Bitcoin Adoption Picking Up Amongst The Old Guard - Banks Changing Tune

The Rake Review: September 2020

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.

The Stars are Aligning

2020 has been a historic year in crypto markets after 2 years of crypto winter, and we see a significant amount of opportunity for investors coming in 2021. While Bitcoin is going from strength to strength, new and exciting developments are coming, from mass adoption to new tech projects and tokens as well as algorithmic funds open up to investors. We are working hard to bring alternative opportunities like that to Stormrake Clients soon.......

This month we wanted to focus on Bitcoin news but we are also trialing a special DeFi section by a guest contributor. Please let us know what you think.

Our content is based on extensive research and if you want more depth on any of our stories just follow the multitude of links we've created.

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The stars are aligning for a 2021 Bull Run based on fundamentals. I hate anything to do with astrology but I use the analogy of stars aligning here, to represent that multiple bullish signals are going off simultaneously. I've never been this firm in my view of increased Bitcoin adoption as an alternative to our current, faltering monetary system. Bitcoin has absolute digital scarcity, which means no more than 21 Million will ever exist. Fundamentally speaking, if supply is fixed and new long term investment increases, the price should rise. In order to illustrate my call here, let's go through the key factors.

1. The Bankers are dropping one by one.

What do JPMorgan, Goldman Sachs and Morgan Stanley have in common? They are all premier investment banks that were skeptical of Bitcoin in 2017 that are accumulating positions and will all benefit from a Bull run in 2021. We've had JPMorgan go as far as setting up their own crypto currency and investing heavily in ETH developers ConsenSys, to news we reported last month of Goldmans setting up a digital currency division to Morgan Stanley chief strategist recommending Bitcoin as an alternative investment in response to heavy money printing of USD. All this would have been unbelievable in 2017 when Bitcoin was still seen as a plaything of tech geeks and libertarians. If you believe in following the smart money this is a very Bullish signal.

2. Corporate Adoption

We've seen news of MicroStrategy (Nasdaq:MSTR) invest $250Million of its capital directly into Bitcoin. MicroStrategy is a successful business intelligence company that has invested a large part of its capital in an asset they see, as an excellent store of value with upside potential, that cash (being actively devalued by the Fed) or other investments (terrible yields for direct investment in safe assets) just don't have. This is a groundbreaking decision by the CEO who has incredible foresight and balls of steel but here's the thing. He bought over 20,000 BTC at above $11,650USD and he knows that if even a fraction of the Nasdaq wanted to do the same there isn't enough Bitcoin and the price would need to rise by an order of magnitude to fit everyone in. Or another way of looking at it is if Apple invests just its cash ($100B USD) into Bitcoin that would require almost half of all Bitcoins in circulation to be sold. In actual fact less than 5% of total supply is available in all the exchanges of the world.

3. Fund Managers

We've seen the Greyscale Bitcoin fund swell to over $5 Billion USD in value. It has had unprecedented success capturing institutional funds and there are a swathe of funds being set up to compete. We spoke with Valkyrie Funds last week who are finalising a round of capital raising (enquire with us if you'd like to invest) and they are ready to take Greyscale on. These funds will ramp up institutional adoption because Wall St needs trusted names and custody to be able to invest Millions. Again this is a majorly Bullish signal.

4. Regulatory advances and the ECB

Regulation has advanced, especially in the US with Bitcoin, derivatives and investments now having a legal framework. This makes it less and less likely that the US or other major nations may try to ban Bitcoin which takes away a common objection to investment. By the way, if countries do try and ban Bitcoin they will fail because Bitcoin can't be stopped as it is a decentralised world wide network.

5. Fed's continued push for Inflation

Someone once said that Bitcoin's greatest threat was if the central banks of the world actually did the right thing and stopped printing money. Well that's just not likely given what we've seen in the last few months. The answer to economic woes according to governments around the world is always the same "Just print more money". Jerome Powell came out to make a historic speech this month and instead of reversing course he committed to increased long term inflation by allowing inflation to run hotter than normal settings if inflation returns (ie keep interest rates low). The economy is now akin to a drug addict that needs more cash with every hit, never able to get off the drug. Here is the US M2 Money supply from 1960 to today. Effectively dollars per Bitcoin is growing exponentially.

And here is the debt that is being encouraged by central banks:

The further we go, the more additional money has to be injected to have an impact on GDP.

