Today’s inaugural issue of The Digital Asset Bulletin builds on 3iQ’s commitment to educate clients about, what we believe, are the growing opportunities in the digital asset ecosystem.
Our publications are informed by a multi-disciplined approach that folds in the implications of broad economic factors, market developments and how the changing behavior of critical players in regulation and investment impacts various digital assets.
Our Thesis
Blockchain enabled technologies such as Bitcoin and Ethereum have migrated from a speculative opportunity to an investment imperative for both the institutional and individual investor.
This shift in outlook owes to a reinforcing loop of performance and adoption across digital assets over the past decade. Mounting structural headwinds may have impaired the performance of many traditional assets such as equities & credit (1), further accelerating adoption.
Why Crypto Now
1. Covid-related spending had the fiscal impact of a WWIII in terms of debt, dollar debasement and deficit spending.
The Monetary Ratchet refers to the current macro-economic set up, where historic sovereign debt to GDP levels accumulated in response to Covid-19 have locked policy response in the single direction of accommodation.
As a result, the degree of monetary debasement combined with other spending and demographic trends, could make a return to sound monetary or fiscal policy, a bridge too far.
Continued monetary profligacy might have implications for investors in fiat denominated assets (stocks/ bonds) as valuations separate from fundamentals and purchasing power declines.
2. Blockchain-based assets are a proven value and more.
The adoption of Bitcoin, Ethereum and other digital assets is an evolutionary step in our growing reliance on technology’s dynamic value proposition, providing more for less over time.
We believe the traditional tech space is already responding as FAANG shifts to MAANG, a nod to the Metaverse’s opportunity. However, this is just a half-step, as only assets with protocols built on blockchain foundations can drive a user-owned reality and escape the trap of fiat debasement.
3. Recent events validate the exponential opportunity in digital assets.
Market developments, as we see it, tilt today’s risk reward dynamic in favor of digital assets, ranging from Bitcoin and Ethereum to staking to NFTs.
Going forward, our Monthly publication and periodic theme pieces will more rigorously explore topics that we believe impact the growing opportunities in digital assets.
The Bulletin provides updates on these themes with metrics and graphics to help contextualize current market action, economic releases and industry events that speak to the adoption and performance of these exponential growers.
Today, we offer a hybrid, by illustrating the deleterious effect of ratcheting up accommodation, which could tighten the monetary debasement/ debt loop.
Real Growth shifts to a real problem…
From 1981 to 2008, the U.S. money supply, equity markets and GDP enjoyed similar growth rates on average of ~5 to 6%. Certainly not in a straight line and through several business cycles, but still resulting in a tight range of growth as rates dropped and inflation ebbed.
Post the Global Financial Crisis (GFC), we see the impact of Zero Rate policy and expanding balance sheets that separate the real economy from the financial economy.
The post Covid period illustrates this clearly as government actions had disproportionate outcome.
The 18.3% annual compounded growth of M2 on the back of Fed accommodation drove a wedge between real economy measured in terms of US GDP at 3.6% and the financial economy proxy, the Wiltshire 5000 equity index, which compounded at 15.7%.
Source: 3iQ Research. Data sourced from Bloomberg, Federal Reserve Bank of St. Louis as of December 31, 2021.
…debasement is global in nature, trapping the FIAT system.
Source: 3iQ Research. Data sourced from Bloomberg as of February 28, 2022.
Resulting in distortion of traditional assets such as equities as measured by a Wiltshire 5000, that is today, 2.5x greater than US GDP.
Source: 3iQ Research. Data sourced from Bloomberg, Federal Reserve Bank of St. Louis, Federal Reserve Bank of Philadelphia as of March 31, 2022. This is a hypothetical example, for illustrative purposes only. Past performance is not indicative of future results.
The decline in M2 velocity as the Fed balance sheet grew demonstrates again how the Covid-related flood of monetary and fiscal support was channeled into asset growth, not the real economy. Today, US debt/ GDP is above 120%, a level not seen since WWII. This diminishes growth prospects for the US and other recently debt-laden G-10 countries, calling into question the duration of any hawkish policy.
