This week, Bitcoin completed its fall from the recent all-time high of $69,000 set in early November to reach as low as $42,000 overnight as the East Coast went to bed on Friday.
On a levered basis, my portfolio is now down 24% since inception, and down 9% without leverage.
Of the top 6 positions that make up 95% of my portfolio, Cardano and Polkadot accounts for the majority of the losses, with ADA and DOT down 32% and 37% respectively from my cost basis.
Ethereum continues to hold strong (+4%), while Solana (+2%), Polygon (+8%), and Bitcoin (+3%) are all barely in positive territory.
While the 40% drop for Bitcoin from 69K to 42K can come as a shock for the crypto class of 2021, corrections such as these are plenty in the crypto space and can sometimes be a great opportunity to add to your position - so long as we continue to be in a macro uptrend.
In the stock market, the general consensus is that a 10% drop is termed a correction, while a more than 20% decline will be considered a bear market. I would say in crypto, a correction would be akin to a 20-30% drop, while a bear market is a decline between 60-70%.
The sooner you adjust your mindset for this, the better it will be for your mental health!
Two Charts to Chew On
Earlier today, I was chatting with a friend about how inflation may have an impact on our portfolios.
(I know, I don’t have a life. But trust me, please follow along.)
I for one, do not believe that the recent bout of inflation will continue to be persistent in the medium term, while the general consensus today, including the Fed, is that inflation is no longer “transitory”.
I continue to believe that inflation as defined - that is, the increase in prices of a broad basket of goods and services - is a short-term supply side issue.
However, I believe that investors focused on inflation are missing the forest for the trees.
Here are two charts that illustrates why.
The first chart is an illustration of the United States’ money supply from 1982 to 2021.
As you can see, the amount of money that is circulating in the economy has been growing over the last couple decades.
However, there were a couple periods that looked like key inflection points where the money printing accelerates at a higher pace.
The first observation is around 1997-98. Another kink can be observed around 2008 to 2012, and then the latest step change in the rate of printing is perhaps the most observable in 2020.
There’s clearly a lot more that we can delve into on these topics, but suffice to say, these changes in the money supply all coincided with certain events.
The latest acceleration in money printing was clearly because of the Covid-19 pandemic as we wired cash to the population, 2008 was the global financial crisis, and 1997-98 were the Asian financial crisis and the collapse of a hedge fund called Long-Term Capital Management.
What you’ll find, however, is that while one would expect the increase in money printing to result in more inflation, that has not actually been the case in the last two decades where inflation has hovered at, or below two percent.
And that’s because folks have been looking at the wrong place all along. The next chart, explains why:
The above shows the S&P 500 index, divided by the same M2 money supply that we saw earlier.
What you’ll find, is that when taking the amount of money supply into account, the main stock market index has just barely got to pre-financial crisis high. In fact, if we take into account the money supply, the stock market is actually far below where it used to be during the dot-com bubble of 2000/01.
While the S&P 500 index has been touching new “all-time highs” almost every other day in 2021, and is 200% higher than where it was during the dot-com peak, what the chart shows is that an investor in the stock market index has barely even kept up with growth of the money printing since 2000.
What that tells you, is that inflation is not the problem here. Monetary debasement is.
Monetary debasement isn’t largely observed in the price of goods you pay (which is how headline inflation is calculated today), it is most observed in scarce assets.
Scarce assets, such as earnings producing companies (i.e. stocks) or physical real estate is where monetary debasement is best reflected. That is, the illusion of a rising stock market or housing prices masks the money printing that is actively devaluing your purchasing power.
Why does this matter?
If you are a millennial that graduated in the last decade or two, for every dollar that you earn, you can now buy less of a scarce asset compared to the prior generation.
That means if you work as hard as your parents, you may not be able to afford that same house that you grew up in because the effects of monetary debasement results in scarce assets such as real estate appreciating at a faster rate than wage growth.
Asset inflation is fantastic for the asset owner, but if you are a new participant to the economy such as the Millennials or the Gen-Z and are drawing down your first paycheck, the effects of monetary debasement stacks the cards against you.
The latest step change in the acceleration of the M2 money supply worries me, but it also means that appreciation of scarce assets will only continue to persist. If you are not yet invested, perhaps this a call to arms to start soon.
Closing Remarks, and a Prediction!
Looking forward, my expectation is that the volatility that we’ve seen in the last two weeks may be coming to an end - hence my statement at the beginning that Bitcoin has “completed” its latest decline.
I believe the $48-49k level for Bitcoin will be the floor for a while, assuming that we continue to be in a macro uptrend. If we break further below $40k from here - I think I would begin to question my thesis.
Assuming that I’m right, and Bitcoin continues to trend up, I would also predict that Bitcoin will begin to outperform Ethereum in the coming weeks in terms of percentage increase.
Ethereum has held up really strong against Bitcoin recently which is fairly unique in the fourth quarter of any year - but whenever Bitcoin (currently $49k) has started the new week below its 20 week simple moving average ($52k), it has outperformed Ethereum until it closes back above that average - seven, out of the last seven times.
See you next week!