From the Trump effect, Microstrategy premium to the liquidity cycle, analyzing the BTC price performance in 2024
If Trump wins, the market will reach a higher level.
Original author: The Giver
Original translation: TechFlow
This is a very long thread intended to chronicle my journey through the rise in Bitcoin prices since October 15th. I will reiterate my original views from my guest appearance on @1000xPod.
Before we begin, I want to make it clear that this is not a recommendation that you go long or short any coin, especially since open interest and positions are extremely crowded over the coming week. The chances that we challenge the all-time high (ATH) are very high, even very likely. This could have a significant right-side effect. Specifically, I think it may be very difficult to manage a new short position here. That being said, next -
Today, I hope to define the nature and intensity of the capital flows that have entered Bitcoin since mid-October. I will discuss the $250B increase in BTC and $400B increase in total crypto market cap since Bitcoin’s $59,000 low, and describe the constrained capacity I believe exists in Q4 2024, which I do not believe will be materially breached.
My view is twofold: 1) New money remains constrained, which is a necessary precondition; the strong inflows we have observed over the past two weeks are primarily speculative; and 2) the excess liquidity required to generate a run-up like we have seen in 2021 does not exist.
However, I believe the following principles are severely overlooked and little discussed, primarily because analysis of price increases is so superficial that it is often only addressed when prices fall.
You need to believe:
1) The direction of the election does not drive price-dependent outcomes; rather, Bitcoin is currently being used as a liquidity hedge against a Trump victory.
2) The “easing conditions” to make new aggregate highs today were not enough. Interest rates and other popular heuristics are not nearly as strongly correlated with genre liquidity as popular rhetoric suggests, and signs point to prices ultimately being suppressed rather than experiencing price discovery.
Recap of previous view
When Bitcoin broke out around 61,000/62,000 during the Columbus holiday, it made me want to revisit the events of that time. So, from that week (to be presented later on @1000xPod), I predicted the following, which I now summarize below:
1. BTC.D increases (and BTC itself may challenge $70,000 before the election results)
2. Meanwhile, mainstream and altcoins generally fall, relative to BTC - because the speculative money mentioned in point 1 is only focused on BTC as a leverage hedge against a Trump victory
3. Initial inflows (cost basis between 61,000 and 64,000) are sold off before the actual election, leaving new directional money (and speculative money)
4. By the effects of 1 to 3, Bitcoin will fall in the medium term no matter who wins
Therefore, I recommend going long BTC and short "everything else".
Why are the money flows mercenary in nature?
My understanding of this positioning is threefold:
1) Microstrategy is the vehicle of choice for large investments and exposure: rapid expansion is often accompanied by local highs.
2) The market consensus is wrong about the "Trump trade"; the impact is not causal, i.e., an increase in Trump's odds does not linearly create opportunities for BTC to perform, but rather the basket of assets that rose this month reflects an underestimation of Trump's victory.
3) A new player has emerged in this cycle - this capital is different from previous players - it has no intention of recycling funds within the ecosystem; crypto-native funds are already fully deployed, and the possibility of spot follow-up is low.
Case Study on Microstrategy
I believe Microstrategy is one of the most misunderstood investment vehicles currently: it is not just a simple holding company for BTC, but more like a FIG (NOL (net operating losses) are covered by new capital raisings), and its core business revolves around generating illiquid net interest income (NIM).
NIM is a concept that can be most easily understood by insurance companies seeking returns on long-term deposits, usually in the form of a liquidity premium (like bonds), where ROE (return on equity) is greater than ROA (return on assets).
In the case of MSTR, or any other stock, MSTR is used to compare two aspects:
1. Expected BTC price growth (which can be defined as the BTC yield)
2. Weighted Average Cost of Capital (WACC)
Microstrategy can be described as an under-leveraged business with a light asset burden - the business's obligations are mostly covered until BTC reaches $10-15K, so it is very capital efficient:
It has efficient access to credit markets, having arranged over $3 billion in convertible bonds, generally with the same structure: <1% coupon and 1.3x conversion premium cap, redeemable if the exercise price exceeds the actual price at some point in the future. However, looking at its 2028 secured notes, we can see that MSTR has a fixed cost of debt of around 6% (already repaid).