In summary I've never been more certain that Bitcoin will keep to its incredible long term trajectory. I'll leave you with a reflective quote from "The Bitcoin Standard"

“People’s choices are subjective, and so there is no “right” and “wrong” choice of money. There are, however, consequences to choices”

- Saifedean Ammous

This month Peter McCormack (who our very own Doug Hemingway beat in a Vegas Pinball competition this year) caught up with Plan B, who is responsible for the Stock to Flow model we use in this newsletter as well as Jeff Booth and Preston Pysh. The result is a definitive explanation of where we are headed and why. Take some time off, put your feet up, and have a listen.

As Plan B says "Once you have seen you cannot unsee. So, once you get it there's no way back"

Watch/Listen on

Youtube
Spotify
Apple podcast
Pocket cast

Markets

Another eventful month in markets with. Bitcoin threatened to breakout upwards for weeks and ended up crashing to $10,000USD. It has since recovered to just above the price MicroStrategy paid for it at $10,730USD currently. The Polkadot (DOT) ICO has landed and is now the 5th biggest cryptocurrency worth an estimated $4.8B USD. LINK is 6th worth $4.6B USD. That action has knocked LTC out of the top 8 and BSV out of the top 10.
The biggest movers were once again DeFi related tokens such as YFI, YFII, LEND and Balancer.

In the NEWS

Hong Kong Paper tell's readers "Bitcoin Will Never Ditch You" on the front page.

Bitcoin is about freedom and privacy as much as it is about money and unfortunately the citizens of Hong Kong have learned the value of freedom the hard way. The CEO of The Apple Daily, an independent newspaper known for telling the truth in the face of oppression was arrested under Hong Kong's new "National Security" Laws. In response Hong Kong citizens lined up to buy the newspaper and even bought shares in the company driving the price up over 1000%. Someone also took out a full length ad on the front cover. The newspaper allowing this ad is a significant statement. Read the message in the photo above. In a world where Chinese authorities are looking to control the population through its own currency, an investment in Bitcoin is an investment in freedom.

And then we saw this advertisement at a tram stop in HK. Which tram will you be on? The one where you supply all your banking and personal data straight to the CCP while they artificially set the price of the Yuan while printing more or the one where you can be your own bank, control your own investments, payments and destiny.

"Once new technology rolls over you, If you're not part of the steamroller, you're part of the road" - Middle sign in the picture above.

Be your own Bank?

We believe the greatest attribute of Bitcoin is the provable scarcity, but it is also a permission-less, decentralised platform that enables you to be fully self-sovereign. At Stormrake, we appreciate that some people may not yet be comfortable with self-sovereignty, but if you're ready to the next step on their crypto journey, then we're available to help you.

Fed Becomes World's Largest Investor

To my point above about the Fed doing the right thing here's further evidence we are moving away from a functioning market. Most people aren't aware of the enormous proportion of the Equity market owned directly by the government in Japan, well the US is heading the same way (ditto Australia).

Here is a Bloomberg screen of selected Fed holdings. There are thousands. This is the direct reason that unemployment is up, the economy is not functioning yet the stock market is hitting all time highs. Essentially the market economy is being nationalised.

The incredible growth of decentralised exchanges has continued this month with Uniswap passing Binance for volume traded. After that happened Sushi Swap nearly stole all the volume in a single day. That's the power of yield farming which we will need to come back to in education. At the same time this is leading to large ETH fees and new projects choosing to utilise TRON network and others.

DeFi Decoded

Stormrake is strongly of the view that Bitcoin is where most of our clients should be placing their value but Alt-Coins and the DeFi space is creating so much value that it can't be ignored so, we have asked Mark (Muggaz) Sugden to write a regular column for us in this space.

Mark has been working in Fintech for the last 2 years, and involved in the digital asset space since 2017. Mark is working with various high profile data analytics businesses in a professional capacity as well as providing community support to early stage projects in the space.

DeFi Decoded by Mark Sudgen

As an introductory piece, we are going to talk about DeFi - which is a portmanteau of ‘Decetralised Finance’

The DeFi boom has been led predominantly by two key drivers - the first is the proliferation of the Decentralised Exchange, or DEX for short - as far as functionality is concerned, very similar to Centralised Exchanges (CEX) however, there is no KYC (know your customer) required to make transactions on the DEX.

