Bitcoin’s performance in recent weeks has quietly shocked Wall Street.
At the time of this writing, Bitcoin is up more than 41% for the month of November alone — with a week of 24-hours-per-day trading left to go — and less than $500 from its all-time high set in 2017.
The drumbeat of Bitcoin endorsements from financial heavy hitters is starting to feel relentless. In these pages we have talked about MicroStrategy, Square, Paul Tudor Jones, Stan Druckenmiller, and even the JPMorgan research department, which went from trashing Bitcoin to seeing it as a 10X investment.
Now the latest bit of jaw-dropping commentary comes from Rick Rieder, the chief investment officer (CIO) at BlackRock Inc. In a CNBC interview this week, Rieder opined that Bitcoin could replace gold.
“Do I think it’s a durable mechanism that will take the place of gold to a large extent?” Rieder asked in rhetorical fashion. “Yes, I do,” said Rieder in response to his own question, “because it is so much more functional than passing a bar of gold around.”
You might wonder why it matters what the chief investment officer of BlackRock thinks.
The answer to that is: Because BlackRock is the largest asset manager in the world, with a mindboggling $7.4 trillion — that is trillion with a “T” — under management.
Hypothetically speaking, if the CIO of BlackRock wanted to put 1% of BlackRock’s customer assets into Bitcoin, he would have to buy $74 billion worth.
And that same CIO is now doing public interviews saying Bitcoin could replace gold.
When it comes to Bitcoin, for months on end, we have pounded the table hard enough to break it. Perhaps we should have used a metal baseball bat.
For many investors, a burning question now arises: When will Bitcoin have another meaningful correction, or at minimum some type of pullback that makes it safer to buy?
The honest answer is: We have no idea. With an asset like this, you just can’t know. That is why, starting at least six months ago — around the time Paul Tudor Jones made a bull case for Bitcoin — we started warning TradeSmith Decoder readers that, at some point, this thing could just take off like a rocket and not look back.
The reason why it could take off, we explained, was partly because institutional buyers are wholly price insensitive when they decide an asset becomes a must-own allocation. They just tell their trading desk something on the order of, “get me a 1% portfolio allocation to Bitcoin. I don’t care how you do it, just get it done in the next 30 days.” And then they just buy. And buy. And buy.
Stock market investors are used to waiting for corrections, or dips — hence the term “buy the dip” — before buying into assets they like. It is the nature of stocks to move around a lot, and to have regular pullbacks and retracements.
Commodities and currencies, however, can be different. Every so often, a commodity or a currency can get into straightforward trend mode and just keep on going, a little at a time, for months on end.
Stocks are different, in part, because institutional investors who buy stocks are very aware they are playing a game, and every so often the large buyers step back from the market to see how prices hold up, or the trading desk senses weakness in the short-term price action and decides to step away.
Commodities and currencies, however, can see their prices driven by commercial hedgers and other entities that have no interest in playing the price improvement game at all. They just execute on the need that is in front of them, and the force of their collective behavior can just drive a trend on and on, day after day, for remarkable stretches of time.
Bitcoin might be more like a commodity or a currency than a stock in this regard. There are signs that the buying forces in Bitcoin could be dispersed enough, and price insensitive enough, to let the trend keep going like the Energizer Bunny.
Now, it is entirely possible this note leaves egg on our face. Bitcoin could go into a correction within days, or even hours, and such is always possible with an asset whose price can rise 40% in a matter of weeks.
But it is also possible the big trend run of the type we are describing occurs, in part because retail investors are driving the trend now, too, perhaps in a very big way.
Another secret of Bitcoin’s robust rise is the ability to buy fractional pieces with no concern for the headline price of a coin. If a small investor wants to put, say, $50 into Bitcoin, they can easily do so, thanks to the fact every Bitcoin is divisible into 100 million Satoshis.
This means any investor can set up a Bitcoin auto-investment type program, where they chip a couple bucks in every month — $10, $100, whatever it is — regardless of the BTC price.
Now, pray tell, what happens if millions of investors start doing that?
This is the door that PayPal has opened up, by making Bitcoin easily accessible to a network of 346 million active users.
PayPal is seeing so much retail demand for its crypto-purchase offerings, it is having trouble keeping up with demand. At the same time, numerous PayPal users are not just tossing a couple bucks into crypto; they are maxing out the purchase limit of $20,000 per week.
Nor is PayPal the only one seeing such demand. Square, another payment processor with a market cap of $90 billion, is seeing rising crypto asset demand via its widely popular Cash App.
Pantera Capital, a crypto-focused hedge fund, believes that retail demand from PayPal and Square users is so strong, that those two entities alone are buying up more than 100% of the newly minted Bitcoin supply.
As you may know, a supply of new Bitcoins is still coming into existence at a fixed mathematical rate. Over a period of a time, on a schedule that is predictable in advance, that rate of new supply will fall toward zero.
In its research, Pantera Capital compared the activity of known suppliers to PayPal and Square with the current rate of new Bitcoin creation. Via that comparison, Pantera concluded that more than 100% of the new Bitcoin supply is being bought.
That suggests that most of the retail investors buying Bitcoin through PayPal and Square have the same attitude as institutional buyers: They are buying Bitcoin to hold, or “hodl,” rather than to trade it. That is why new supply is not being recycled back into the market fast enough to meet demand.
And when there is too much demand, relative to a fixed rate of supply that cannot expand for any reason — with no court of appeal other than the ironclad laws of mathematics — the only way to adjust a persistent demand-supply imbalance is through upward movement in the price.
The more long-term oriented, price-insensitive, and globally distributed the buying cohort, the longer that upward buying impulse can last. And with more entities offering mouse-click-level access to Bitcoin purchases in 2021 — that will surely happen — the number of Bitcoin “hodlers” is likely to expand by the millions.
This could go on for a while.
If you regret not being involved, you may want to buy a little here and now, regardless of price, just to ease your troubled mind. And then, if a correction does come, have some dry powder on hand and think of it as a blessing.