We can therefore visualize MSTR's overall cost of capital from a credit perspective, using the implied probability assigned to achieving 1.3x MOIC, with a hybrid convertible instrument.
If for 5 years you collect $1 per year (no redemptions), then for the lender to balance between offering the convertible and paying the note $6/year, that means the $5 per year gap for 5 years must be filled by a lump sum payment of $30 in year 5.
So, the following formula works: 5 + 5/(1+x)^1 + 5 + 5/(1+x)^2 + 5 + 5/(1+x)^3 + 5 + 5/(1+x)^4 must equal 30/(1+x)^4. This equates to a cost of capital of about 9%, while the current debt-to-market ratio implies a cost of equity of about 10%.
In simple terms: if the BTC yield, i.e. the annual expected growth rate of BTC, can exceed 10%, then the premium of MSTR should expand relative to the net asset value (NAV).
Using this framework, we can come to an understanding that the premium reflects overeager sentiment, or expectations that BTC will soon expand - so the premium itself is reflexive and patient, rather than lagging.
So when we overlay the premium onto the BTC price, we see two periods where the premium exceeded 1 - the first half of 2021 (when BTC first approached $60,000), and the peak in 2024, when we previously approached $70,000+.
I think that with the stagnation premium ending tomorrow, the stock market is aware of this and expects the proceeds to be used to buy BTC, and is expressing this expectation in two ways:
Buy MSTR ahead of time, predicting a recalibration of the premium to ~1-2x as Saylor may buy more BTC;
Buy BTC directly, not only to cater to Trump's victory, but also to Saylor's buying intention (via IBIT inflows).
This theory fits with the options market (which is biased towards the short term), which has seen increasing activity predicting a BTC price of $80,000 by the end of the year, matching the implied BTC gains created by the MSTR purchase (1.10x $73,000 ≈ $80,000).
However, the question is: what type of buyer is this? Are they here to collect $80,000+ price discovery?
How has this new money affected price action in October?
Despite initial correlation via algos and perpetual contracts, the lack of sustained follow-through across almost all assets except BTC has led to speculation that the current bidding is simply inflows through MSTR and BTC ETFs.
We can draw several conclusions from this:
1.ETH ETF:Despite over $3 billion in new inflows into ETH ETFs since mid-October, there has been virtually no net inflow. Similarly, ETH CME open interest (OI) also appears unusually flat, leading us to conclude that this buyer is not inclined to diversify and is only interested in Bitcoin.
2. BTC exchange and CME open interest is also at or near all-time highs. Futures open interest for the coin is at its highest point this year, at 215,000 units, 30,000 units higher than in mid-October and up 20,000 units since last weekend. This behavior is reminiscent of the desperation to gain exposure we saw before the launch of the BTC ETF.
3. Altcoins were losing strength against BTC until mid-October, with Solana’s strength following ETH and other altcoins, which were lackluster and unattractive. In absolute terms, other altcoins are actually down this month, at around $220 billion, compared to $230 billion on October 1st.
What happened to Solana on Oct 20th? I think the growth in SOL (+$10b) mostly reflects an unexpected repricing of a meme asset (looking at the GOAT chart and underlying AI space, these are happening heavily on Solana). Users must buy Solana when entering the ecosystem and redeem to Solana when they make a profit, which is consistent with the L1 fat tail theory and reflects the larger trend we have seen on APE and DEGEN this year. During this period, I believe about $1b of wealth was created and SOL was passively held during the election.
4. The first stablecoin reduction of the year, resulting in a lack of self-generated USD to generate new demand (slowdown) beyond what is created today.
We have seen a similar repricing phenomenon in traditional markets - we can observe how this demand has emerged through the case study of Trump Media vs. Tech: the stock is trading at $50 today, compared to around $12 on September 23rd with no new earnings or news releases. To put this into context, Trump Media is now worth about the same as Twitter - an increase of $8 billion in a month.
Thus, two possible conclusions can be drawn:
1. Bitcoin's use as a liquid proxy simply reflects money being bet on the election, and does not reflect sustainable long-term positioning as implied by other narratives such as rate cuts, loose policy, and productive labor markets. If the latter, the market should have performed more consistently, and other risk proxies (gold when the dollar is depreciating, SPX/NDX otherwise) should have shown more even strength over the month.
