Bitcoin In A New World Order - CHAINLETTER 46
Global polarisation and bitcoin's role as the financial system is forced to adjust
So much has happened, and so quickly. As discussed in the ETHOS section, there are clear signs of exhaustion with the bloated, inefficient, virtue-signalling, arrogant, pompous and hypocritical left. That’s a great source of optimism for those wishing for less government in their lives.
But it is also leading towards a planet that will be politically and philosophically split, and we have a financial world order not fit for purpose as this changes.
The MACRO section discusses two articles: firstly, Russell Napier’s explanation of why the global financial “non-system” is failing, with China at the root of the problem. Secondly, we highlight Ewan Markson-Brown’s piece (published separately on CHAINLETTER earlier) which presents a scenario in which digital forms of money – stablecoins and bitcoin - play the central role in some form of reconstruction and détente.
We are at the start of that process, at the bottom of the S-curve. I urge you to find a quiet corner sometime over the next week or two to have a read.
In that spirit, have a wonderful Christmas and a very happy 2025.
Technical Healthy corrections, BTC relative to the NASDAQ reaches all time high
On-Chain Fair value catches up, medium term holders continue to take profit
Macro The collapse of the global financial non-system, and how if might be replaced. Mounting problems in China
Cryptoverse Quantum computing update as Google announces Willow
Ethos State in retreat as Individuals demand their freedom back
Technical
The big news since the last letter is that the bitcoin price broke above the US$100,000 barrier. In even better news, the price then corrected back to the mid/low US$90k range. I’ll explain why I’m a fan of these sort of corrections later.
It was to be expected that there would be some faffing about at what is a psychologically massive moment, as predicted a month ago. While that has been the case, bitcoin’s progress since has been pretty serene compared to the rest of the rabble. Altcoins are experiencing some serious volatility.
We enter nervous territory for the technicians. The 365-day Exponential Moving Average (EMA) is about to cross the previous cycle’s highest price. The last time it did that turned out to be at a level pretty close to the top.
The MACD is similarly extended (middle chart, below). Both are shown below
Will it be the same this time? Is it all over?
Without wanting to tempt fate, it doesn’t feel like it. The upward trajectory since the November 2022 cycle low has been far less steep than the near-vertical ascent in 2020/2021. And anecdotally, there is far less of the frothing silliness seen back then.
Furthermore, we don’t have the same macro backdrop. Back then, the US 10-year bond yield was around 1%, now it is 4.4%. No wonder there was speculative excess.
If anything, the recent upward inflection on the 365-day EMA resembles the early part of the 2020 run. That suggests we are entering the full bull stage rather than marking any sort of cycle top.
That’s why corrections like these are good news. They pour iced water on speculators and allow longer term investors a chance to buy at lower prices. It’s a double benefit.
Bitcoin Dominance Prevails
A decent measure of crypto eco-system risk remains the Bitcoin dominance chart. When bitcoin dominance is high or rising, animal spirits are becalmed. And vice versa.
The Trump victory catalysed a major move in altcoins, but that is now being reversed. The altcoin rally can be characterised as a “regulatory relief rally”. We will have to see whether it has traction.
While animal spirits have been revived, we remain of the view that there is plenty to play for in Bitcoin, so we don’t have to aggressively move down the quality scale to extract strong returns from the asset class.
Better than the NASDAQ
Bitcoin’s recovery now means that it has caught up with the NASDAQ Index in terms of performance. The tech-heavy NASDAQ represents some the highest growth companies on the planet, so it’s a notable achievement, and must have asset allocators scratching their heads. The chart below show Bitcoin relative to the NASDAQ.
It’s unreasonable to think that there won’t be corrections along the way in this bull market. Nothing goes up in a straight line, particularly an alternative asset that attracts intense speculative behaviour, but we’re far from a situation where it is widely owned.
The market will always give you a chance.
On-Chain
Fair value catches up with the BTC price
Our fair value indicator has returned to neutral as the value transacted over the Bitcoin Network has caught up with the rise in the price. Actually our latest fair value is US$98,689. Note how the return of the premium/discount (green line) to fair value (red line) has typically indicated a good time to buy – in a bull market.
