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Tom’s Take on Crypto

Tom’s Take on Crypto

Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 4 (FSInsight. com’s head of research Tom Lee revealed the first five of his ten rules of Bitcoin investing on April 23, 2020, and gave an updated outlook for the remainder of the year. The webinar is available on the website and the following is a condensed version of his comments. This is the second in a series of 10 reports from his webinar, one for each of his rules. Stay tuned for the next one.) The Ten Rules of Bitcoin Investing: Rule No. 5 The Rule of ‘The Ten Best Days.’ If you have read the first four parts of this series, you’d know that: 1 the U.S. is going to be very important in the continued development of Bitcoin and crypto currencies; 2 the Bitcoin Misery index is a proprietary FSI tool that has been a good way to evaluate how investors feel about Bitcoin’s price action; 3 Bitcoin’s 200-day moving average (dma), and the halvening, which took place May 11, are important factors to consider; 4 Bitcoin performs best when the Standard & Poor’s 500 index is performing well. In Rule No. 5, it’s important for investors to know that the reason a “buy and hold” strategy (or hold on for dear life, HODL) makes sense for Bitcoin is that only a handful of days each year account for the bulk of BTC’s gains. As shown in the chart below, BTC was down, on average, every year if we exclude the gains for the top 10 days (based on percentage moves). And if we look at the top 10 “point gain” days, BTC would be down even more every year. However, the “buy and hold” (or HODL) strategy produces very different forward returns depending on when you bought. As you can see in the next chart, BTC moves in boom and bust cycles, and its Market Cap to Cumulative Mining Revenue (Mkt Cap/CMR) ratio is one of the best relative fundamental valuation metrics for predicting those waves In our view, the best way to capture the top 10 “point gain” days is to HODL when Mkt Cap/CMR multiples are low. Now, as Warren Buffett says, price is what you pay but value is what you get.  Unsurprisingly, BTC is a much better store of value and much better investment if it’s purchased at lower Mkt Cap/CMR valuation levels, and it performs very poorly if purchased near the high end of the range. (See chart.) At today’s levels, forward returns for BTC over 1M, 3M, 6M and 12M have historically been very attractive. Remember that network effects drive most successful platforms.  Yet BTC is not 10%, not even 1% but actually 0.1% of financial assets, or overall addressable investments.  It is effectively individual or retail ownership only and at that size it is too small for network effects. Bitcoin’s network valuation is $200 billion which ranks it as tiny versus other liquid markets. What’s happened to Tesla’s (TSLA) stock could be instructive about network effects.  The huge rally in TSLA this year is due to the Russell 1000 growth manager having fears of being left out. Call it institutional FOMO.  Tesla is less than 0.7% of the weight in the Russell 1000 but is one of the biggest contributors to YTD gains. Sound familiar? What we say is institutional FOMO was a $135 billion increase in TSLA’s value in 90 days. Network effects can be powerful. (This is the fifth part in a series of Tom Lee’s 10 Rules for Bitcoin Investing.  As a reminder, Rule No. 4, Bitcoin performs best when the Standard & Poor’s 500 index is performing well, was published May 29;  No. 3, about buying BTC above its 200-dma, was published May 14; No. 2, about the BMI index, May 8; and No. 1, May 1, says that the USA is the determining factor for cryptocurrency’s future.  For more, please see Tom’s Take May 1, or the webinar replay.) Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 4

