Economic growth figures are starting to trickle in and, as expected, they’re bad. Really bad. This past week the U.S. reported Q1 GDP growth as -4.8%. Italy’s GDP fell -4.5%, Spain came in at -5.2% and France trumped that with a whopping -5.8%.  And that’s just warming up – Christine Lagarde, head of the ECB, has warned euro-area GDP could fall by as much as 15% in Q2. 

And yet stock markets in the U.S. and Europe closed up on the week, in spite of the inevitability the next quarter will be worse still.

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This could be partly due to the concentration of market capitalization – nearly 25% of the S&P 500 market capitalization is from five tech companies, which arguably will do relatively well from more people staying at and working from home. 

Or, it could be because the stock market has broken all ties with the actual economy. The aforementioned concentration of the S&P 500 is intensifying, fueled by the dominance of passive investing, which means its performance does not reflect that of most of its constituents. And the “moral hazard” posed by the government’s willingness to bail out companies in difficulty suspends the need to scrutinize balance sheets and evaluate viability. 

But reality doesn’t stay suspended forever, no matter how much we wish it would. Eventually the abrupt slowdown of economic activity will feed through to numbers investors can’t ignore, and the current price/earnings (P/E) valuations will start to look absurd.  

This is where bitcoin comes in. Its underlying technology and monetary system make it one of the few investable assets that is immune to the economic fluctuations we have ahead.

First, its P/E ratios will never look absurd because it doesn’t have any earnings. Nothing to get hit there.

Second, its use will not be curtailed by lack of customer mobility – users can transact from anywhere. In fact, logistical constraints could boost interest in bitcoin transactions from those who normally hand over physical cash (although why they would want to if people aren’t moving around is another question). 

Third, its market valuation is not susceptible to artificial support from governments trying to keep investor (and voter) spirits up. 

This does not mean bitcoin’s price will keep going up while other prices come down. We saw back in March that when things get bad in markets, bitcoin also suffers. Its price is driven by sentiment.

But it is also driven by expectations of future adoption and demand, which are unrelated to the drivers of demand for most other investable assets. 

In terms of fundamentals, bitcoin has nothing to lose in the upcoming crisis – no income, no debt and its future adoption does not depend on happy and confident consumers. Just the opposite, in fact.

The growing awareness of this, combined with heightened media attention due to the upcoming halving, could be one of the reasons behind this week’s recovery. Or perhaps it is being swept along in the wave of inexplicable optimism in traditional markets. 

Should that turn south, bitcoin is likely to suffer in the sentiment-driven short term. Longer term, however, fundamentals tend to surface, and those that drive bitcoin are radically different from those that drive traditional markets.

Talk about marching to your own beat. 

One argument in favor of the bitcoin price rallying after the halving is that of supply and demand. Assuming demand is more or less constant (I know, but work with me here), when supply drops the price should go up. Basic economics – you remember that graph from high school, right?

After the halving, there will be fewer new bitcoin entering the market every day. Since miners need to sell part of their hard-won new bitcoins to meet expenses, some of the sell pressure comes from miners. If they are selling fewer bitcoins (because they have fewer bitcoins to sell), then there is less supply meeting a constant demand and the equilibrium price moves up.

Fine, but one part of this model is already obviously unstable – demand is not constant, not by a long stretch.

Even so, there is another overlooked weakness: The dent in sell pressure is negligible. 

Post-halving, there will be 6.25 fewer new bitcoins entering circulation with every block. Assuming a new block every 10 minutes, that translates to approximately 900 fewer new bitcoins a day.

Considering the number of bitcoins transferred on-chain in April was an average of over 270,000 per day, 900 less won’t make much of a difference to the supply curve in that simple basic price equilibrium graph. 

Any positive halving impact is more likely to come from increased awareness and trader interest resulting from the media attention. The juxtaposition of what is becoming known as a “quantitative hardening” against a “quantitative easing,” combined with growing unease about the latter, is likely to transform this media-fueled attention into a lasting interest from investors, analysts and economists. 

