The Golden Bull Begins

Bitcoin is ripping through resistance like toilet paper, making new all time highs seemingly by the hour. Is the Golden Bull market finally here?

Within hours of Trump being officially elected to the Presidency, Bitcoin soared to fresh all-time highs, buoyed by the hopes of crypto industry reform that was promised by the billionaire politicians just a few months ago. During a speech at the Bitcoin Conference in late July, Trump had promised several key reforms to the crypto industry, including firing the unpopular Gary Gensler, which was met with roars of elation from the crowd.

He also promised to defend the industry from hostile interests such as Elizabeth Warren and the Senate Banking Committee, who had threatened to impose strict Anti-Money Laundering regulations on crypto, despite the fact that the industry is hardly used in funding crime or terrorism.

In fact, Chainalysis estimated that only $20B of crypto transactions were sent to illicit addresses in 2022, far less than the $800B- $2T that is laundered through banks every year. 

In any regard, it seems the brakes are off. Hours into a Trump victory, Bitcoin soared to new all time highs, breaking $75K before retracing slightly, and then rallying to $76K a day later.

As the week wore on, Bitcoin continued to climb higher and higher, and on market open on Sunday morning, the orange coin gapped up by literally $5,000, creating a massive dislocation in the market.

Throughout the day on Sunday, the price climbed higher and then on Monday, we saw the Omega candle, as it is termed by Samson Mow. During the day, the price soared higher, breaking all-time highs literally every single hour until it topped at $89,000.

The immediate catalyst for this face-melting rally appeared to be a massive BTC purchase coming in from Microstrategy, who purchased approximately 27,200 Bitcoin for around $2.03 billion on Monday, marking its largest purchase since it first began accumulating over four years ago.

The recent purchase increased MicroStrategy’s Bitcoin holdings to about $24 billion, based on Monday’s record price of over $86,500 for the crypto. Bitcoin has gained a lot of momentum after U.S. President-elect Donald Trump’s endorsement of the asset class and promises to rehash crypto regulation. MSTR remains the largest publicly traded corporate holder of Bitcoin, apart from BlackRock’s U.S. exchange-traded fund IBIT.

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Now let’s get back to it!"

In late October, MicroStrategy announced their Q3 financial results, and coincident with that, a new capital plan to raise $42B of capital, split equally between equity and debt securities raises ($21B each, a sly callout), and purchase massive amounts of Bitcoin. The plan is already in motion, as the events from this last week have demonstrated, with the large spot purchases. Their balance sheet had $46M in cash and cash equivalents at the end of September, so bitcoin buys in any size are being funded by equity dilution or debt borrowing, not from their current cash balance.

The MicroStrategy feedback loop works like this: MSTR raises capital, either in the form of equity or debt, and purchases BTC. As the price rises, MSTR moves further in the green on their investment and borrowing debt or raising equity becomes easier. Since the weighted average cost of capital (WACC) is 8.03%, and Bitcoin’s 10 year CAGR is 55%, the company has a huge margin of profitability. 

In effect, this is financial vampirism on the current banking system. MSTR is acting as a siphon, sucking economic energy out of the equity and bond markets through capital raises, and directing that energy into the hardest money that exists with a limited supply cap of 21M. As long as the WACC sits below their Bitcoin hurdle rate, they can continue this process ad infinitum. 

Like I stated on Twitter, I had the impression that MSTR would lose its bitcoin premium in equity markets this year as the ETFs gained adoption, institutions looked for trust/savings vehicles, and other products would replace the stock as a holding vehicle.

I wasn't bearish, but I just thought it would cease to trade with BTC and go back to trading like a normal SAAS stock. All additional capital that wanted exposure to bitcoin would flow to ETFs. Instead, I now think MSTR is essentially a better version of the ETFs- no fees, no fund managers, no lockout periods, and a cashflowing business underneath to back the purchases- like my friend @atlas_hodl pointed out to me yesterday. Furthermore, many asset managers (including Vanguard) have blocked clients from purchasing any Bitcoin financial products. Micro Strategies, as an actual software company with real revenues and clients, isn’t technically a bitcoin product.

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As some analysts have pointed out, although MicroStrategy’s stock trades at a premium of more than 2.3 times its net asset value (NAV) in Bitcoin—which might seem irrational given that buying Bitcoin directly avoids this markup—the company has a unique advantage. MicroStrategy actively leverages its position to acquire more Bitcoin. This year alone, it issued two convertible debt offerings in March with interest rates below 1%, expanded its convertible note offering in June, and completed another offering in September, all to fund additional Bitcoin purchases.

This ability to raise capital is the keystone in understanding MSTR’s outperformance, which has surpassed all the gold ETFs, Bitcoin ETFs, the S&P 500, and the NASDAQ. 