The Ten Rules of Bitcoin Investing: No. 4

Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 5 (FSInsight. com’s head of research Tom Lee revealed the first five of his ten rules of Bitcoin investing on April 23, 2020 and gave an updated outlook for the remainder of the year. The final five of ten rules will be published later this year. The webinar is available on the website and the following is a condensed version of his comments. This is the third in a series of 10 scheduled reports, one for each of his rules. Stay tuned for the next one.) The Ten Rules of Bitcoin Investing: Rule No. 4 Bitcoin performs best with S&P 500 Index is performing strongly If you have read the three parts of this series, you’d know that the U.S. is going to be very important in the continued development of Bitcoin and crypto currencies; that the Bitcoin Misery index is a proprietary FSI tool that has been a good way to evaluate how investors feel about Bitcoin’s price action; and that Bitcoin’s 200-day moving average (dma), and the halvening, which took place May 11, are important factors to consider. This report is based on: 1 Empirical data we have found that suggests there is a correlation of performance between Bitcoin and the Standard & Poor’s 500 index (SPX). That’s something many investors might consider counter intuitive, given the role of crypto currencies as alternative investments. 2 Dynamics of the investor base interested in BTC. We have also found that Bitcoin performs best when the Standard & Poor’s 500 index (SPX) is doing well. In other words, BTC performs in sync with the SPX. See table below. Granted, there are only 10 years of history, but it is notable. For example, where the SPX has the strongest gains, guess what? We see the best returns for Bitcoin. So does this mean Bitcoin is a risk-on asset? Maybe.  But we think the better explanation is Bitcoin works best when there is a clear macro trend. This positive correlation relationship is even more apparent when looking at a chart below. As can be seen, in years when the SPX was up, BTC tended also to be up, last year being the most recent example. In only one year, 2014, was the SPX up and BTC down, while there were years when BTC was up but the SPX was down (2015) or flat (2011). (This is the fourth part in a series of Tom Lee’s 10 Rules for Bitcoin Investing.  As a reminder, Rule No. 3, about buying BTC above its 200-dma, was published May 14; No. 2, about the BMI index, May 8; and No. 1, May 1, says that the USA is the determining factor for cryptocurrency’s future.  For more, please see Tom’s Take May 1, or the webinar replay.) Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 5

The Ten Rules of Bitcoin Investing: No. 3

Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 4The Ten Rules of Bitcoin Investing: No. 5 (FSInsight. com’s head of research Tom Lee revealed the first five of his ten rules of Bitcoin investing on April 23, 2020 and gave an updated outlook for the remainder of the year. The final five of ten rules will be published later this year. The webinar is available on the website and the following is a condensed version of his comments. This is the third in a series of 10 scheduled reports, one for each of his rules. Stay tuned for the next one.) The Ten Rules of Bitcoin Investing: Rule No. 3 Rule #3: Buy Bitcoin when it is higher than the 200-day moving average If you have read the first two parts of this series, you’d know that the U.S. is going to be very important in the continued development of Bitcoin and crypto currencies and that the Bitcoin Misery index is a proprietary FSI tool that has been a good way to evaluate how investors feel about Bitcoin’s price action. Now, I’m going to describe the usefulness of Bitcoin’s 200-day moving average (dma), and the halvening, which took place May 11. Bitcoin could be back in a bull market soon and here’s why: Bitcoin’s 200 dma (based on 200 calendar days, not 200 “equity trading days”) is around $8,050, and this level is important because it reflects the long-term trend in prices and is also essentially where most active traders have acquired their security/bitcoin. In a nutshell, when Bitcoin regains its 200 dma, as it has recently, the momentum will be viewed by investors as bullish. Why is that? Historically, Bitcoin acts much better when it is above its 200-dma. This will be a big positive. See chart below. Remember, Bitcoin is viewed as a commodity, and hence investors are more constructive when Bitcoin is in a positive trend, and, as noted above, this is measured by its price relative to the 200-dma. As of today, May 14, Bitcoin is slightly above its 200-dma, having regained it on April 29. The Halvening The other important point is the “halvening” for Bitcoin, which happened May 11. This affects the equilibrium of supply and demand of Bitcoin. Recently, there has been a lot of skepticism regarding the boost to Bitcoin from the halvening. The negative arguments center around coin miners and their need to sell more Bitcoin if the value of the block reward is cut in half. However, we think this is conflating the larger supply demand dynamic. A simple illustration to the left shows that if demand is constant (we assume higher due to Iran) and supply is cut in half, this creates a net demand imbalance which should be resolved with a higher price to create a new equilibrium. History shows “net demand” rises approximately 128% to 320% post-halvening, to go by the two preceding halvening events, when price gains were quite dramatic Notice in the chart below the significant change in the gains of Bitcoin price into the halvening and after it took place. The halvening is a strong bullish signal about supply and demand. History shows that as demand changes you see a strong response. (This is a third part in a series of Tom Lee’s 10 Rules for Bitcoin Investing. As a reminder, Rule No. 2, about the BMI index, was published on May 8, and No. 1, published on May 1, says that the USA is the determining factor for cryptocurrency’s future. For more, please see Tom’s Take May 1, or the webinar replay.) Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 4The Ten Rules of Bitcoin Investing: No. 5

