Swipe Right For Crypto

Insights
• Jul 01, 2024
Swipe Right For Crypto

by Ryan Shea

Sell in May and go away” is a well-known phrase in the world of equity investing. Even though most financial advisors are not fans of this seasonal strategy, quantitative analysis of stock prices suggests the rule has some merit, with returns typically lower in the summer months than in the rest of the year. Certainly, in 2024, in crypto markets, the adage proved prescient with the Trakx benchmark Top10 Crypto CTI ending the month down almost 10%.

Even after this pull back, the year-to-date return for the Top10 Crypto CTI is a more-than-respectable 31% (double the return of commodities, the best performing traditional asset class so far this year). Nevertheless, it is fair to say that 2024 is not shaping up as the crypto bulls anticipated.

Cudda, Shudda

Things certainly got off to a great start with the SEC’s decision to green light spot Bitcoin ETFs in January. It provided the sentiment boost necessary to take prices above the previous all-time high achieved during the 2021 bull market. However, this positive momentum proved impossible to sustain. In fact, even prior to last month’s slump, price action had turned decidedly lacklustre in crypto markets as the following pithy tweet alluded to – see image.

Swipe Right For Crypto

Source: X

Such subdued market conditions has left many crypto fans scratching their heads because there have been plenty of bullish developments this year that could have, indeed should have, sent prices to new all time highs.

Positives Aplenty

Several months after their launch, it is clear that spot Bitcoin ETFs in the US have been a big success1. In this short period of time they have seen cumulative inflows of around $15bn, pushing overall AUM to $60bn, which is about two-thirds the size of US gold ETFs – financial products that have been around for two decades. Seeking to emulate this success, other countries have followed the US’s lead. Joining Hong Kong, which launched Asia’s first spot Bitcoin and Ether EFTs back in April, last month VanEck launched a Bitcoin ETF2 in Australia and other Asian countries are soon expected to follow suit.

Furthermore, we know from the last SEC 13F filings that over 700 large tradfi asset managers (including one US state pension fund) have holdings of US spot Bitcoin ETFs. The arrival of institutions has long been assumed to be a pivotal moment in the industry’s evolution because it provides a catalyst for crypto to jump what PR/marketing people call “The Chasm”, a social hurdle that all technology needs to overcome if it is to gain widespread public acceptance3.

Finally, in mid-April Bitcoin underwent its fourth halving. As I outlined in a research note published at the time, this quadrennial event has historically been a harbinger of bullish price action.

Worry Time?

Those are some fairly major positives. However, as mentioned, rather than pushing beyond the all-time highs set in early March crypto prices have been moving in the opposite direction and, even threatening to break below the trading range in place since early spring– see chart below.

Swipe Right For Crypto

Of course, news that the US and German governments have begun offloading Bitcoin seized during earlier criminal investigations plus Mt. Gox – the defunct exchange – finally distributing Bitcoin recovered from its fatal 2014 hack to its creditors, has weighed on market sentiment. However, the absence of price confirmation (meaning prices moving in the same direction as the underlying fundamentals/technicals) prior to these non-speculative Bitcoin sales has some market participants concerned that the market is not just suffering a temporary bout of supply indigestion but is instead warning – albeit subtly - that the 18 month old crypto bull market may, in fact, be over.

While one should never rule anything out when it comes to the behaviour of financial markets – a lesson all investors eventually learn, often at great expense - I do not subscribe to this more pessimistic take.

Amara’s Law

First, the flattish-to-down price action observed since Bitcoin’s fourth halving is actually not that unusual. As demonstrated in the chart below courtesy of Ecoinometrics, Bitcoin’s normalized price4 was either at or below the current level at the same point in time after the second and third halvings. Only after the first halving in 2012 was Bitcoin’s normalized price performance stronger5.

Bitcoin Price Performance Around Halving (Normalized)

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What the chart clearly demonstrates is that while every halving has seen Bitcoin’s price rise by many multiples, in all cases the bulk of the returns are back loaded, typically not beginning until six to nine months after the event. In today’s halving epoch this would equate to September onwards. (Interestingly, the full quote I started this update with is “Sell in May and go way, don’t come back until St Leger’s Day”. St Leger’s Day is a horse race in the UK town of Doncaster that takes place in mid-September – a September rally really would be quite the coincidence!)

This time lag was typically overlooked in the slew of bullish media articles printed around the April halving and it has probably been a source of disappointment to paper handed crypto investors looking to turn a quick profit from the halving.

In many ways the return profile of Bitcoin halvings reminds me of Amara’s Law, coined after an observation by the American scientist and President of the Institute of the Future, Roy Amara. According to his law:

We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

Replace the word technology with halving and I think you would agree the similarity is striking.

The question for crypto investors now though is whether the historical post-halving pattern will hold for a fourth successive time, meaning one should anticipate a substantial rally in Bitcoin’s price over the coming 12-24 months?