The last part of that sentence is important. We have to be confident that we are in a bull market regime to take this seriously. Given the supply/demand dynamics referred to in Have I Missed (3)?, it’s way too early to call the top in our view.
Continued Dispersion
That said, it is important to monitor the behaviour of longer term holders. Their strong underlying belief in the importance of bitcoin makes them good counter-cyclical traders. In other words, they are greedy when others are fearful, and vice versa.
Although perhaps they are just being rational.
As bitcoin becomes too great a percentage of their net worth, they choose to diversify into other, more material, assets. Why not bathe in the other pleasures in life? It doesn’t mean that they are necessarily selling everything.
This results in a dispersion of ownership, something we should celebrate. The more owners, or adopters, the broader and deeper the network of acceptance.
This process has clearly started. We see this in the HODL waves, which have been reproduced multiple times in these pages.
The orange line tells the tale. As the price moves higher, so the wallets that have been holding for more than a year start to shrink.
What’s next? Looking at the above chart you would think that there is more selling to come from the longer term holders, a decline back to the 55% level, perhaps?
Yet the troughs on the graph are clearly rising. What if the dispersion is reaching its nadir? What if, in aggregate, old holders have already taken enough off the table? In that case, we would truly have a squeeze higher, especially given that there is so little in the way of new supply.
More people know what they’re buying…or do they?
There is a compelling reason why this might be the case. Simply, the understanding of bitcoin as a sound money asset is better than it has ever been. In its early days, it is hard to argue that this was the case. It was far more volatile, and far more likely to fail, than is the case now. A far, far larger cohort of investors are adding to their portfolios with the express understanding that it forms a long term store of value.
In other words, are the old long term holders now dispersing to a new set of long term holders?
The question can only be posed rhetorically. We don’t in truth know, but watching this metric will be an important gauge.
What we can say is that the number of new holders still has a long way to go before calling the top of the cycle. The orange spikes in the chart below need to move substantially higher before the bell rings.
Macro
Russell Napier tells us how and why the existing world financial order will change. Ewan Markson Brown writes about bitcoin’s role in the new framework, and why we are poised at the bottom of the S-curve in terms of adoption of bitcoin and stablecoins.
The end of the global financial “non-system”
Speaking of global financial distortions, here’s a link to a fascinating piece by Russell Napier, called “America, China, and the Death of the International Monetary Non-System”.
The essence of it is that the current global financial system (or “non-system”, because no system was ever agreed upon) is in its death throes. The original sin was to allow China to run a managed currency in a world of free capital flows. This has had a catastrophically distorting impact on business investment, the price of money and the relationship of that to economic growth, debt, asset bubbles, financial engineering… the lot.
We covered some of this ground in far less cerebral fashion back in October (“All Change In China”), predicting that the combination of new policies would put downward pressure on the RMB, (and upward pressure on the desire to impose tariffs), accompanied by fracturing political relationships.
Here are some quotations from Napier’s piece:
“Predicting how any new U.S.-centric monetary system will develop is not easy, but such a system must allow for excessively high debts…to be inflated away.”
“That path of moderation is likely to take the form of financial repression—such as that imposed upon savers in the aftermath of World War II, to force their savings to fund the investment needed for postwar reconstruction, but at interest rates that did not reward them for the current and expected levels of inflation. That is a world in which bankers will create more credit and more money and more inflation than they have in recent decades.”
“…governments will increasingly see their role as managing the wealth of the nation to ensure that the imbalances of the non-system are unwound gradually.”
“This greater government action will make it very difficult for savers to preserve the purchasing power of their wealth. For those who wish to attempt to do so, it is time to take the radical step of preparing to benefit from a fixed-asset investment boom in the United States and across the “friend-shoring” world, which is the antithesis of what has come before.”
This is very much our thinking, of course. As is the idea that there will be a more profound fracturing between East and West.
The big difference is that we believe bitcoin will turn out to be the lifeboat. Its rise will continue to be the counterpoint of financial repression, and, as discussed in the next article, ultimately the neutral monetary asset to bridge the divide.
This is why this recent change in US leadership is so important for bitcoin.
As an asset it has been monumentally de-risked.