The Ten Rules of Bitcoin Investing: Rule No. 2

Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 4The Ten Rules of Bitcoin Investing: No. 5 (FSInsight. com’s head of research Tom Lee revealed the first five of his ten rules of Bitcoin investing on April 23, 2020, and gave an updated outlook for the remainder of the year. The webinar is available on the website and the following is a condensed version of his comments. This is the second in a series of 10 reports from his webinar, one for each of his rules. Stay tuned for the next one.) The Ten Rules of Bitcoin Investing: Rule No. 2 Rule #2: Consensus mostly right, thus Bitcoin Misery Index The Bitcoin Misery Index (BMI) is a diffusion index, a proprietary tool that we invented for our clients interested in cryptocurrency investing. In essence, the BMI is a proxy for how investors feel about bitcoin’s “price action.” It measures the expected sentiment of a holder of bitcoin (where a reading of 50=Neutral, <27=Misery, and >67= Happy). Though we do not recommend timing the market, the BMI has had a very instructive practical history. Theoretically, it has been a good way to evaluate Bitcoin’s price for those who have timed Bitcoin via BMI, as you will see below. Again, we don’t recommend timing the market, but the BMI is useful for entry points.  We believe it is a good investment tool and it’s available on our website. Where are we now? Currently, the BMI resides around 43, a recovery from a recent low at 13. See nearby chart. As you can see in the chart, the BMI slipped below 66 on 7/11/19. Although it then temporarily bottomed at 35 on 10/24/19 and recovered to 57 in mid-February 2020, the BMI then proceeded to tank all the way down to 13 amid the coronavirus (COVID 19) outbreak. Since then, investor sentiment has improved as the BMI gradually climbed back to the current level around 43. What does this mean? Well, with the BMI rising as it is, history suggests about a 105% six months forward return when the BMI is at 43.  However, once the BMI begins an uptrend (such as now), investors should note that a reading of 43 is not associated with the best scenario, based on six months forward returns for Bitcoin. More specifically, since 2011, when BMI is 43 (or decile 4), the average 6M return for Bitcoin is 105%. While this is definitely good, as a signal it is not as strong as waiting for the BMI reading to rise towards 50-53 (decile 6) or even more ideally, 57-61 (decile 8).  See chart below. (This is a second in a series of Tom Lee’s 10 Rules for Bitcoin Investing. As a reminder, Rule No. 1, published on May 1, says that the USA is the determining factor for cryptocurrency’s future.  For more, please see Tom’s Take May 1, or the webinar replay.) Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 1The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 4The Ten Rules of Bitcoin Investing: No. 5