Limited Supply Scarcity

Reading much of the commentary relating to halvings one gets the impression that subsequent price gains are pretty much baked in because cutting new coin supply by 50% (hence the name) not only reduces selling pressure from Bitcoin miners, but reinforces Bitcoin’s credentials as a scarce financial asset. It is as if halvings mechanistically propel Bitcoin’s price higher, a patently false idea.

Limited supply does not by itself give something scarcity value. The pen I am currently chewing on6 is unique (extremely limited supply) because no one else has a plastic biro that has been chewed by me – at least not that I know of – but it’s worthless as no one in their right mind would wish to buy it off me. Scarcity value only occurs when the item supplied is in demand by others, and the more “others” there are, the more valuable it is. Hence, while the reduction in new Bitcoin supply after a halving is helpful, for the value of Bitcoin or any other finite supply cryptocurrency to rise over time it has to coincide with either stable, or better yet, rising demand.

Thankfully for crypto, the fiat money system serves as a very useful demand stimulant. Even in ideal circumstances, fiat money is designed to lose 2% of its value every year because that is the central bank’s inflation target. But, as I have pointed out in numerous research notes over the last few years, we are far from an ideal situation. Inflation, long thought vanquished, reared its ugly head in the last couple of years and many people – myself included – see this as just a foretaste of what is to come because of the precarious position of government finances in pretty much every major economy around the world. (Top tip: Google “Fed/Treasury Accord” to see what future I am envisaging.)

Rage Against The Machine

Actually, it goes beyond that.

People are not simply worried about governments using inflation as a fiscal escape valve, there is a much deeper and wider sense of disaffection with “the system”. This was neatly illustrated in a recent article in the Daily Telegraph newspaper, which had the following lead photo.

Swipe Right For Crypto

I may be wrong, but from memory I cannot recall another instance when every single leader of a G7 nation had such deeply negative approval ratings. The explanation for their unpopularity was detailed in an article published by the Financial Times earlier this year and I wholeheartedly agree with the author’s perspective. To wit.

Leaders across the developed world are, at least in part, victims of a long-term decay in national morale. Slower economic growth, rising inequality and a growing feeling that the system is rigged against the average person — all these factors are magnified by the polarising impact of social media.” [Ed note: My emphasis]

Such sentiments accord with opinion polls showing people, particularly in the developed world, increasingly pessimistic about their financial prospects. For instance, in last year’s Edelman Trust Barometer, a worldwide survey with 32,000 participants, the number of people who thought their family would be better off in five years time dropped to a record low in 24 out of 28 developed countries!

Economic Optimism Collapses7

Swipe Right For Crypto

Source: 2023 Edelman Trust Barometer

This is clear, unequivocal, evidence that the majority of people in the advanced world no longer believe the system is delivering for them. And how do people react when a system no longer serves their best interest? They seek to change it.

In fact, this desire for change is already apparent in the political arena as illustrated by last month’s EU elections.

Political Dissonance

The three political groups on the right of the EU political spectrum (European People’s Party, Conservative and Reformist and Identity and Democracy) gained 30 more seats than they won in the previous vote back in 2019, giving them a combined total of 324 seats. Meanwhile, the four parties on the left (Socialist and Democrats, Renew, Greens and Left) lost 42 seats relative to the previous election, pushing their overall tally down to 307. A shift to the right that the opinion polls had previously flagged.

However, as the table below shows, the single biggest gainer in the EU election (gaining 27 more seats to 89) was “nonaligned”. These are MEPs who have neither attached themselves to one of the existing political groups mentioned above nor coalesced ideologically to satisfy the strict requirements to form a new political group in the European parliament (a minimum of 25 MEPs who share the same political affinity from at least seven member states8).

EU Election Results (2024 vs. 2019)

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Of these 89 nonaligned MEPs, roughly half are classified as far right/national conservative while a third are from left populist/nationalist parties. Given the increased tally after the election, it is possible that a new, more extremist (right or left) political group emerges within the European parliament.

This fracturing of the political centre in the EU was not of a sufficient degree that it will have a discernible impact on policy making at the supranational EU level because the centrist EPP, Renew and the Socialists and Democrats parties combined still have a comfortable majority (406 versus the 359 threshold); plus ça change, plus c'est la même chose – just as the EU likes it. However, at the national political level, the results were anything but comforting.

A Slap In The Face

The success of the right in the EU vote was particularly problematic for France and Germany – the zone’s two economic heavyweights – because their national governments are headed by centrist or centre-left politicians. In short, the EU vote was a unambiguous slap in the face of their elected leaders.

The response of German Chancellor Olaf Scholz to the ascendency of the far-right AfD has been to brush it off and hope for the best for his increasingly unpopular coalition government. French President Macron instead took a much more radical approach to the increased support for Le Pen’s right wing National Rally party. Rather than shy away from the challenge he dissolved the French national assembly and called a snap general election.

It was certainly a bold move on the part of Macron, but also extremely risky. And judged on the basis of the first round results the risk may not have paid off. The exit polls placed Le Pen’s National Rally in first place with 33% of the vote, followed by the left-wing New Popular Front who with 28% pushed Macron’s Together coalition into third place with just 21% of the vote. Given turnout was high relative to previous national elections it is hard to blame voter apathy for the poor performance of Macron’s team.