2. The market fully expected a Trump win; this money is not stable and unwilling to participate in the broader ecosystem, even though today's positioning shows that it should/will participate. This fractal is not what crypto natives are prepared for, as this type of buyer did not exist in the past.
What is this new buyer referring to?
When analyzing the makeup of participants, historically it has typically included the following categories:
1. Speculators (short/medium term, often creating deep capital troughs and peaks, very sensitive to price and rates)
2. Passive bidders (via ETFs or Saylor, though he buys in bulk) are price insensitive and happy to support pricing as they have ingrained HODL behavior in a typical 60/40 portfolio construction.
3. Arbitrage bidders (price insensitive but rate sensitive) - employ capital but have no overall impact on price, may be the initial mover of the early year momentum.
4. Event driven bidders (create open interest expansion in a specific time period), such as the ETH ETF and the Trump summer campaign, which we believe is what we are seeing now.
Category 4 bidders have a playbook for the summer, which can be expressed by my previous tweet about Bitcoin as partisan leverage (next tweet).
This shows that buying behavior is indeed impulsive and jumpy, but this buyer does not care about the election results (which can be interpreted as the lack of linear correlation between Trump's odds of winning and Bitcoin price). They may de-risk like Greyscale bidders did when ETF trading went live, involving closed-end funds on BTC/ETH.
BTC as a lever for two-party bargaining
(See tweet)
How do interest rates affect the price of Bitcoin?
In June/July (next tweet), I hypothesized that it would be difficult to view rate cuts as a simple aspect of easing. In this tweet and subsequent posts, I will debunk this theory and discuss a key missing variable that I believe causes us to overestimate Bitcoin demand: excess liquidity.
First, let’s compare Bitcoin’s price over the past 5 years independently to historical SOFR (interest rate). This shows that 2022 and 2023 are very strongly correlated, while 2020, 2021, and 2024 seem to be more dispersed. Why is this? Shouldn’t lower rates make borrowing easier?
The problem is that unlike those particular years, borrowing markets are already quite strong in 2024, suggesting that rate cuts are coming. One unique mechanism is that the average low-grade debt is issued with shorter maturities (so maturities are in 2025-2027), which dates back to a few years before the “highs last.”
You can also check out the debt index created by @countdraghula (ignore QE) to get an overview of actual debt growth.
Similarly, the stock market has performed very strongly: the “S&P 500 has surpassed any consecutive rallies of the past decade, totaling 117 weeks” (without a -5% return). The previous longest rally was 203 weeks, when the economy recovered from the trough of the global financial crisis.
In other words, credit and stock markets have created a massive restorative rally without a recession.
My reasoning: We experienced a unique mechanism in 2021 and 2023 (COVID and SVB failure) that led to liquidity injections. New facilities were built using the power of the Fed's balance sheet.
Business/liquidity cycle is broken
( See tweet for details)
Bitcoin's correlation with M2: Demonstrating how emergency measures create growth and volatility
Bitcoin's growth is often seen as the biggest antecedent, however, since 2022, Bitcoin's correlation with M2 is weakening (and starting to resemble the 2021 peak again). I think this is closely related to the current government's willingness to open up its balance sheet to achieve financial stability. This is at all costs.
So the key questions are - what exactly is Bitcoin? Is it a leveraged stock? Is it a chaos asset? What conditions must occur in order for price discovery to occur when the underlying market (~$2 trillion) is already so large that it almost matches the TOTAL1 highs we saw in 2021?
I think these questions are unlikely to be answered during this year's office transition.
How Emergency Measures Support Bitcoin: COVID-Induced Quantitative Easing in 2021
I think using 2021 fractals to visualize future price action is flawed. In 2021, ~$2 trillion was injected through at least a few projects. The expiration dates of these projects coincide very interestingly with Bitcoin's price action (PA).
On March 15, 2020, the Fed announced plans to purchase $500 billion in Treasuries and $200 billion in mortgage securities. This rate doubled in June and began to slow in November 2021 (and doubled again in December 2021).