The Ten Rules of Bitcoin Investing: Rule No. 1

Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 4The Ten Rules of Bitcoin Investing: No. 5 (FSInsight. com’s head of research Tom Lee revealed the first five of his ten rules of Bitcoin investing on April 23 and gave an updated outlook for the remainder of the year. The webinar is available on the website and the following is a condensed version of his comments. This is the first in a series of 10 reports from his webinar, one for each of his rules. Stay tuned for the next one.) The Ten Rules of Bitcoin Investing Cryptocurrencies and Bitcoin (BTC) have been around for over a decade, a time period in which they are solidly up. However, as an asset class the believers in it are few, to go by the minuscule amount of money invested, 0.1% of the total, vs. other financial assets. Still, as I have noted before, Bitcoin has shown and continues to show great resilience, such as during the financial turmoil of 2020, for example.  Earlier in the year, I gave a 2020 outlook that proposed the escalation of geopolitical risk, the coming halvening and the U.S. election year as the three major positive developments for Bitcoin in 2020. These 3 developments supported Bitcoin’s solid run at the start of the year As coronavirus spread around the world, Bitcoin fell along with other asset classes and global markets. Nevertheless, Bitcoin remains one of the best-performing assets and is outperforming almost all equity market indices on a relative basis. (See chart below). Bitcoin Performance in 2020 (as of 4/22) Let’s start with my first (out of ten) rules of Bitcoin investing. I’m not trying to sound nationalistic, but the fact of the matter is that for cryptocurrencies, the U.S. is the future for the next three to five years. While many think, and rightly so, that cryptocurrencies are for folks in those parts of the world that are unbanked or where their own currencies are debased, that’s not the most important part of the story. In the foreseeable future, adoption in the U.S. is key, and here’s why. Rule No. 1: The USA is the Future If you think about where the world’s global wealth, about $300 trillion, is located, more than 60% of it is found in the U.S., China and Japan.   To appreciate why the US is a big deal for Bitcoin, take a look at the world’s aggregate wealth (per recent Credit Suisse Global Wealth Report). The top three dwarf all other countries. (See chart below.)  We are talking about $175 trillion out of the world’s total.  Moreover, at nearly $100 trillion, you will note that the U.S. is more than half of the three major countries and one third of the total. The U.S. is unique given its demographics, national wealth, and deep and liquid markets. The U.S. is the most important major economy for digital assets per the Bitcoin Market Potential Index, created in 2015 by Garrick Hileman, professor at the London School of Economics LSE. The BMPI highlights countries’ best potential for Bitcoin adoption. The U.S. ranks fifth overall but is the only major country in the top ten. (See nearby BMPI table.) And more specifically to the U.S., Millennials here are set to inherit some $68 trillion over the next two decades, according to a study by Coldwell Banker. In addition, the latest Federal Reserve Survey of Consumer Finances shows that Boomers and the Silent Generation control about 77% of the wealth.  The Silent Generation controls $22 trillion today and is an average age of 78.5 (oldest is 88.5). (See chart below.) Tom Lee’s First 5 Bitcoin (Replay)The Ten Rules of Bitcoin Investing: No. 2The Ten Rules of Bitcoin Investing: No. 3The Ten Rules of Bitcoin Investing: No. 4The Ten Rules of Bitcoin Investing: No. 5

What Are the Risks?

