Bitcoin, Incredible Hulk and Governments

Abraham George Crypto Musings


In many aspects, last week was a very good week for market participants. The mood was ‘risk on’ everywhere. To follow up, we had strong earnings from all the big banks.

We are still in the very early stages but so far Q3 earnings are looking like Q2 or it may be even better with more earnings surprises to come. Positive earnings surprises invariably fuels stock prices and that’s what we are seeing now.

The bigger price action was in the energy sector. Crude oil closed on a higher high for the eighth consecutive week. The price of oil ended the week above $82. The producers that faced the attack of the shale industry are now selling oil for about double the price it costs them to produce it.

Our bullishness in oil was built and premised on the US presidential election outcome. We knew all along Biden will go completely opposite to Trump on climate action, and he will be very well supported by other global leaders and large corporates. The vow to kill fossil fuels in the name of climate action, only builds a moat around the existing producers.

Yet, we were outdone by another asset class for the week. Bitcoin was on a song. It ended up 7% up yesterday. For those who don’t know cryptocurrencies trade through out the week. 24/7. It probably was one of the most defining week for Bitcoin. It was driven by news that the SEC would approve a Bitcoin futures ETF. After repeated denials and objections, finally the authorities are finding religion with the crypto world.

I think this is a good time to discuss about Bitcoin as it is very much the centre of attention in the news. Bitcoin has been compared to the Tulip mania and industry veterans and big names like Warren Buffet, Charlie Munger has called it all sorts of names and opined that Bitcoin is worthless. Industry captains like Peter Schiff, Michael Burry and Jamie Dimon has not been exactly kind to Bitcoin either. Whereas, other very successful veterans like Ray Dalio, Stan Druckenmiller, Paul Tudor Jones have been sympathetic to (and awed by) the Bitcoin story. In many aspects, the retail world is confused and divided. By the way, the family office of billionaire investor George Soros disclosed it was investing in Bitcoin.

Comparisons to the Tulip bulb mania are all unwarranted as that was a fad that lasted for a while and it never came back. But Bitcoin is different. Antifragilistically different (to borrow Nassim Taleb’s jargon). In its 12+ year history, every time it was sold off even to a point of more than 90%, it has come back much stronger. Bitcoin is like the character Bruce (David) Banner in the movie ‘Incredible Hulk’. The more you make him angry, the more Banner gets stronger. So far, it has produced an annual compounded growth rate of 200%. As an investor, would you want to miss that? To tell you the truth, no analyst has the faintest clue about the true value of Bitcoin. If anyone is claiming to know that, I think he must lying or ignorant or worse both.

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The world’s largest crypto currency trades more like a bio-tech or small cap mining stock than a long-term store of value. In the last five or six years, Bitcoin volatility may be largely traced to China. Every time China announced some measure of capital controls on its citizens, the public used Bitcoin as way to get their money out of China. China responded with a total ban on crypto trading activities in China but after a plunge, it roared back up again. One time, it ripped seven times higher after an initial sell off. Three months later Bitcoin futures were launched, giving hedge funds a liquid way to short the madness. Actually, Bitcoin topped the very day the futures contract was launched. A few days later it was worth only 1/6th of its value from the top.

Fast forward to now. A few months ago, China declared Bitcoin trading and mining as fully illegal (for the nth time already). Bitcoin dropped to below $30,000 and now it is at $62,000.

Bitcoin has risen 50% from the lows of three weeks ago. We will cover China’s decision to ban everything that is to do with Bitcoin in another briefing but yesterday’s announcement of the approval of the first Bitcoin futures ETF by SEC as early as next Tuesday gives Bitcoin all the credibility that it was looking for.

There are many Bitcoin ETF applications pending with the SEC. The SEC follows a carrot and stick mandate and they hope to widen their bureaucratic and regulatory ambit and reach. Everything will happen in its own time.

This ETF structure should enable large institutional audience to allocate better money to Bitcoin. This situation looks very similar to the GLD, the biggest Gold ETF which launched in 2004, which enabled institutions to pile into (and get out of) gold efficiently. Will be interesting to see what this can lead to for other altcoins especially with XRP where I have the most economic interest.

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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.