21 June 2021
MicroStrategy has been fully utilising environment of near-zero interest rate, cheap liquidity, and passive investing by raising cheap debt and most recently, filing to issue $1bn worth of shares to accumulate even more bitcoin. On the mining side, great mining migration continued as the Sichuan government ordered local state-owned power grid to cut off the supply of 26 mining farms by 6/20, not sparing ‘clean’ hydroelectricity-powered mining rigs from the clampdown. 7-day average of bitcoin network’s total hashrate has declined significantly from peak of 180m TH/s (5/14) to 125m TH/s (Chart 1).
Despite the above developments which should strengthen demand-supply dynamics, sentiment has become more bearish over the week, as bitcoin failed to break above $40k decisively to reclaim 200-days moving average, and instead slid down to low of $33k during the weekend. The price action does not look great but on-chain data depicts a more positive picture with liquid supply decreasing (Chart 2) with bitcoin flowing into illiquid (as defined by ratio of cumulative outflows to inflows over the entity’s lifespan) entities, and supply held by ranks from whales to shrimps (0.1–1 bitcoin) either remaining stable or increasing. In the alts space, most printed double-digit drawdown, with the exception of $AMP (Coinbase listing) and $SHIB (Coinbase Pro listing).
Bear market, however, gives participants with conviction (or at least those that deem digital assets to be a positive expected value game) the time to build. Last week saw greatest financiers investing in the digital assets space; Henry Kravis, Stanley Druckenmiller, Dan Loeb and David McCornick participated in Bitwise’s Series B ($70mio at $500mio valuation) as they bet on future of digital assets index funds, while Peter Thiel and Allan Howard participated in BitDAO’s $230mio raise as they bet on future of DeFi. Mark Cuban also wrote that DeFi could be the next great growth engine for the US, but also got burned in Iron Finance; many found the billionaire getting ‘rugged’ comforting as it reinforced the narrative of DeFi as being equitable, with no unfair protection over the rich and the powerful.
On the macro side, last week saw much-anticipated quarterly FOMC statement. Fed turned tad hawkish as it used the opportunity to tone down on the dovishness and manage market expectations; Fed increased inflation projections for next year and added 2 rate hikes to 2023 forecast in its dot plots. Real yields rose in the short to medium part of the curve, causing DXY to benefit. Following FOMC, James Bullard from the St. Louis Fed said interest rates may have to raise next year to tackle possible inflation, spooking the equities market, and spooz finished its worst week since February. Gold also came under pressure due to higher real yields and stronger dollar. Next week, big tech will be in the spotlight with the U.S. House Judiciary Committee expected to vote on antitrust bills.
What is Happening?
98% of hedge fund CFOs expect crypto allocations by 2026. Fund administrator Intertrust surveyed 100 hedge fund CFOs (managing an average of $7.2bn in assets), and found that they expected to hold 7.2% of their funds’ assets in crypto by 2026, and 17% of the respondents expected to have >10% of their investments in crypto. Based on Preqin’s forecast for the total size of the hedge fund industry, this could equate to ~$312bn of assets in crypto if replicated across the sector. Also last week, Paul Tudor Jones mentioned he wanted 5% of his portfolio in bitcoin (together with 5% in gold, cash, and commodities respectively) as he liked “the idea of investing in something that’s reliable, consistent, honest and 100% certain”.
Despite MicroStrategy’s $400mio bitcoin purchase which should have buoyed the markets, the overall digital assets market remains under pressure. Anecdotal reports of high-profile crypto hedge funds ligthening up their crypto delta positions and consistently negative funding in the past 1 month imply negative sentiments and lack of demand for leverage.
We at Satori Research have been maintaining a very light portfolio given the bearish market. This current “crypto winter” is optimal to conduct quantitative research and synthesize new strategies. We strongly believe seasons change and we will be ready to capture the opportunities when “crypto spring” inevitably arrives.