(Please note that our senior digital analyst David Grider, who writes our weekly crypto column, is sitting in for Tom Lee for this particular note.  This is part three of a three part series. Tom will return to writing Tom’s Take shortly) Part 1 is available here. Part 2 is available here. What are the Risks? Following March lows, the global macro picture has improved, and crypto prices have risen by nearly 55% in tandem. Our calls for bullishness near the market bottom came with the recognition of current uncertainties at the time, but our caution in several of those areas has since diminished. But risks remain and we’re are keeping an eye on them. In terms of market structure: (1) crypto remains afflicted with lower but improving liquidity for now, compared to levels of February and early March. According to Coinmarketbook, Bitcoin buy support within 10% of the orderbook has risen to $160 million from mid-February lows of $55 million but remains off the $225 million to $500 million levels seen in the month prior to the sell off. Bid/offer liquidity on futures contracts paint a similar but somewhat better picture, with spreads well off March highs and almost back near prior levels, according to Skew. (2) Crypto miner capitulation risks have abated now that prices have risen. We’ve seen data suggesting miners were selling more than they were mining during late March. It’s possible the sell-off marked the flush out of miner coin inventories that was needed to put markets on healthier footing.  But this does not mean investors should assume the risk is gone entirely. The Bitcoin block reward halving in two weeks will mark an important test indicating the financial health of the mining ecosystem. On the surface, we expect the new supply reduction to be bullish for coin prices over the long run. While we lean towards optimism, we are keeping an eye on how the medium-term picture immediately following the halving will play out once miner revenue has been cut in half. If Bitcoin prices show any prolonged weakness following the halving, it may cause unprofitable miners to shut down. This poses a further risk to coin prices if those same miners have material balance sheets of coins that then must be liquidated in that process. This could cause selling pressure from existing supply to increase more than the offset of new supply reduction temporarily. The open question in our mind- is there still a material segment of the mining market exposed to this risk or were they flushed out last month while those remaining are hedged? Additionally, there is always the concern of possible regulatory crackdowns, whether through (1) U.S. Treasury action; (2) Exchange crackdowns, (3) a tax response from the IRS; manipulation accusations from the CFTC; and SEC moves on ICOs. Privacy issues remain as well. The so-called known unknowns of possible events include serious hacking; a destabilizing code bug; and an old-fashioned systemic shock. Source: FSInsight, Coinmarketcap The big money question, of course, is how should investors position themselves in this environment? My broad market view continues to be that crypto is in the second or third inning of a prolonged recovery following the bottom December of 2018, despite the recent bumps and volatility we’ve seen. The near-term future seems positive but that’s not a certainty, and no one knows with 100% accuracy what will happen next.  However, what can be said is that crypto valuations look reasonably cheap. That said, while I don’t think it’s likely we go back to the mid-March levels, it doesn’t mean they can’t get cheaper. If they do, I’d view it as an opportunity to get more aggressive as prices become more attractive. The risk/reward looks attractive to me over next 12 months. Recommendations Portfolio Allocation—overweight crypto assets at 1% to 2% of portfolio exposure vs their market weight at 0.01% for the next three to five years and increase/ decrease exposure as valuations become more attractive or stretched respectively. Size Positioning—favor the larger cap, blue chip crypto names over smaller cap and more speculative ones over the medium term until we have greater certainty following the Bitcoin halvening. Defensive vs Cyclical—favor more defensive proof of work (PoW) monetary commodity names over more cyclical proof of stake (PoS) names near term, again until we have greater certainty following the Bitcoin halving. Asset Selection—Overweight Ethereum relative to Bitcoin during the next six to 12 months. Underweight Ripple relative to market. Part 1 is available here. Part 2 is available here.

What is the Investment Outlook for BTC and Cryptocurrencies?

(Please note that our senior digital analyst David Grider, who writes our weekly crypto column, is sitting in for Tom Lee in this particular note. This is part two of a three-part series. Tom will return to writing Tom’s Take shortly) Part 1 is available here. Part 3 is available here. How should investors frame crypto’s drivers and was the recent move a justified fundamental deterioration or an opportunity? 1. Emerging Market Play Crypto market growth resembles that of an emerging market economy that’s recently opened to the outside world seeing new capital inflows and growth. Remember, that like all emerging markets, it is influenced by macro external forces and shocks, and it is still early innings yet and idiosyncratic boom/bust drives may dominate. 2. Digital Gold Thesis I don’t think that a month of trading action, bad as it has been, should outweigh 10 years of noncorrelation.  Both gold and Bitcoin’s reaction to the turmoil has been mixed. Bitcoin’s correlation to gold has risen since the last sell-off now that the panic of the crisis has subsided, and it’s now proving to be an uncorrelated hedge asset again. One more point, crypto has been a reliable store of value if bought cheaply. 3. Tech Disruption Trend There are secular technology growth drivers favorable in the long run. My bottom line is that crypto drivers are currently mixed, and the net outcome depends on the weight of each. Nevertheless, there are potential crypto catalysts are on the horizon, such as: Crypto Market Structure — In the way of supply-side dynamics, for example, there is the upcoming halving, which should reduce new supply. Investors holding coins at an unrealized loss tend to not sell until prices reach prior breakeven levels, which tends to reduce sell pressure from existing supply. And now that there’s been some deleveraging, that reduces the downside squeeze risk. On the demand side, the dynamics could improve if investors re-leverage to go long.  The expansion of a killer app like Decentralized Finance (DeFi) on Ethereum or other’s networks could increase the fundamental usage of crypto. And as liquidity increases higher demand could squeeze the shorts. Central Bank Fiscal Response — Other potential catalysts could come as a liquidity spillover from improvements in U.S. financial markets, and from potential global inflationary pressure. Macro Market Influence — Finally, the stock market looks like it may have bottomed and may continue recovering which could help crypto prices. On the macro side, catalysts could include a sustained rise in gold and more geopolitical shocks, whether military or economic. Part 1 is available here. Part 3 is available here. (This ends Part 2 and stay tuned for Part 3, which will discuss the risks to BTC and cryptocurrencies.)