What is unclear is whether any price momentum from the halving would be enough to offset a hit to general sentiment from broader macro concern. As always in investing, one’s individual time horizon is everything.

In spite of a stream of bad news on employment, production and earnings, the S&P 500 had its strongest April since 1987, possibly floating on the stimulus laughing gas. European indices also had a good month, as economies started announcing tentative steps towards opening up their economies and electricity consumption started edging up. 

As April turned into May, markets started to retreat, perhaps digesting the recent gains and perhaps unnerved by a new anti-China belligerence from the U.S. and earnings warnings from tech companies. Gold continues to play the inflation game but with less enthusiasm and some profit taking – it remains to be seen how it would perform if stocks head south again. And West Texas oil had its first positive week in about a month as confidence gathered around the production cuts, although there could well be more turmoil there as the next futures expiries approach. 

As you can see in the chart above, bitcoin had a particularly strong month.

The jump this week gave bitcoin its best April in years, with data suggesting this rally is largely fueled by U.S. investors, with growth more in spot volumes than derivatives. 

And a lack of foreign reserves has pushed countries such as Lebanon and Turkey towards currency crises, which remind us that a strong dollar impacts much more than just FX markets. What’s happening in Lebanon, where anti-government protests have turned violent and triggered the closure of the capital’s banks, will become a textbook example of the risks of centralized finance for years to come. 

(Note: Nothing in this newsletter is investment advice. The author owns small amounts of bitcoin and ether.)

CoinDesk Research has published its first in a series of deep dives into listed crypto companies. We’re starting with Hut 8, one of the largest listed bitcoin miners, and its financials and recent operational shifts reveal some of the hurdles bitcoin miners struggle with in capitalizing their business while maintaining margins. 

Preston Pysh looks at investment opportunities in a market increasingly manipulated by government printing, predicting that a “break” will be triggered either by social unrest or a natural transition to a different form of money. TAKEAWAY: Preston is not a crypto enthusiast (among other things, he hosts the podcast “We Study Billionaires”), but he is bullish on bitcoin largely as an alternative to an increasingly debased dollar – this makes his take particularly interesting for those managing diversified portfolios, which should be everyone. 

How many of a project’s contributors have to be hit by a bus for the project to stall? Introducing the “bus factor,” a new metric that measures resilience. Really. TAKEAWAY: Actually, it’s a cool concept, intriguingly expanded on here by analyst Hasu. The higher the bus factor (the more widely distributed the code development), the easier a network is to replicate. The lower the bus factor (the more concentrated its control), the greater the risk. A couple of years ago Twitter woke up to a mercifully false rumor that Ethereum creator Vitalik Buterin had been killed in a car accident. (It didn’t involve a bus as far as I know.) The news pushed ether’s price down 15%. These days the impact would probably be different (although please be careful, Vitalik), but the anecdote shows that this is a metric worth watching.

The city of Ya'an, in China's mountainous Sichuan province, is publicly encouraging the blockchain industry to help consume excessive hydroelectricity ahead of the summer rainy season. TAKEAWAY: This highlights how excess energy from hydroelectric and natural gas plants can bring down operating costs for miners, making their sector – crucial to the maintenance of the bitcoin network – more profitable and less vulnerable to price swings and halvings. 

Bitcoin futures and bitcoin options both had their most active day since the crash on March 12, according to derivatives data provider skew.com. TAKEAWAY: To be honest, I’m not sure what this means, but it feels significant.

Coin Metrics presents “free float supply,” which adjusts supply measurement by taking out founding tokens and vested tokens, as well as those that are inactive, burned or probably lost. TAKEAWAY: The result is a measure of circulating tokens, a more reliable gauge of a network’s size and liquidity. Bitcoin’s free float supply, according to Coin Metrics, is over 4 million less (over 20% less) than the reported figure, which implies that its velocity (the transaction rate compared to the amount outstanding) is higher than many have calculated.