It’s truly genius if you think about it. If other companies follow suit, like I have been recommending $GME to do, then the trickle of capital could become a deluge, pulling in trillions of dollars into the respective stocks running the Saylor playbook, and thus into Bitcoin. The virtuous feedback loop would develop as these stocks rally, allowing them to raise more and more capital to buy more and more bitcoin. 

In trading on Wednesday afternoon, MSTR diverged significantly from the Bitcoin price, falling from $380 per share all the way down to $323 at the low. As the stock retraced, BTC continued to rally all the way to $93K before falling back down to $90k. This led many on Twitter to speculate that MSTR was doing another At The Money (ATM) offering of equity and using the funds to purchase Bitcoin. 

This strategy is cognizant for those who truly understand how Bitcoin responds to market dynamics. On a livestream last week with Erik from Outlier Trading, he asked why Bitcoin, as an inflation hedge, doesn’t seem to trade with inflation expectations. The orange coin shouldn’t be rallying right now.

I explained that the better proxy for understanding why the Bitcoin price moves is liquidity. Whenever a central bank announces a new easing program, or when they intervene in their foreign exchange markets, Bitcoin finds a local bottom and begins to rally. This can be seen in the start of QE programs from the Fed and ECB, or in the Yenterventions of the Bank of Japan as I pointed out earlier this year. Here’s a Bloomberg chart I made overlaying BTC and Global Liquidity, as you can see, it trades with levered beta:

Obviously I am not alone in saying this. Many other macro researchers, including Michael Howell of Liquidity Wars, have noticed this correlation. Since Bitcoin is a financial instrument, any increase in systemic liquidity has an immediate impact on allocations of all risk assets, with bitcoin and crypto being furthest out on the curve. With the lowest market caps, this means that each marginal dollar causes disproportionate moves in the prices of cryptocurrencies like Bitcoin or altcoins.

The process for this is quite clear: As central banks ease, they swap bank reserves for “safe” assets like Treasury bonds or mortgage backed securities issued by Fannie May and Freddie Mac. These securities therefore move from commercial bank balance sheets to the central bank, which frees up space for commercial banks to invest in other things. This creates what Alfonso Peccatiello calls a “portfolio rebalancing effect”, by gobbling up the most conservative assets and pushing banks and financial institutions further out along the risk curve.

As these banks want to do something with their newfangled bank reserves, they deploy them to buy more bonds, which lowers bond yields and suppresses volatility. This encourages carry traders, who boost asset prices by adding liquidity to high yielding instruments like certain bonds or equities. As this process continues, everyone moves further and further out on the risk curve since the central bank gobbles up all the bonds.

Macro Alf summarizes it like this in his article:

Summarizing, here is the virtuous cycle behind the Portfolio Rebalancing Effect:

Central Banks expand their balance sheet and purchase government bonds, and often also corporate bonds and mortgage-backed securities;

Commercial Banks are on the (forced) receiving end of QE, and hence their portfolio composition gets skewed towards more reserves, and less bonds;

But reserves are sub-optimal to own compared to regulatory-friendly bonds for the reasons we discussed, and hence they look to rebalance their portfolios;

They start buying the very same bonds QE is buying, hence suppressing volatility further and compressing credit spreads across the board;

Other banks who have resisted the temptation have now held inert bank reserves for a while and missed on the ‘‘carry’’ party, and given the reduced volatility pile on and rebalance their portfolio too;

Asset allocators and investors across the world are more and more encouraged to take additional risks in their portfolio, supporting the flow of credit and capital.

Thus as central bank liquidity (or liquidity in general) rises, more and more capital will flow across the risk curve, and small market cap assets like Bitcoin rise. Liquidity has now become the driving force in pricing risk instruments, like I have stated time and time again. Value investing, fundamental analysis- these are all things of the past. 

In a world where money is infinite, liquidity is king.

In their quest to kill the business cycle, central banks have become cyclical themselves, injecting liquidity whenever there is a recession or threat of deflation, and withdrawing it once CPI inflation or asset price inflation begins to get out of hand. Again, I’ll use Howell’s graphs here as a reference, but this has been going on for decades.

As we can see, we bottomed in global liquidity (this measure includes corporate and bank liquidity, not just central banks) in late 2022 and have been climbing upwards ever since. If this cycle is set to continue, we should see a substantial increase in liquidity over the next few years, topping in 2026 before falling again. This would roughly match the 4 year bitcoin cycles, where BTC rallies and then enters a bear market before breaking out again.

With a coming liquidity wave and the engine of MSTR firing on all cylinders, capital is being primed to pour into this asset class. Bitcoin is closing in on $100K as we speak.

This means the golden bull market has barely begun.