What’s Going on With Cryptocurrencies: The Big Picture (Part 1)

(Please note that our senior digital analyst David Grider, who writes our weekly crypto column, is sitting in for Tom Lee in this particular note. This is part one of a three-part series. Tom will return to writing Tom’s Take shortly) Part 2 is available here. Part 3 is available here. In the current market environment, with the sharp price volatility seen in Bitcoin (BTC) and cryptocurrencies generally in the past 12 months, it’s fair for investors to ask, “What’s going on?” While follow on contagion and spillover from the global economic chaos is the easiest answer, I think that the situation deserves a closer look, as there might be market nuances worth examining in detail. I see a number of potential issues that cryptocurrency investors need to better understand. Last month on March 12th and 13th we saw unprecedented panic selling, with exchange inflows spiking sharply and prices crashing by 50%. Secondly, the trading infrastructure, the plumbing so to speak, saw liquidity evaporate and spreads blow out amid a huge surge in transactions, which created bottlenecks and backlogs that exacerbated the problem. Liquidity and spreads still remain well below pre-selloff levels. In any big selloff, there are cascading effects, such as structural liquidations and deleveraging. Some sellers must get out at any price and that pressures prices to the downside more than might otherwise happen in a “normal” downdraft. This has reduced the credit leverage overall in the crypto economy to new low levels. While it puts prices on a healthier footing, the largest lender, Genesis Capital, has stated they’re taking a step back from extending credit during this time of uncertainty. That may slow the releveling of capital back into crypto markets, while other newcomers like BlockFi have been expanding market share by lending to miners that would otherwise have trouble finding credit. Looking at the supply dynamics, it appears that the turnover was mostly normal and that a good deal of selling came from recently moved coins. This tells us that the sellers in the last wave down came from (1) newer holders who entered the market over the last 6 months and (2) those that were active traders, possibly institutions that were margin called on crypto or broader portfolio positions and needed to raise liquidity. What About the Macro Fundamental Perspective? The smart investor takes a long-term perspective, but unfortunately, it’s not entirely comforting if your holdings are down 70% and more from their all-time highs, as might the case for some. As the famous saying goes, price is what you pay and value is what you get, and in crypto investing, value matters more than price as well. The revaluation put cryptocurrencies prices in a “value buy” range after the sell-off that they hadn’t seen since December of 2019. Prices have recovered by 70% since, and while they’re not as cheap, investors who are underexposed to crypto could use these levels and pullbacks to accumulate their core ideal position. History is often useful to consult, and investors should consider what is it telling us now about the current risk-reward. More on this below. Additionally, flows might matter more than fundamentals right now. Valuations are largely moving in unison and they look much cheaper across the board. Part 2 is available here. Part 3 is available here.