Blockchain analytics firm Glassnode has introduced a new metric called Glassnode On-Chain BTC Index (GNI), which aims to link price performance to network fundamentals. TAKEAWAY: Any fundamentals-tracking index is subjective, no matter how much rigor goes into selecting and quantifying the components. However, as long as the methodology is consistent, they can provide valuable information about trends and shifts, and at first glance the GNI does a good job of taking into account the principal value drivers of sentiment, liquidity and network health. The index recently turned from bearish to neutral, which is itself a bullish sign.

Large crypto investors, popularly known as “whales,” seem to be accumulating bitcoin amid the ongoing price rally. TAKEAWAY: Although an imperfect indicator, this can be interpreted as bullish, as high-net worth individuals or funds appear to be adding to or taking new long positions in bitcoin, perhaps in response to the monetary turmoil in the fiat world. 

Genesis Capital* released its Q1 lending report, which highlights more than $2 billion of new loan originations, twice the figure for the previous quarter. This brings their cumulative amount lent to $6.2 billion. TAKEAWAY: Those are substantial figures, which point to a deepening maturation of the space. The report is worth a read, especially as it gives insight into the timeline around the March 12 crash, and how Genesis handled the turmoil. It also confirms that the lender has tightened credit, given the market uncertainty. This is likely to be temporary and comes as a relief – the sector needs strong lenders, as leverage can fuel growth but can also bring it tumbling down if it has to unwind suddenly. (*Genesis Capital is owned by CoinDesk's parent company, DCG.)

Leigh Cuen spoke to several crypto custody and wallet providers about the uptick in activity they have seen since the beginning of the lockdown. TAKEAWAY: Growing interest in off-exchange custody solutions implies a growing interest in holding crypto assets, rather than just trading them. Some of the exchanges Leigh spoke to cater mainly to institutional clients, but others have a wider base, which implies that interest in bitcoin is spreading amongst all types of investors. 

The second fund of a16z’s crypto division has raised $515 million, more than the original target of $450 million and considerably more than the $300 million raised by the first fund, which launched in 2018. The investments will focus on next-generation payments, decentralized finance, new monetization models and the concept of a decentralized internet. TAKEAWAY: While this is a crypto venture fund, investing in startup equity and tokens without the intention to trade, this raise is bullish for the sector as it implies a belief that at least some of the beneficiary blockchain companies will have viable businesses. 

Silvergate Bank added 46 crypto customers in the first quarter, bringing the total to 850, largely institutional investors. The number of transactions more than doubled in Q1 vs Q4, and was up more than 3x vs the same period in 2019. TAKEAWAY: One intriguing disclosure in the report was the mention of a lending service called SEN Leverage, currently in pilot mode, which will allow bank customers to obtain U.S. dollar loans collateralized by bitcoin. Crypto as collateral is a fascinating area to watch. On the one hand, the bearer status of bitcoin, its relative liquidity and its ease of transfer make it an ideal collateral from a lender’s point of view. On the other hand, current legislation makes it very difficult in practice. This paper by Xavier Foccroulle Menard, posted on SSRN this week, gives a great explanation as to why. (TL;DR: it’s to do with UCC definitions of collateral – guess what, bitcoin doesn’t fit.)

Hangzhou-based Ebang International Holdings, one of the leading manufacturers of bitcoin mining equipment, has filed with the Securities and Exchange Commission for an initial public offering of up to $100 million. TAKEAWAY: There does seem to be a trend amongst Chinese companies of trying to list in the U.S., in a bid to broaden their geographical diversification. Curiously, this could encourage the shift of the epicenter of bitcoin mining away from China and towards the U.S. 

CFTC commissioner Brian Quintenz, one of the organization’s crypto supporters and who advocated for self regulation in the crypto industry, will not seek renomination when his post ends this month, and will leave the regulatory organization by late October. TAKEAWAY: SEC commissioner Hester Peirce, who has argued in favor of bitcoin exchange-traded funds and also favors a more supportive approach to innovation, is also nearing the end of her term. As far as I know, her plans have not been made clear yet, and we don’t know who will be replacing Quintenz – but this could mark a subtle change in tone at one of the most powerful securities regulators.