Macro Conditions are Lining Up for Bitcoin to Hit $100k in 2021
Over the past year, we have seen economic puzzle pieces click together. An unusually prolonged Bitcoin bull run has become less unusual in the face of uncertainty spurred by the Federal Reserve.
Revisiting the S2F Model
In a time of Bitcoin price fluctuation panic, we have often referred to the Stock to Flow model to assuage concerns. This S2F indicator takes the core feature of Bitcoin – scarcity – and extrapolates it into a long-term trend. In other words, it projects the value of an asset based on its relationship with its annual production – mining – with its reserves.
Although stemming from the world of precious metals, the S2F model translates to Bitcoin even more firmly. BTC has an embedded mining difficulty/cost after each halving and it has a hard cap of 21 million coins that could ever exist. Both of these mechanisms reflect the scarce nature of precious metals.
As with all indicators, the SF2 model is an abstraction, a mental construct that picks up on a certain aspect of reality to make a point. This means that they never align with reality completely and never will be able to. That would fall into the domain of supercomputer simulations, not indicators.
Although the S2F model has its underlying theoretical issues, such as assuming that market capitalization is directly driven by supply rate, we have seen from the real world examples what it means when an asset has an abundant supply. Some may fault S2F’s linear regression as a “chameleon” statistical model, but this doesn’t detract from how Bitcoin is viewed, valued and used in practice.
DOGE vs BTC: Two Cryptocurrencies with One Huge Difference
Owing to its open-source nature, it is quite easy to copypaste Bitcoin’s code and make a new altcoin. This happened all the time. Purportedly created over a weekend by Billy Markus, Dogecoin (DOGE) was one of them. However, the key difference between BTC and DOGE is that the latter had a massive coin supply of 100 billion.
And even that cap was lifted by DOGE’s co-creator Jackson Palmer in 2014. After which, Dogecoin releases 5 billion tokens on a yearly basis. As a result, Dogecoin not only never reached a price of a single dollar, but barely breached $0.08.
One can only hope to see momentary interest spikes corresponding with Elon Musk’s intense DOGE shilling to his ~49 million Twitter followers.
In the end, this key difference in scarcity between Dogecoin and Bitcoin will always result in a graph like this – flatline vs growth.
MicroStrategy Counting on Macroeconomic Trends
With or without the S2F model, Bitcoin has forged a path as an asset immune to centralized, willy-nilly supply tinkering. This is why it continues to incur the wrath of central bankers, making them resort to old-school red herrings. In the meantime, corporate bond yields keep falling under the inflation rate.
While this puts bond investors in a bind, Michael Saylor’s MicroStrategy has made it a focal point for investment. By issuing convertible bonds at 0%, he is counting on the Federal Reserve to continue to devalue the US dollar. Therefore, he leverages the Fed’s infinite supply of USD with Bitcoin serving as the finite supply vessel.
Up to date, MicroStrategy holds 90,859 BTC with an average purchase price of $24,063. With Bitcoin’s latest ATH surging past $50k, it totals to about $5.12 billion. Meaning, MicroStrategy made at least $2 billion in profits.
With corporate bond yields going into negative territory, other companies will likely follow suit. This had already happened with MassMutual ($554 billion AUM) and Altshuler Shaham ($50 billion AUM). This Monday, NYDIG, Bitcoin provider for corporations, raised another $200 million from Stone Ridge Holdings Group, Morgan Stanley, New York Life, MassMutual and Soros Fund Management.
Food and Gas Prices Soaring
Inflation continues to rise apace headed by two critical drivers – food and fuel. Similar to the period of the Great Recession during 2009 – 2011, and compounded by lockdowns, it seems we are entering a period of greater instability instead of recovery. Jerome Powell, the Fed Chairman, himself stated that it will take “some time” for the US economy to fully recover.
Of course, “some time” is a non-statement, signifying infinite flexibility. What is clear is that both gas and food prices keep climbing, with the former spurring the latter. The gas price might even top the $4 ceiling this summer.
In turn, one gets less value per unit of the dollar. This tends to have the effect of rising labor wages and decreased corporate margins, all of which point to a bearish financial asset market such as bonds. Furthermore, tight monetary policy in the form of yield curve control (YCC) may have the effect of popping the global bond market bubble, estimated at around $100 trillion.
Have the rising prices affected your daily life routine yet? Let us know in the comments below.