Bitcoin Proving to Be a Macro Hedge…

March 6   Fair Value: $13,000-$15,0000 If ever the view that “crypto is a macro hedge” is to be put to the test, then 2020 would seem to be that time. Thanks to the fear and loathing created by the outbreak of the coronavirus, the ripple effects of COVID-19, as it’s known, is far reaching. We are seeing pure havoc in fixed income markets (the yield on the U.S. Treasury 10-yr note at historic low); turmoil in equities (U.S. stocks down 12% from highs) and, to top it off, panic buying of toilet paper and hand sanitizer. Bitcoin (BTC) was created after the 2008 Great Recession and no event, until COVID-10, stressed both the real and financial world in this way. In 2020, Bitcoin is proving to be the best hedge against current macro risks, up 27% , surpassing gold ,+10%, and even rallying long bonds,+23%.  Even as  there’s been a stampede into bonds and gold, Bitcoin has outperformed both. And this is all the more impressive considering that BTC was the best performing asset in 2019, up +92%. Indeed, crypto as a whole is actually doing very well so far this year, with many digital assets outpacing Bitcoin: Chainlink +167%, Bitcoin SV +148%, Tezos +129% and even Ethereum +77%. In other words, despite the calamity and disruption in financial markets, crypto assets are doing well and providing a hedge. With rollercoaster equities market, one might ask why is Bitcoin and Crypto beating other asset classes? There are a number of reasons for this. At the fundamental level, however, our view remains that digital assets are ‘network value’ based. Hence, increasing the user base grows the value of the platform. I estimate that less than 500,000 people use crypto today. Thus, the future growth is not only orders of magnitude faster than overall world GDP, but more importantly, future crypto growth is largely ‘uncorrelated’ to future GDP growth. Hence, it should be a macro hedge. In other words, it is not the ‘store of value’ argument, but rather crypto is proving to be useful here. With interest rates in the U.S. reaching remarkably low levels, it is causing US bank equities to weaken – U.S. banks are the worst performing sector this week. Thus, digital assets are more useful. FS Insight, Bloomberg  Where is fair value? About $15,000 based on P/Regression and $13,000 based on P/BE mining. Our 2-variable price regression model (see nearby chart) has done a good job of explaining Bitcoin’s fair value of the past few years, It signaled Bitcoin was overvalued on July 2019 (near the top) and last October flashed Bitcoin was undervalued (near the bottom). Currently, Bitcoin has substantial upside implied by these models. What could go wrong? Bitcoin and crypto are outperforming because, in our view, they are largely uncorrelated to macro. But the heightened hysteria that is fueling further distrust of traditional financial institutions is also fueling crypto demand, in part, as well. Thus, the greatest risk is financial institutions see fiat flight and try to limit fiat to crypto on-ramps. Absent this, however, crypto has room to rise. Bottom line:  I have stated that we believe 2020 returns for Bitcoin and crypto should exceed the +92% rise seen in 2019. The halvening is in 2 months, and I see this as another positive catalyst. Thus, I recommend adding crypto exposure. For those with constraints and can only buy listed entities, the following are listed crypto in the US: GBTC (Bitcoin), ETHE (Ethereum) ETCG (Ethereum classic).