The final formation of the French government will be determined by how the parties fair in the second round vote which is less than a week away and this will, in turn, depend upon how successful tactical voting agreements between the parties opposed to a right wing government are. If these machinations do not succeed and National Rally is able to form a government Macron will see his authority gravely undermined and he will be left as president in name only. Worse, it could also presage a financial crisis and not just in France, but in the broader EU, as investors are concerned what a National Rally victory would imply for the sustainability of France’s high debt load.

Snap Two It

Macron is not the only political leader who has recently displayed an unexpected penchant for snap elections. British PM Sunak last month surprised everyone9 when he announced the general election will be held on July 4 - well ahead of the January 2025 deadline. Given the apparent rightward shift of voters in the EU, one would be forgiven for thinking that his decision “to go early” was to capitalize on a lead in the polls. However, nothing could be further from the truth. His centre-right Conservative party is miles behind the left-wing Labour Party. Indeed, the size of Labour’s lead in the polls is such that there is a real prospect of the parliamentary Conservative Party being all but wiped out. (The Conservatives are also losing a lot of support to Reform, a new right-wing populist party born out of the old Brexit Party, headed by the vocal EU sceptic Nigel Farage).

This is what makes the British vote so noteworthy. A Labour victory, especially if it is on the scale predicted by the polls, speaks to the depth of public dissatisfaction with the current system and the desire of voters to mete out a punishment to incumbent governments regardless of where they sit on the political spectrum.

Dis-United States

Of course, the main political event of the year is November’s US presidential election. Unlike the 2020 vote, which had Biden consistently in the lead over Trump by several percentage points, the polls this time around are much closer. (Assuming, of course, Biden makes it to the start line, which after his dire performance in the first presidential debate last week is not the slam-dunk it would normally be.)

US Presidential Polls

Swipe Right For Crypto

Source: projects.fivethirtyeight.com/polls/president-general/2024/national/

Considering that Trump recently gained the dubious honour of being the first former US president to be criminally tried and convicted – something one would tend to think of as a sure fire vote loser – this is a remarkable result, one that speaks to extent to which US voters, just like their counterparts in other countries, are disillusioned with the current political leadership.

A Political Wedgie

As I pointed out in last month’s crypto update, Team Trump has adopted a much friendlier approach to crypto than Team Biden, something that is not exactly hard to do given how crypto unfriendly the current administration has been. The decision to make crypto a significant wedge issue in the presidential race is smart politics on the part of the Republicans. First, because the majority of crypto users are at the younger end of the age spectrum and historically they tend to lean more democratic, so anything that attracts their support is a step in the right direction. Second, by playing the crypto card the Trump team is seeking to tap into the well of economic pessimism felt by people and the sense that the system is somehow rigged against them. It not only burnishes Trump’s credentials as the outsider seeking to overthrow the system but it reinforces the connection between the two because the same factors that are driving the shift in the political landscape are the very same factors driving crypto adoption.

Of course, changing the political system is relatively easy – it just needs a sufficient number of votes. Changing the financial/economic system is much harder, but if enough people feel that their best interests are not being served then they will seek to change it. Crypto provides the mechanism by which to effect change, an option that was not available until Satoshi came up with his ingenious solution for decentralized money. And, having a crypto fan in the most powerful job in global politics would certainly help in that regard. Indeed, it could be the fuel required to power the fourth post-halving rally.


1 This will likely soon be matched by ETH ETFs after the SEC gave them the greenlight [https://trakx.io/resources/insights/crypto-clash-biden-trump/ ].

2 See: https://www.coindesk.com/business/2024/06/20/vanecks-spot-bitcoin-etf-goes-live-on-australias-biggest-stock-exchange/

3 Widespread public acceptability is also an imperative for anything to even be considered as a form of money – see: https://trakx.io/resources/research/a-network-theory-of-money/

4 Normalization is required because Bitcoin’s price levels were markedly different at each halving event making direct comparisons impossible.

5 The divergence in Bitcoin’s performance after the first halving and subsequent halvings may reflect crypto investors “pricing-in” the halving effect by purchasing Bitcoin prior to it in order to benefit from higher future expected returns, which serves to flattening the return profile. This is possible because the halvings are deterministic in the Bitcoin code making them highly predictable (the block subsidy gets cut by 50% every 210,000 Bitcoin blocks mined and the target block time on the Bitcoin blockchain is 10 minutes).

6 A bad habit I know.

7 This was their chart title not mine!

8 The reason for such strict guidelines (apart from it being a typical exercise in EU bureaucracy it is because political groups receive higher funding for their staff than non-attached or non-aligned MEPs) – see: https://www.europarl.europa.eu/RegData/etudes/BRIE/2019/637956/EPRS_BRI(2019)637956_EN.pdf

9 Well not quite everyone. A few Tory MPs were found to have bet on July 4 as the election day just prior to the announcement - a rather grubby episode that did absolutely nothing to improve public perceptions of Tory MPs – see: https://www.bbc.co.uk/news/articles/clkkyx9rxzzo

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