A neat tie-in to all the above is this fabulous note (“A New Financial Order”) by Ewan Markson Brown, which I sent out earlier as a standalone note.
It’s an essential piece of reading on the “why” for bitcoin. It also, very logically, makes the case for both bitcoin and stablecoins to live alongside the dollar, providing a fix for the highly precarious global rift Russell Napier anticipates above.
Ewan explains how the adoption of digital finance – via increased usage of stablecoins and bitcoin at this early stage of their evolution – is poised at the bottom of the S-curve, ready to meet the many challenges of the changing world ahead.
I consider this one of the most important pieces we have published.
At Wiston Capital. we are fervently driven by trying to explain why this is such an important asset, one that is still in its early days. If investors only care about price, they will never have the conviction to build a long term position in an asset that in future years has to high chance of becoming the cornerstone of global finance. We’d rather they didn’t make that mistake.
Inflation latest
The latest inflation print in the USA was 2.7% yoy, and in the UK 2.6%. Inflation is so under control, apparently, that the Fed sees no problem in cutting interest rates. But 2.6% is a long way off the 2% target.
The Guardian headline to explain this was:
“Wall Street falls sharply as Fed indicates fewer rate cuts in 2025 to fight inflation”
Why don’t they have NO rate cuts if they’re fighting inflation?
Do they know something we don’t? Is growth at such risk that they can afford to take their foot off the throat of inflation, that eternal value destroyer?
Or is it the familiar playbook? The need to annually roll over around 20% of the US$350 trillion in global debt requires that the liquidity plate be kept spinning. While it’s a bad political look when inflation is running at more than 5%, in the low single digits central planners have no choice but to try and get away with it. As explained earlier by Napier, financial repression (interest rates lower than inflation) is going to be the only tool left in the policy kit to manage the debt excesses.
In the end, markets will bully policymakers into keeping the taps running. The Fed’s language has triggered a nasty bout of “de-risking” in crypto, but it wouldn’t surprise us to see risk assets recover pretty rapidly.
The China factor
It is now clear that China, in its attempts to escape the debt-deflation spiral, is willing to contemplate the unorthodox. As per the FT:
“China’s leaders have changed their stance on monetary policy to “moderately loose” from “prudent” for the first time in 14 years…”
As a consequence, Chinese sovereign bond yields have collapsed.
This accentuates the rate differential between China and US 10-year treasury yields.
Naturally, it’s more attractive to own the US dollar under these circumstances, which is why the dollar index (the DXY) continues to strengthen. Surely, it’s only a matter of time before the RMB devalues?
A strong dollar has negative ramifications, particularly in overseas markets, as it makes debt servicing tougher for businesses, therefore choking off growth. There might also be inflationary consequences, as the cost of imports rise in local currency terms. This creates pressure in emerging markets to keep domestic interest rates elevated in order to prevent currency weakness.
While the Fed’s dual mandates (inflation and jobs) are explicitly US-centric, these tensions are surely also a factor in the decision making process. As mentioned earlier, lower rates are required to manage such international distortions, and if international distortions become too pronounced, it’s ultimately not in the US interest.
It isn’t surprising in this regard that gold, and precious stones like jade, are so prized in the Middle Kingdom. Long term, the stuff hanging around their necks has held its value a great deal better than the paper in their wallets.
Bitcoin is too good
As an afternote, before setting up Wiston Capital, I co-hosted a webinar with Charlie Morris in December 2021, in which we interviewed Russell Napier about his views on the emergence of financial repression.
We had to ask him what he thought about bitcoin, of course, and his answer was:
“I think ultimately the problem is that it’s too good….” (42 mins)
The twin threats that it posed to governments, he argued, were that it would become firstly a means of transaction, and secondly a means to move money across borders. Governments wouldn’t stand for either (as they hadn’t stood for Facebook’s Diem), particularly in a future world of capital controls (a point on which he’s been consistent in this latest piece).
It’s an understandable position, but it also misunderstood the decentralised and incorruptible nature of the technology. My belief is that the more far-sighted members of the new US administration understand that the bitcoin genie is now out and cannot be put back in the bottle.
That being the case, the only other conclusion is to accommodate it. And if accommodated, it is likely to end up far, far larger than it is today.