Bitcoin Reachs 200 day moving average, bull case for BTC strengthened

January 29, 2020 One of the biggest asset class surprises last year was the 92% gain in Bitcoin (BTC). Twelve months ago, few besides our shop would have credited such an outcome.  So far in 2020 the cryptocurrency is continuing to roar ahead. Though it’s early in the year, BTC is up 26% YTD, already the best showing of any major asset class, and building on that big 2019 move. The case for owning Bitcoin has strengthened even since the start of the year, as two additional tailwinds recently emerged (see below), bringing to five the positive convergences I envision for BTC this year. Source: FS Insight The list of positives for Bitcoin are rising in 2020. 1 The coronavirus outbreak, and the associated uncertainty both in terms of disease spread and of economic impact is increasing demand for “safe haven” assets. Thus, gold and Bitcoin are both up sharply since then. In fact, Bitcoin’s correlation to the S&P 500 has flipped in the last 3 months from +13% to -10%—a pretty meaningful swing. 2 On 1/27/2020, BTC traded above its 200-day moving average for the first time since October 2019. I believe that moving above the 200-day is validating that Bitcoin is back in a “bull market.” The data supports this. Since 2010, when Bitcoin is above its 200 dma, the six-month forward return averages 193% and up 80% of Source: FS Insight Bitcoin is viewed as a commodity, and hence, investors are more constructive when Bitcoin is in a positive trend—this is measured by its price relative to the 200-day moving average. Bitcoin has re-attained its 200D the time, while when BTC is below the 200 dma the average gain is only 10% with a 36% win rate. The total number of positive convergences/tailwinds now numbers five in 2020 with the other three being: (i) heightened geopolitical tensions US-Iran; (ii) US election cycle in 2020 (shifts Washington focus away from crypto); (iii) Bitcoin halvening. Plus, if Sanders (leftist ) is leading, Bitcoin surges. ● What could go wrong? The biggest risk, in our view, is that Crypto demand weakens for retail investors. This is not the case, at the moment, but our thesis remains that Bitcoin and crypto is largely a retail story over the next 3-5 years. Bottom line: 2020 looks to be strong for crypto. The leadership is broadening. In the past four months, the best performing crypto platform is BSV, up 258% and privacy coins are leading (+35%). Privacy leadership makes sense given heightened geopolitical risks and also the coronavirus risks. . A Large List of Things can G o Wrong Source: FS Insight Cryptocurrencies, by nature, derive their value from network value/ adoption—this is the same basis for the valuation of  USD or gold.  Hence, the risks to crypto are impediments to adoption growth or a reduction in the utility value of digital assets. Below is a list of risks.

Crypto Spring Has Begun in the Face of Mass Skepticism

By Thomas J. Lee, May 15, 2019 The 2018 crypto bear market was more painful than any other prior crypto downturn because many of those hurt were retail investors new to the asset class.  That 85% crushing decline not only wiped out investor capital, but sentimentwise left many of those newbies thinking Bitcoin and crypto broadly were declining into oblivion. As bad as 2018 has been, 2019 has seen a surprising resurgence in crypto markets, both in price and dynamism, which naturally begs the question: Is  the “Crypto winter” over? I think the Crypto Spring has begun and four important factors inform my conclusion: improving fundamentals and sentiment.  Price technical are positive, and the market appears to be reaching a supply/demand balance. Fundamentals:  Bitcoin’s on-chain volumes are up year to date, the first increase since 2017.   Facebook, for example, is developing its own decentralized platform including a crypto-currency, and several banks have announced their own “stable coins” which are digital versions of cash.  Equally important, there’s been a surge in Bitcoin usage and volumes in countries where financial stability have worsened. Bitcoin and crypto have become a lot more useful in 2019. Sentiment: Crypto rising on good news and shrugging off bad news. Despite several notable negative developments in 2019—among them that Bitfinex disclosed it received unorthodox funding from Tether to replace cash purportedly seized by governments—Bitcoin and the broader crypto market’s prices have largely absorbed this bad news and continued to rise. That’s a major shift from comparable 2018 dynamics and a great sign. Price technical are positive: On April 23, Bitcoin saw a “golden cross,” which is the 50 day moving average crossing above its 200 day average. Equilibrium: Initial coin offering funding has dwindled to effectively zero, so that the “get rich quick scams” are largely gone.  Bitcoin is the most important crypto asset at the moment, and its success creates a vast halo for the rest of the landscape.  This favorable supply and demand dynamics are unequivocally positive for crypto. The bottom line is that the evidence is strong that crypto winter is over.  I think prices have bottomed and within the next 12-18 months, and we should be seeing new highs for Bitcoin and other useful tokens and projects.  An investor’s exposure to crypto rests entirely on individual risk tolerance and financial position.

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