Centralised Exchanges have been known to charge fledgling projects up to $300k to list, and the DEX removes this significant barrier to entry, which has empowered innovative projects to bootstrap their products without the need for significant investment from VC's and bad actors.

On the flip side, it has also enabled nefarious actors to list scam tokens and projects, before pulling the rug on speculators.

The second key driver is the success of some of the bootstrapped projects - in particular is a DEX called Uniswap, which has more than doubled the daily volume of Coinbase Pro - one of the leaders in the space. Another project, Yearn Finance, which offers 'Yield' based on storing assets in their smart contracts ($900m right now) has risen from $700 in July to $33,000 at time of writing.

Overall within the DeFi market, there is almost $10b of digital assets locked within various protocols.

Of course, as you can expect in the crypto space, many clones of these successful projects have appeared, and the challenge is to sort the signal from the noise, and hopefully we can help with that - in the meantime, make sure you check out https://defipulse.com/ - which will give you a great high level overview if you would like to know more

Bitcoin Network Utilisation

Some points of note on the dash below. Price is now under 10,000 sats per Dollar. There may actually come a time decades from now when there are not enough sats to go around. At that point people will use a secondary smaller currency for micropayments and store wealth in Bitcoin. A new section has been added comparing Gold and BTC. BTC is still relatively small at only 1.64% of Golds Market Cap.

Stock to Flow Valuation:

Current Long-Term Stock to Flow (StF) Price: $14,669 USD vs Current Price - $10,732 USD. Market price is lower than the historical trend suggesting that Bitcoin is undervalued today. However, the StF model also shows an increasing price every day for the next year to $100,000 USD. According to the efficient markets hypothesis, a rational investor would buy today and wait for the $100,000 USD price to materialise if you trusted the model. That’s why we rate Bitcoin as a Strong BUY

Crypto Class: Information & Education

The Blockchain: A live view.

We've recently come across an excellent way to visualise what happens to transactions within a blockchain and we share it with our readers in this month's education session.

Please open https://txstreet.com/ in a new browser. (I'm assuming everyone has 2 screens - if not, you can flick between this and the link).

What you see in front of you now is a brilliant visualisation of the ETH and BTC blockchains. Each little person represents a transaction that's trying to get on a block (bus). They all compete however based on the amount of transaction fees they've chosen to pay. If you use exchanges and don't usually select your fee you may not have realised that sending from your own wallet allows you to choose how much fee you'd like to pay. Now economics and market forces come into play. If the fee you chose is too low you may have to wait a long time to get into a block and in turn your transaction will be slow. If you've overpaid you are likely to have sent your transaction really fast but may have wasted some funds. This system allows those that are in a hurry to effectively skip the queue which is great because it means the highest value transactions get through fast while least important transactions wait.

On the side you can see people leaving little houses. These are various apps built on that blockchain. The Unicorn for example is a decentralised exchange called Uniswap. We mentioned it earlier having become the world's largest exchange by volume this month. DeFi projects built on ETH are using up a huge amount of transactions resulting in very high fees. You can see the fee on the current block in USD on the black display.

Comparing ETH to BTC.

You've probably noticed that there are way more transactions on ETH than BTC. There are 2 reasons for that. Firstly, ETH acts as a platform for a huge variety of projects and uses. Each of these is a transaction on the Base blockchain which is ETH. Secondly, BTC is not designed as a quick payments network. Rather, it is used as a store of value. The slower the blocks the more safety there is from a 51% attack. You can see the busses are way slower in BTC than ETH. BTC blocks are designed to be around 10 minutes apart whereas ETH is going at several blocks a minute.

In the future it's likely that you will use Bitcoin to safely store the majority of your savings / spare cash but you might keep a small amount for transactions in a currency that's fast and less secure like Ripple (XRP) or Stellar (XLM). These will be more volatile so you may not want to keep too much value in them. If we think in terms of the Stock to Flow model Bitcoin has the highest Stock to Flow ratio. The amount being created and circulating is low compared to the value of the existing coins.

Have a play with TxStreet and we can answer any questions.

Until next month, Happy Investing!

Stormrake Team

custody@stormrake.co

General Advice Warning

The information provided in this newsletter is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information contained here you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant Product Disclosure Statement (PDS) of the product provider to make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice. You can get a copy of relevant PDSs from Stormrake by email custody@stormrake.com.

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