Cryptoverse
Google Willow and the threat of quantum computing
The announcement of Google’s Willow quantum chip has reactivated some shivering spines. How long before these things chew up bitcoin, while simultaneously curing disease, building transporters (bags not be the test pilot, Scotty) and/or declaring war on humankind?
Well for the time being we can breathe out, according to this piece, entitled “What Does Google's Quantum Computing Chip Mean for Bitcoin?)
First, despite the development of qubits, you need millions of them to achieve the computational power needed to decrypt bitcoin (the Google chip has 105 qubits). That is many years away.
Secondly, it’s a top of mind issue for people like Vitalik Buterin at Ethereum and Scott Aaronson, so quantum-resistant algorithms will be developed.
On top of all that, we always wonder about the motive for decrypting bitcoin. It would cost hundreds of billions of dollars in capital and power, it wouldn’t be guaranteed to succeed, but if it did, it would be rendered worthless. Who would do that? It would be much more profitable to rob one of the big banks…or all of them.
De-crypting bitcoin isn’t like breaking into Fort Knox to steal all the gold. Well, it would be like breaking into Fort Knox, except that as soon as the safe key is turned, all the gold would turn to mud.
Disappointing.
Ethos
Back in July, in “Bitcoin In A World Of Political Fragmentation” I wrote that
State versus Individual is going to be the dividing political narrative for the next generation.
Things move fast. Not only has the Republican victory in the US galvanised those yearning for blob reduction, but the collapse of Assad in Syria, Macron in France, Sholtz in Germany, and the astounding behaviour of President Yoon Suk Yeol (who spuriously declared martial law in South Korea, and thankfully failed), has revealed the fragility of the big statists and the power huggers.
The world is really divided up, not between right and left, but between governments who serve the people and governments who serve themselves. The latter see themselves as the arbiters of all, blessed with pantechnicon vision and judgement. Their edict must brook no dissent.
In the West, we aspire to the former yet have been drifting inexorably toward the latter. This extends not just to elected representatives, but to those on the state payroll - in education, law enforcement, the civil service and parts of the media. As dependents of the state, they cling to what is considered the correct line of thinking, and align with the consensus. Fair enough. You’re likely to lose your job if you don’t.
Yet that sense of moral rectitude, that “we know best”, is gut-wrenching.
I’ve always loved Ronald Reagan’s “nine most terrifying words”:
“We’re from the government and we’re here to help”.
And the waste! The billions thrown at useless, demoralising, impoverishing schemes. The senselessness of net zero. The billions thrown at healthcare, without any discernible improvements, the politicisation of education, the obsession with race and gender. What a waste of time, money and effort.
The truth is that people want to get on with their lives. We’re not perfect, but we’re also not that bad. The super-vast majority of us are decent, law-abiding, responsible citizens. We just want the simple things in life and be left alone to enjoy these fleeting years.
So the good news is that people are starting to say: we’ve had enough. The wind has changed direction. It might be a time of upheaval, but also, maybe – hopefully - a time for great optimism.
(Where are you going with this, this is a bitcoin letter, Ed). (I am the Ed, Ed)
What’s this got to do with bitcoin?
Well, the question should be, “what’s this got to do with sound money?” It isn’t a coincidence that the bloated state has emerged during a period of unanchored money, or fiat currency. If governments are free to inflate their spending capacity, with barely discernible short term repercussions, they are able to turn themselves into all-consuming trolls. They are able to pay lots of people to vote for them. They are able to wage war without fear of destitution.
Bitcoin is the sound money that the world has needed, ever since gold’s inability to be easily physically moved resulted in its abandonment as a global reserve asset. It is not surprising that the new right finds crypto intellectually compelling, as they look for a way out of rising indebtedness and the continued grind of currency debasement.
The important insight of blockchain technology is that you can own something on the internet. It is yours, like holding a gold coin in your hand. You can have no fear of losing it or it being confiscated. And you can then transfer that thing to anyone, in any corner of the planet, without the involvement of a bank, or an exchange, or a dealer, or a boss, or a lawyer. It is revolutionary.
One day, governments, too, are going to wake up and realise this is the only option for a truly independent, global reserve asset.
Great article Charlie, Thanks.