Bitcoin's time to shine: TBL Weekly #45
Two dynamic interviews on bitcoin's future. Debt ceiling negotiations and the dangerous experiment of liquidity drainage.
Welcome to TBL Weekly #45—the free weekly newsletter that keeps you in the know across bitcoin, rates, risk, and macro. Grab a coffee, and let’s dive in.
See what best-in-class Bitcoin storage feels like at thebitcoinlayer.com/foundation
Debt ceiling shenanigans
Since 1960, Congress has either raised or suspended the debt ceiling 78 times. And if I’m counting correctly, we are only 63 years removed from 1960. Please take this into consideration when accounting for how much of this publication we spend dedicated to analyzing the current battle in Washington. Yes, the brinksmanship has an effect on Treasury bill markets, overall risk sentiment, the price of default insurance against Treasuries, and most notably, the Treasury’s ability to pay its obligations. But we still aren’t willing to entertain the idea of all-out default. Politics is often theater.
Looking to what might happen when Treasury runs out of money—Medicare and Social Security payments are prioritized over national parks, for example, so there are measures that can be taken. But when the day comes that the Treasury General Account falls into the danger zone, and it does appear we are right there, hearts will stop, from the Capitol to Wall Street. Each time this happens, without a doubt, the establishment financial infrastructure loses credibility. Just do your best not to become too preoccupied with each and every turn in the negotiation. Unless, of course, you’re trading bills. In that case, blessings to your house.
Gearing up for the bitcoin run
This week, The Bitcoin Layer had the great pleasure of interviewing Fred Thiel, CEO of Marathon Digital Holdings, the second-largest publicly traded bitcoin miner by market cap. (The largest, Riot Blockchain, is a company we’ve also covered here, with Pierre Rochard’s interview and our Electricity Hash Value model, which relies on Riot’s electricity input costs.) Catch Fred’s interview below—it is a fascinating look at what it takes to be a leader in the mining industry.
My most important takeaway, and a question I ask to essentially every bitcoin market participant that has been around for several years, surrounds the halving and Marathon’s outlook. In short, Fred confirms that as a very large miner, Marathon designs its entire business strategy around a “two years on, two years off” philosophy. In bitcoin’s 14-year history and through its three halving cycles, we have seen, in each cycle, a pattern of two years bull market, two years bear market. We tend to agree.
It is painfully obvious thanks to the basic laws of economics that a reduced supply should, all else being equal, drive the price of a good up. In Joe’s brilliant post this week, he sums up what is now our driving narrative: the halving cycle is coinciding with Fed easing, assuming that the Fed will need to enter accommodative mode sometime by early 2024. Becoming unabashedly bullish as the year progresses feels precisely on brand here at TBL—for all of 2022, we expressed caution that the Fed’s job would act as a macroeconomic headwind for the digital asset, but the tailwinds we expect from a global liquidity perspective will be joined alongside the drive to bitcoin’s fourth halving event, and the time for caution has passed.
Without offering investment advice, we do believe the downside risks to bitcoin are now heavily outweighed by these two bullish drivers converging. Don’t miss our research and analysis as we continue to unravel this thesis. The last piece of the puzzle is now trying to time the end of QT.
QT is a dangerous experiment
Quantitative Tightening, or QT for short, is the process by which the Fed reduces the aggregate size of its balance sheet. When Treasuries it owns mature, the overall level of reserve balances declines in the system. This decline in reserves, in an ample reserve regime, has only been attempted once before in the ‘Janet Yellen as Fed Chair’ era. It failed spectacularly. The Fed, this time around, has been able to shrink its balance sheet but not as much as it had hoped—spiking mortgage rates sharply reduced the amount of MBS rolling off the Fed’s balance sheet. Additionally, the regional banking crisis of 2023 drove the Fed to expand its balance sheet outside of its QE/QT program—this also reduces the efficacy of draining liquidity from the system.
Once QT persists throughout the rest of the year, banks and the stock market will both be doing their best to survive it. What exactly are they trying to survive? A liquidity draining program that the market has only experienced once before, a time which ended eventually in QE. QE is what drives the bitcoin market, from a psychological perspective, more than anything. QE is the epitome of the failure of central banking and government currency, and evidence that our credit money system relies on credit expansion. Credit contraction, which we experience during recessions, tightening cycles, and QT, does have its end. That end, the experiment says, is usually an explosion of QE. Bitcoin awaits, but the Fed is desperate to prove it can make it through without.
The Week Ahead
In the week ahead, we look to some more April economic data to confirm that Q2 was not the start of a recession. GDPNow projections now point to 2.9% growth, suggesting that a recession is not underway as we had previously suspected. We must be data dependent instead of let our bias dominate, but that doesn’t mean we ignore the cycle. As of right now, we are in between late cycle and recession, with some metrics showing deep contraction and others showing resilience.
Rates moved higher on the week and stocks pushed toward their 2023 highs, both indications that the market is not ready for an imminent recession. With the expectations of a June interest rate hike stuck on more-or-less nil, markets will need much more dramatic data, on either side, to decide their next move. We’ll get some interesting housing and spending data next week, but the market will be focused on getting to the Memorial Day extended weekend.
If you’re enjoying today’s analysis, consider supporting us by becoming a paid subscriber. As a paid subscriber, you get full access to all research as it drops.
Here are your quick links to all of the TBL content for the week:
Tuesday
We are 346 days away from Bitcoin’s fourth halving, an event that occurs every 210,000 blocks, when its supply issuance schedule is programmatically cut in half. On the macro side of the coin, credit contraction and economic deterioration are settling in which will warrant the Fed to start easing up policy. We believe that given the totality of bank, credit, and economic data, that day will come before the end of the year, and our confidence is even greater that it will come within 365 days.
The Fed will shift from tightening to easing and reignite risk-taking animal spirits, right around the same time the issuance of the world’s highest-beta risk asset declines. As one money supply expands, another one grows more scarce.
We cover bitcoin through a global macro lens, and the time is swiftly approaching when two cycle-shifting events spanning these universes might converge, marking the beginning of the next major bull market with rocket fuel.
Check out—Bitcoin's next halving could converge with the Fed's next easing cycle
Wednesday
In this episode, Fred Thiel joins Nik to discuss the future of bitcoin mining through his own lens as CEO of Thiel Advisors and Marathon Digital Holdings (NASDAQ:MARA). Fred discusses Marathon's expansion into the UAE and focus on developing technology for the bitcoin mining industry as a whole.
Check out—The Future of Bitcoin Mining with Fred Thiel
Friday
In this episode, Nik sits down with trust attorney and wealth planner Brian Standing to discuss how bitcoin can be utilized in estate planning. We examine self-custody versus custodians, hardware wallets and how to utilize them for multigenerational wealth storage, holding bitcoin in retirement accounts, and Brian shares some philosophical thoughts about bitcoin as the potential monetary system of the future.
Check out—Bitcoin Estate Planning with Trust Attorney Brian Standing
Our videos are on major podcast platforms—take us with you on the go!
Apple Podcasts Spotify Fountain
Keep up with The Bitcoin Layer by following our social media!
YouTube Twitter LinkedIn Instagram TikTok
That’s all for our bitcoin and macro recap—have a great weekend everybody!
Bitcoin's most intuitive hardware wallet just got cheaper.
Passport is now just $199. Set it up in minutes, take your bitcoin off of exchanges with ease, and experience unmatched peace of mind.
Get it at thebitcoinlayer.com/foundation & receive $10 off with code BITCOINLAYER
Great article Nik. Thanks for the insight. 😎