Friends and associates,

Price weakness in the face of spot bitcoin ETF approval betrays the underlying significance of the event. We raised awareness about the 'buy the news, sell the fact' potential HERE and HERE. This perspective wasn't based on a specific edge regarding the ETF but stemmed from Bitcoin's remarkable strength in the second half of 2023 and a period of complacency following a notably long stretch without a 25% drawdown. This quieter period presents an opportunity to highlight the substantial potential of the ongoing Bitcoin bull market. TLDR: Price weakness presents an incredible opportunity to gain exposure in the early stages of an institution-led crypto bull market

Spot Bitcoin ETF Approval: A Game Changer

BlackRock, Fidelity and Franklin Templeton now hold Bitcoin. Let that sit in for a second… Despite short-term price fluctuations, the approval of the spot Bitcoin ETF is a monumental event and bitcoin’s >150% gains in 2023 reflects this. The ETF offers regulatory clarity, institutional validation, and is likely to attract significant flows in the coming years.

Regulatory Acceptance

With major asset managers holding bitcoin the likelihood of negative U.S. government intervention declines another notch lower. 'Regulatory uncertainty', often cited as a barrier to investing in this asset class, continue to decline.

Under Gary Gensler's leadership, the SEC has been deeply resistant to crypto integration since FTX's collapse in October 2022. The SEC's probably knew that a spot Bitcoin ETF signifies regulatory validation and opens the door for mass adoption, which likely explains its reticence to approval. Despite the resistance, the US judicial system has effectively forced Gensler's hand. Bitcoin is a tool for freedom and thus we expect it will force many more hands over the coming years.

There is a lot more work to be done on the regulatory front, including an overarching framework for stablecoins and a clear application of securities law in crypto but the path towards increasing regulatory clarity is firmly entrenched.

Institutional Validation

Large asset managers now serve as marketing vehicles for bitcoin. Larry Fink is punting bitcoin on CNBC and Franklin Templeton put laser eyes on its twitter profile! At times this will challenge these traditional institutions because bitcoin’s volatility will humble the best of investors. But in the long-run institutional marketing budgets will drive awareness, adoption and may go a long way to overcoming many of the erroneous narratives that critics levy at bitcoin.

Sustained Market Flows

With the ability to earn fees and retain assets on their platforms, advisors are now more inclined to offer Bitcoin ETFs to clients. Plus, they have Larry Fink as intellectual insurance during volatility.

At some stage, advisors will recommend a delegated percent of client funds be allocated to bitcoin. The historical impact of small allocations to bitcoin are profound. Those that allocate to bitcoin will significantly outperform those that don't and underperformance will pressure the latecomers into allocating.

Estimations suggest that a 0.5%-1% allocation from U.S. wealth managers, accounting for roughly $56 trillion in assets, could add about $1 trillion to Bitcoin's market cap.

These factors and the way in which the market has absorbed mass selling of GBTC from the FTX estate since it was converted to an ETF makes us very constructive on the market outlook for the next 6 to 18 months. Bitcoin’s fundamental indicators also remain robust.

Fundamental Analysis of Bitcoin

Supply Illiquidity

Over 60% of Bitcoin, excluding coins older than 7 years, have not moved in the last 12 months, indicating a high level of supply illiquidity. If holders aren't selling them price is biased higher.

Upcoming Halving Cycle

The halving cycle due in April 2024 will further reduce Bitcoin's supply growth and tends to be an approximate trigger to a more exuberant phase of the cycle

Net Realized Profit/Loss Trends

Current profit-taking activities are contained compared to previous cycles, indicating a healthy market state.

Broad-based improvement in Macro Conditions?

Turning our attention outwards to traditional macro conditions, signs suggest that broad-based improvement in conditions is possible over the coming quarters. Real rates may have topped out at 2%. The yield curve is steepening and has further to go. Bonds could have turned and may strengthen from here.

Plus, US fiscal projections will have to be significantly revised if rates don't fall

Market Outlook and Strategy

Looking ahead, we anticipate strong performance in the second half of 2024 and further gains into 2025. Short-term market dips, as post-ETF euphoria wears-off, should be viewed as opportunities for strategic allocation over the next 6-18 months. Those concerned with the short-term volatility should pull back the lense and digest that bitcoin has never returned less than 27% annualised over any 4 year rolling period…

The short-term volatility is largely noise and merely an opportunity for active managers to do their job. Sound Money Capital plans to reallocate client exposure through Q1, focusing increasingly on select altcoins in anticipation of growing risk appetite in late 2024 and 2025.

On the personal front, it was wonderful to spend an hour with postgraduate students at USC (University of Southern California) in January. The students were sharp as nails, many were knee-deep into crypto already and they asked tones of great questions. Demographics are a key factor favour crypto adoption over the coming years and forms part of our 3 market forces paradigm. I will outline that in a future note.

Wishing you a wonderful February wherever you find yourself,

Rob Price, CFA

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