumes just a fraction of Visa ($13.5 trillion) and Mastercard ($7.7 trillion).
• Still - for an asset that we don’t really expect to ever become a payment settlement network, that’s very impressive… as noted by NYDIG: “This is astonishing growth, in our opinion, for a payment network that just had its 13th birthday. The major card networks have multi-decade histories — Visa was launched in 1958, Mastercard in 1966, American Express issued its first card in 1958, and Discover in 1985”.

• On that note, NYDIG has done a great job clarifying the difficulties of quantifying reliable volume metrics when looking at blockchain networks – we urge readers to educate themselves here to better refute some of the obscene volume metrics floating around, which put Bitcoin volumes ahead of Visa’s.
• Elsewhere, Pantera Capital highlights that last year there were $1.4 trillion of cryptocurrency capital gains, and given that every crypto sale at a profit triggers a taxable gain in certain countries (even if an investor is still fully invested in crypto), some of the negative price action prior to the Russian takeover could be justified by investors having to sell crypto holdings at market prices in order to raise cash to pay the IRS (Tax Day in the US is in April). No idea how meaningful this is, if at all, but definitely an interesting narrative for a Friday 5 PM, IPA-fuelled, pub conversation.
• One of the biggest crypto hacks to date (of c. $325 million) has occurred on Wormhole Portal, a platform that helps users transfer funds between Solana and Ethereum (the owners of the portal, Jump Crypto, have made the crypto holders of the stolen assets whole). This highlights the significant risk still prevalent in Decentralized Finance infrastructures, analog to how Centralized Exchanges suffered several hacks before they stepped up their security infrastructure. Since 2020, c. 90% of funds stolen within crypto occurred within the DeFi space. Tread carefully.
• On a more cheerful note, the DoJ recovered $3.6 billion worth of bitcoins related to the Bitfinex hack that occurred in 2016 (which, at the time, were worth a fraction of that). That’s 80% of the full amount stolen – and since Bitfinex had made its customers whole in the past, the funds will be returned to them instead (good customer service always pays back… with dividends). This is the largest financial seizure in the history of the DoJ.
• We brought this recovery forward because it really is a great case study of why blockchain-based cryptos are not really suited for criminal activity – in more than five years, the couple behind the attack had only cashed out 20% of the BTC holdings they stole. This is mainly due to the complicated nature of turning large amounts of BTC into fiat currency without raising any suspicions, which speaks to the effectiveness of Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures in place by current exchanges. (Any snarky anti-crypto readers right now better go peruse the latest Credit Suisse allegations, essentially harboring money for warlords, drug dealers, and vast criminal enterprises for multiple decades, and knowingly doing so, and then please refrain from any additional snarky crypto money laundering thoughts.)
• Whilst India and Russia had notoriously turned negative towards cryptos, in the last few weeks they’ve pivoted towards a more welcoming stance, with the Indian Finance Minister proposing a 30% tax instead of banning private cryptos, and Russian politicians praising cryptos potential benefits whilst submitting conservative legislation (probably as they open their eyes to the massive amounts of potential revenue that could come from capital gains taxes). Given the size of both countries, and especially given China’s prohibitive approach to cryptos, it’ll be interesting to see what these two large EM economies do.

WATCH THE MACRO DECOUPLING OF CRYPTO