The Ten-Year Project: Update #7

PYA WALTMAN CAPITAL, LLC

THE TEN-YEAR PROJECT

UPDATE #7 INCEPTION DATE: DECEMBER 2016

Article by: Eric Foster, CFP®, CPA

The Phoenix

According to Greek mythology, the phoenix is a magnificent bird with radiant feathers. Legend has it that this extraordinary bird lives for centuries, before meeting its end in a spectacular display. As the end of its life approaches, the phoenix builds a nest, known as a pyre, from aromatic woods such as cinnamon and myrrh. Then, the bird sets its own nest ablaze, engulfing itself in flames. Rather than meeting a tragic end, the phoenix emerges from the ashes, reborn and renewed, ready to begin a new life cycle. The topic of this blog has lived a similar existence since its birth in 2009. Bitcoin’s journey has been full of spectacular advances followed by seeming extinction with plenty of “I told you so by the pundits” along the way.

I started this blog series back in December 2016 as a public learning exercise on Bitcoin. You can find the first 6 articles here. My last Bitcoin update was published in January of 2023. At that time, Bitcoin traded for around $17,000 and had suffered significant losses during the 2022 calendar as had stocks, bonds, and real estate. I made a few predictions in my last article, so I thought it would only be fair to revisit them.

The price of Bitcoin is likely to “slug” around for a while. Given the price in January 2024 is closer to $45,000, I’d say that I underestimated how quickly the price would recover. Bitcoin spent much of 2023 bouncing between $25,000 and $30,000 and took a leap higher last fall when news of a possible ETF approval gained steam. We’ll revisit that topic later.
The pace of regulation will likely speed up. This prediction has been pretty spot on. 2023 saw a race by several firms to get traditional investment vehicles approved by the SEC. This was sparked by a lawsuit filed by Grayscale against the SEC who had denied Grayscale’s bid to convert its trust vehicle into an Exchange Traded Fund (ETF). Grayscale won a unanimous decision in late August in the D.C. Circuit Court of Appeals, which forced the SEC to reconsider the application to convert. This court ruling has emboldened the belief that the SEC will ultimately be forced to allow a Bitcoin ETF. We’ve seen plenty of activity from the traditional financial players now racing to get their share of potential fees from managing such an offering. Currently Blackrock, Grayscale, Fidelity, Invesco, Franklin Templeton, and others have pending applications with the SEC, with expectations of a possible decision this month.

What does it all mean?

In reality, if you want Bitcoin exposure today you have plenty of options. You can go directly to a custodian like Coinbase and purchase. You can open a Fidelity Digital Assets account and purchase Bitcoin and Ethereum, or you can buy Grayscale’s trust at any major custodian. So, a new ETF isn’t so much about opening some large untapped pipeline from retail investors into the digital assets space. That’s not to say it does not matter.
Adoption stories like Bitcoin’s are fueled by the removal of friction. IF there is demand and IF it’s easy to access, demand tends to grow especially when prices for an asset are rising. A slew of new ETFs will create price discovery and lower fees for investors which is a good thing. Financial advisors who must please their compliance departments will have more regulatory clarity with an SEC approved product to use.
Institutional demand is likely to grow once the SEC has approved a product. Boards and committees are less likely to suggest exposure to Bitcoin without the SEC’s stamp of approval.
There will be a massive marketing push for Bitcoin ETFs. Grayscale has close to a monopoly with their foreign trust product today. As of January 4, 2024 the Grayscale Bitcoin Trust had assets of $27.3 billion earning a management fee of 2%. With ETF approvals, I’d expect assets to add to that pile rapidly. All of those fees are up for grabs, so expect to see a lot of ads vying for the business. I’ve noticed heavy advertising in airports over the past few months for GBTC (the trading symbol for Grayscale’s product).

What if the SEC does not approve anyone’s ETF? This would create a good amount of chaos, as the market has developed a near consensus view that this cycle of applicants will see approval. A denial would be interesting for sure, but I’d say that’s highly unlikely. The SEC’s past stance of denying anything and everything took considerable damage at the hands of the court system. They have moved along applications throughout the fall with major players who have been busy replying and clearing comments and concerns from the SEC. I think all signs point to an approval at some point this year.

Someone’s loss is another’s gain. This is happening rapidly and was already discussed above with the comments around ETFs. Largely wiped from existence are the upstart BlockFi, FTX, and Gemini players. Traditional Wall Street titans are about to join the Bitcoin game in a significant way. Remember, all they really care about is the opportunity to make money by supplying the investing public with products that earn fees. Being involved in Bitcoin isn’t BlackRock saying anything good or bad about crypto, it’s just their flagpole on the mountain of fees they can try to earn.

Bitcoin Halving

The Bitcoin halving occurs approximately every four years, reducing the rate at which new bitcoins are created by half. This process is built into the protocol, designed to control inflation, regulate the supply of bitcoins, and create scarcity. By halving the reward miners receive for validating transactions and adding new blocks to the blockchain, the event contributes to Bitcoin's deflationary nature and potential value appreciation over time. There have been three Bitcoin halving events. The first halving occurred in November 2012, the second in July 2016, the third in May 2020, with the fourth upcoming in April 2024.

Bitcoin halving events have historically been accompanied by remarkable price surges. Between the first and second halvings, Bitcoin surged by a staggering 10,000%, jumping from an initial value of about $12 to over $1,200. The period following the second halving saw BTC initially stagnate around $650, but it later skyrocketed to nearly $19,000, marking an impressive increase of over 2,900%. In comparison, the most recent halving resulted in a 750% price increase, starting at around $9,000 and surging to nearly $70,000.

Pointing to the halving events and expecting another massive price surge is likely to lead investors to disappointment. These are highly anticipated and predetermined events, and that’s not what tends to move markets and prices. Bitcoin has a finite supply, which is one of the most important attributes that any investor needs to understand. This is just that attribute playing out right on schedule. If the Bitcoin price continues to advance, it will be because more people want more exposure. With a truly finite supply, demand can only influence one part of the equation – price.

What Happens Next?

I’d guess that a Bitcoin ETF is approved in January 2024. That may well happen before this blog post is even published. We will see an arms race of marketing kick off as a result and you’ll be inundated by Bitcoin everywhere. Here’s where context will matter. Risk assets need a good environment in which to advance. This is true for stocks and Bitcoin together. The recovery in price for stocks and Bitcoin last year was fueled by an economy that continued to improve during 2023. Supply chains improved, inflation fell, the Fed did most of its work in raising rates and all of those things helped companies improve their margins and profitability. That’s a great recipe for stocks to rise and risk behavior to do the same.

The macro environment will certainly play a role this year for Bitcoin too. If the economy continues to defy expectations and strengthens further and the Fed begins to ease interest rates on the back of falling inflation, we’ll have continued easy monetary policy. This is an election year unfortunately, which means we’ll likely have politicians of all stripes promising all kinds of things to voters. Deficits ($1.8 trillion estimated for 2024, and that’s in a growing economy) and debt ($34 trillion) continue to mount. I think those factors play the biggest role in the success of Bitcoin. Currency debasement is rampant around the world, which puts all investors in a war to defend their wealth. The narrative of Bitcoin as a way to battle back is gaining adoption. A finite

currency that is not directly controlled by any government (decentralized) is the opposite to debasement. I think it’s possible that you see a 2000-style tech market advance in Bitcoin over the next 2 years. Several factors would have to line up in order for that to occur, so odds would say it probably won’t happen. I think it will be interesting to watch for sure.

Current Bitcoin Price $43,646.88 as of January 5, 2024, at 2:22 pm

The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.

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