Crypto-David vs. Macro-Goliath

The difficulty of thinking about the next year from a global perspective lies in the tension of holding two opposing dynamics in your mind at the same time as Denis Oevermann explains in his crypto-macro analysis. The first dynamic is the global macro turmoil, that has been unfolding in 2023, but goes back to the COVID-induced period of lockdowns. As we enter 2024, markets are expected to face certain headwinds, particularly in the early months. The macroeconomic environment, especially monetary conditions and liquidity are anticipated to remain tight, with low confidence in the control of inflation. The subsequent economic unravelling could lead to short-term market corrections and a recession, especially around the time when the yield curve un-inverts eventually – with the initial yield curve inversion being a historical indicator of impending macroeconomic shifts and turmoil, with a lag of 12-18 months. The second dynamic is crypto-native. Despite the above challenges, the outlook for crypto assets in 2024 remains overwhelmingly positive. Research suggests that any downturns in the early part of the year should be viewed as temporary. This is due to the expected easing of monetary conditions and subsequent injection of liquidity into the market, following the economic turmoil, which historically leads to a quick recovery and rally in risk assets. Crypto assets, known for their high sensitivity to liquidity, are projected to be among the first assets to recover, outpacing equities in the rebound. Let me add two thoughts to further support the analysis by Denis Oevermann. Although it is an old narrative, the upcoming halving will be insufficiently priced in again. By April 2024, the block subsidy miners receive will be cut from 6.25 BTC down to 3.125 BTC per mined block. Think of it like this: keeping the BTC price stable in the current fourth epoch requires a demand of at least 328,500 BTC per year. Any additional demand results in fiat-denominated price appreciation. From the fourth halving onwards, demand of 164,200 BTC per year will suffice to keep the price stable. Anything above will result in price appreciation. How likely is it in your view that demand for Bitcoin would fall by 50% in 2024? Because that is what it would take to see the price depreciate. What knocks the probability even further down is a new, or resurrected, narrative that went front and center in Bitcoin-land in 2023: the longing for the mythical Bitcoin spot ETF in the United States. While the SEC is fully authorized to reject all proposals at any time, you can grasp with your hands the pressure that built in the markets since heavyweights like Blackrock submitted their applications. The next opportunity to get a first, many, or maybe even all applications greenlighted by the SEC presents itself in early January 2024. No matter when: the amount of new investment in-flows could be enormous. If only one percent of only Blackrock’s AuM would be redirected into Bitcoin spot ETFs (as Matthew Sigel suggests, see below), that would amount to an additional demand north of 90 billion USD, which is roughly 11% of Bitcoin’s market cap as of early December 2023. We may indeed sail into a perfect storm in 2024, where Bitcoin may have to prove its resilience against a macro environment unprecedented since its inception in 2009.

The crypto crystal ball: Predictions for 2024

In his contribution, Dominic Weibel goes at length to formulate 13 predictions for crypto for the coming year. Let me just pick out a few ones: Going a step further than other analyses is the claim that Bitcoin will reach a new All-timeHigh in 2024, continuing to outperform any other asset class (c.f. Prediction #1). A compact overview comparison across ten asset classes over the last ten years puts strong empirical data to the claim.

Institutional adoption is finally upon us as crypto assets enter traditional portfolios (c.f. Predictions #3 and #4). People said this last year already and talk is cheap, so what about the numbers: what difference would “getting off zero” in crypto terms make for your portfolio? Under prediction #4 you find several model calculations that show the changes in return and Sharpe ratio when the Bitcoin share in a portfolio moves from 0% to 10%. Finally, a thought-provoking prediction (#7) titled “the non-consensus setup”, in which Dominic Weibel expects ETH to outperform BTC in the next crypto bull-run, arguing that Ethereum is – in contrast to Bitcoin – a deflationary cash-flow asset and fully functional computing platform with the best chances to host the bulk of DeFi instruments in the future. On top of that, Ethereum offers intrinsic yield through staking.

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The art of valuating crypto assets

One of the key hurdles for institutional investors entering crypto is that valuation models from TradFi are often unsuitable while specific crypto valuation models that feature risk and predictive metrics are still lacking, says Matthew Sigel, Head of Digital Assets Research at VanEck in our interview. While VanEck’s sophisticated valuation model for open source blockchains rests on the three pillars penetration rate, market share, and monetization share, their Bitcoin model deviates significantly from that. It rests on the assumption that Bitcoin reaches half of gold’s market share, its analogue counterpart. This lead VanEck to set a (long-term) target of $275k per bitcoin, a “conservative estimate” as it excludes potential additional effects from second layer solutions that may extend functionality in the future. They also have an interesting surprising outlook on Ethereum compared to Solana, Ethereum’s closest competitor, which I invite you to read. VanEck is a “fundamentally macro thematic investor”. Their main concern echoes our macro analysis: the amount of global debt and the declining credibility of those issuing it. VanEck’s models estimate that the US could face interest expenses between 60%- 100% of all(!) tax revenues – if interest rates stay above 6% in the future. The underlying thesis is that trading partners of the US will increasingly be hesitant to fund the US system of “sanctions, war, and super woke social policy” and find a way out – and a neutral monetary system is such a way.

The surprising greening effect of Bitcoin mining

Yet, there are also hurdles holding institutional investors back from investing in Bitcoin. The biggest is the energy consumption debate. We had the opportunity to talk with Harald Rauter, a sustainability and growth advisor and Bitcoiner about this complex topic. His verdict on international climate action is sobering. He makes a compelling geo-political argument about why it has been ineffective. Most climate models, named “Shared Socioeconomic Pathways”, expect a level of international cooperation that is unrealistic. The support for a set of shared commitments defined in the Paris Agreement in 2005 has been eroding ever since. The reasons are many. Nations are struggling through a reshuffling of the US-dominated world order of the last century. A decaying fiat monetary system with record levels of debt, inflation, and interest rates, puts immense pressure on governments and leads to conflicts over high prices for food and energy. Erupting from this mess are military conflicts and wars.

However, according to Rauter, there is a surprising, alternative pathway to climate action that does not rely on cooperation – Bitcoin mining. The surprise is that Bitcoin, as a side effect of aligning economic incentives, can create climate-positive outcomes in a world of competing nation states. Economic incentives drive Bitcoin mining operations to search for stranded energy globally – and pay for this otherwise unused energy. The changing economics enable new projects that have been unviable so far: building out renewables and reducing venting/flaring of fossil energy sources. Two additional quantitative projections for you to ponder the changing narrative: First, a recent PWC report estimates “ESG-focused institutional investment” to rise to $33.9 trillion in 2026. Imagine, if 1% of that amount would find its way into “Bitcoin-Climate” projects? Such a demand would be 40% of today’s market cap of Bitcoin. Second, at the PlanB Forum 2023, Daniel Batten presented a study according to which the Bitcoin network could become carbon-negative by 2026. How? By putting Bitcoin mining operations onto 35 landfills and capturing the emitted methane to run the miners. This would render Bitcoin mining the first industry worldwide to achieve such a feat without resorting to any carbon offsetting. Now, that would be a surprise.

THANK YOU

With that I extend my warmest thanks to Dominic Weibel and Denis Oevermann for stemming the lion’s share of research effort and our colleagues in Marketing and Legal for getting the report published. Dear readers, clients and friends, I wish you calm and peaceful holidays with a few silent nights even, because come January, the silence may be over for quite some time in crypto.