The PDCF and MMLF (which provide loans to prime money markets through the stabilization fund) mature in March 2021.
Direct lending was reduced from 2.25% to 0.2% in March 2020. Direct lending to companies through the PMCCF and SMCCF was introduced, ultimately supporting $100 billion in new financing (increased to $750 billion to support corporate debt) and bond and loan purchases. This will taper between June and December 2021.
Through the Cares Act, the Fed is preparing to provide consumers with $600 billion in 5-year loans, and the PPP is scheduled to end in July 2021. According to a report in December 2023, about 64% of the 1,800 loans at that time were still outstanding. As of August, 8% of these loans were past due.
This speed of money injection and creation is very unique. It is also clearly reflected in the price action in 2021 - peaking in the first and second quarters, falling in the summer (when many projects ended). Ultimately, when these projects stopped completely, the price of Bitcoin experienced a huge downward fluctuation.
Further easing in 2023: Bank failures
According to the Fed’s balance sheet, as of March, BTFP loans totaled $65 billion, and the discount window peaked at $150 billion. The Fed also lent about $180 billion to bridge banks to resolve the crises of Silicon Valley Bank (SVB) and Signature Bank.
To put this into context, the Fed’s lending level to banks during this period was about 6.5 times higher than during the pandemic.
The reason is obvious: all of these held-to-maturity (HTM) securities on the bank’s balance sheet are unrealized losses. These losses do not need to be reported under FASB accounting standards. In 2022, US banks’ HTM portfolio grew from $2 trillion to $2.8 trillion, largely due to re-labeling them as HTM. This would normally be acceptable (the market value of long-term fixed income securities suffers due to persistently high interest rates), but actual depositor demand led to a bank run, forcing liquidity to be realized - which involved writing down these securities.
Since March 2023, Bitcoin price discovery has been largely liquid, and with the rollout of the program — which halted new lending in March 2024 — it was during this period that crypto assets became overheated and saw a short-term correction.
Glass Ceiling: Why It Exists
In summary, I think the sequence of operations was:
1. Capital was activated after what was most likely a US government sell-off (central bank discount) and MSTR front-loaded, pushing prices from $59,000 to $61,000 via premium expansion.
2. The rally from $61,000 to $64,000 was generated over the long weekend, largely due to the impact of Trump hedges.
Some funds exited last week as prices adjusted downward to $65,000, leaving some specific buyers with a still very high cost basis (over $70,000) this week.
3. ETFs continue to support spot prices driven by Trump's directional opportunities (even though Bitcoin's beta has not risen), while laggards continue to lag despite expanding holdings, lacking capital recycling.
4. Bitcoin buying remains static in its own ecosystem and is unwilling to "engage" elsewhere.
Why I don't think there will be strong price discovery in 2024:
1. Lack of re-staking (measured by DeFi total locked value compared to 2021).
2. Overconfidence in the degree of float that will actually occur after interest rate cuts.
3. Lack of very strong government stimulus (emergency injection).
4. Muted reaction in other markets (like stocks, gold, etc.).
Really, the last part - some potential upside risks (some I've considered, some I think are not relevant in this time frame)
· This week's M7 gains totaled about $15 trillion. If they perform well (a month ago I thought most companies' growth would be hard to beat), then some of this new money could flow in and be invested in Bitcoin and related assets. I believe Alphabet was up $10 in after-hours trading earlier today.
· China's stimulus (which I think is already reflected in Bitcoin's investment) continues to expand beyond previous statements.
· The impact of primaries on the market remains sticky, however, the results of 75 elections show the opposite and more severe view: link.
· Inflation hedges unravel from fundamentals (which were very strong during the IRA bill passed by Democrats) and move to Bitcoin and Gold for a longer period of time during the Trump term.
Overall, I think the market will reach a higher level if Trump wins, and Harris (as the other candidate) may not be valued as much as it should be. Therefore, even with the above risks, the expected value of the market can still be guaranteed.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
You may also like
Base hit a record of 106.26 TPS, up nearly 28% since November 23
220 WBTC transferred from Wintermute to unknown wallet, worth over $20 million
Hut 8 CEO: The current balance sheet Bitcoin holdings are 9,100
ARK Invest sold 20,552 Tesla shares yesterday