Source: 3iQ Research. Data sourced from Federal Reserve Bank of St. Louis as of December 31, 2021.
Policy adjusts as a Result
This deteriorating monetary and economic reality may be at the root of recent shifts in attitude towards blockchain and digital assets.
The first was President Biden’s March 9th executive order (EO) with its balanced language, “ensuring responsible development of digital assets”. The takeaway was the demand for senior cabinet members to submit a report by September on the “future of money and payment systems, including the conditions that drive broad adoption of digital assets.” Janet Yellen was the first cabinet member to respond, with a quite different tone in her April 7th comments at American University on the same topic.
Where Biden kicked off his six directives with three concerns addressing safety and risks, Yellen’s first point was the call for innovation, not bringing up Sovereign money until point number four. But the shift in sentiment went beyond a more favorable prioritization of the benefits. Rather, it was the specific language Ms. Yellen used to highlight the innovations from digital ledger technology, quoting Satoshi’s October 2008 paper. Instead of criticizing Bitcoin and other digital assets, Ms. Yellen cited the benefit of distributed ledge technology, noting Satoshi’s “novel method for validating transactions, using cryptography to address the so-called, double spend problem”.
Quoting from the Satoshi white paper and referencing President Biden’s EO as well as the mandated report makes it clear that US policy addressing the digital assets is already underway… All to leverage the innovations possible through “blockchain enabled digital assets” to use Ms. Yellen’s words.
War and Money
Punctuating the case for urgency, Credit Suisse Monetary Strategist, Zoltan Pozsar wrote that the G-7 led sanctions in response to Russia’s invasion of Ukraine ushered in a new monetary era, ‘Bretton Woods III’.
The current iteration is a departure from both the Bretton Woods I, gold-backed fiat system and Bretton Woods II, where a diminished USD retained reserve status with a petro-dollar pact. The strictures of the Bretton Woods regime became more problematic for the US, as the economy struggled and the wartime deficit grew. Finally capitulating, on August 15th 1971 Richard Nixon ended USD convertibility into Gold, ending the 1944 Bretton Woods compact, and greater financial autonomy.
We note this sequence as each of Bretton Woods, Bretton Woods II and the current iteration, Bretton Woods III were all born out of new world orders on the back of war and destabilizing deficit spend.
While history may not repeat, it has been said to rhyme. These developments suggest that this familiar rhyme has increased in meter, being heard by more strategists like Mr. Pozsar and informing policy makers as we write.
…As adoption rates increase
Investor adoption of Bitcoin and Ethereum as measured in Wallet addresses has grown over time and sustained 50%+ price drawdowns and little to no regulatory clarity until recently.
Source: 3iQ Research. Data sourced from Coin Metrics as of April 19, 2022. ETH data excludes ERC-20 or equivalent tokens.
Understanding the cost/ benefit of owning an exponentially growing asset.
The below graphic demonstrates that Bitcoin is ~2.5x riskier than the S&P 500 as measured by 63D historical volatility. Substituting uncertainty for risk, this reality makes sense. A new technology, with modest adoption contributed to a much less certain price path relative to the inveterate S&P 500. However, that was in the past.
Today’s ~2.5x greater volatility is down from 4 to 8x greater volatility for Bitcoin. Basing effect is one factor for sure, but fundamental and structural elements also add to the closing of this uncertainty divide. More exchanges and greater adoption are two factors that have contributed to the overall decline in volatility. In effect the volatility chasm represented mispriced risk, which was realized to the upside as measured by a more favorable Sortino ratio AND outperformance in absolute terms. Looking at the graphs closer, we see that this compression has BTC vol trending lower, while SPX vol is approaching 2020 levels.
Source: 3iQ Research. Data sourced from Bloomberg as of April 20, 2022.
Source: 3iQ Research. Data sourced from Coin Metrics as of April 15, 2022.
Source: 3iQ Research. Data sourced from Bloomberg as of April 15, 2022.
Source: 3iQ Research. Data sourced from Coin Metrics as of April 19, 2022.
(1) Past performance is no guarantee of future results. There can be no assurance that any investment will achieve its objectives or avoid substantial losses.
