“Nobody got fired for buying IBM”
…but you might get fired for not buying Bitcoin

Every Bitcoin cycle has a theme and a core driver, and sometimes we’re so close to it, we can’t really figure out what it is (or was) until it’s in the rear-view mirror.

In 2013, I always said it was the Cyprus Bail-Ins and the realization that the banking system was heading in a direction where the expression, “safe as money in the bank”, wasn’t quite true anymore. The core driver was the rise of centralized exchanges – even though one of them, Mt. Gox, blew itself up in a meltdown event which is still unwinding to this day.

The 2017 cycle was about the explosion of the cryptocurrency space as an asset class unto itself: Ethereum stormed onto the scene and with the ERC-20 token specification, igniting a mania of “tokenize all the things”. The ICO boom drove the momentum – and the advent of stablecoins like Tether provided the lubricant to get capital into the digital asset space.

For the 2020 cycle, it was the arrival of the first maverick billionaires – Paul Tudor Jones, Stan Druckenmiller, Elon Musk, Michael Saylor – at the time when their entrance was mistakenly taken to mean, “the institutions are coming” into Bitcoin as an asset class.

Not even close. But what did happen was that a lot of hedge funds and high rollers who were ahead of the curve and out to capture alpha started piling into what was then called “The GBTC arb trade” – long story, explained in detail here but essentially meant that trading desks could book fat profits before they were actually realized, at the cost of  locking up their capital for six months.

When it finally came apart (the cycle ended), the GBTC premium morphed into a discount to NAV – and when things went really bad (LUNA, 3AC, Celsius … FTX) GBTC’s own parent entity, DCG, went bankrupt and GBTC became an island of trapped capital, over $30 billion worth.

Now we’re in a new Bitcoin cycle:

We have a new theme and a new catalyst. GBTC comes into the picture here again, because it is both the reason why the Bitcoin price was somewhat muted once the catalyst hit, and also part of the new catalyst.

Remember what we’ve been saying for a year, maybe more: in the next cycle, the institutions will show up, and because of the huge asymmetry in Bitcoin, they will find it compelling enough to allocate a small percentage to it.

I predicted a new investment mantra for institutional fund managers, “The 1% Allocation”.

Let the data points commence: Fidelity, with $12.6 trillion AUM and one of the spot ETF providers (the only one who built out their own custodian to handle it) has added an allocation of “crypto” to their flagship, “All-In-One Conservative ETF” – self professed as, “A one-ticket solution diversified across regions, market caps and investment styles/factors, with the attractions of professional management.”

The one percent allocation goes back years – in fact the first time I saw it was in a Central Bank of Barbados working paper from a pair of  economists there, recommending that country’s central bank hold 1% of it’s foreign reserves in Bitcoin – that was in 2015.

By 2022, even the Basel Committee on Banking Supervision was setting guidelines on “crypto” allocations for Tier 1 reserve assets:

“Group 2 exposure limit: A bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%”

(That BIS paper didn’t differentiate between Bitcoin and “crypto”, although it should…)

And this recent Motley Fool article, which is mostly about Cathy Woods’ upping her allocation in ARK Funds to 19% cites the 1% allocation as rather matter-of-fact conventional wisdom now:

“Until this year, the consensus view had been that Bitcoin should account for only a tiny portion of your overall portfolio. As a general rule of thumb, 1% was the norm, and any percentage over 5% was considered ultra-aggressive.”

The new 1% Rule: Buy Bitcoin

We all know the old adage, “Nobody got fired for buying IBM”, which was a mantra back in the “Nifty Fifty” days (which was before my time, but there have always been later iterations: substitute IBM for Microsoft, Google, Apple, etc.)

Here’s what I think happens now: while today nobody may get fired for buying, say, The Magnificent Seven, tomorrow you may very well get fired for not plunking 1% into Bitcoin. Yes, really.

What will a 1% allocation across the institutional wealth spectrum do to the value of Bitcoin? My mental model going back to The Crypto Capitalist Manifesto has always been to look at the total size of the bond market, compared to Bitcoin and precious metals.

Basically, this: pic.twitter.com/FhwvjUxYOq

— Mark Jeftovic, The ₿itcoin Capitalist (@StuntPope) February 11, 2024

From there I posit what would happen if just 1% of that “return-free risk” (bonds), walks on over to Bitcoin. Considering Bitcoin only recently recaptured the $1 trillion market cap, and there’s anywhere between $150T and $300T in global bonds (depending on what you include), a mere 1% exiting fiat-backed bonds and stacking sats would more than double Bitcoin’s market cap, at a minimum.

We’re just over a month into this new era of Bitcoin being available as an institutional allocation strategy and early indications are already there that capital allocators are even choosing Bitcoin over gold – which was something that admittedly, surprised me:

Can someone do a wellness check on @PeterSchiff? pic.twitter.com/mUc2xGwK2j

— Jameson Lopp (@lopp) February 14, 2024

I thought those who had already allocated to gold would stay there, and add Bitcoin, but it is now looking like institutional fund managers who had allocated to gold as an anti-fiat hedge have lost patience with gold’s repeated breakdowns from all-time-highs.

Gold did print a new all-time high in December, but as I’ve observed, since the prior high in 2020, a new ATH in gold may mean a multi-year pullback rather than an impending higher high.

Bitcoin, by contrast, looks poised to put up a new string of them, for the next couple years at least.

So I now humbly present you with “The Theme” of this cycle:

The Theme is: The Institutions are Coming.

The core driver is: The Bitcoin Spot ETFs.

The mantra will be: Allocate 1% to Bitcoin.

This is an excerpt from The Bitcoin Capitalist – Mid-Month Portfolio Review, we’re halting access soon: learn more here ».

My forthcoming ebook The CBDC Survival Guide will give you the tools and the knowledge to navigate coming era of Monetary Apartheid. Bombthrower subscribers will get free when it drops (and The Crypto Capitalist Manifesto while you wait), sign up today. Follow me on Nostr, or Twitter.

Lumpenvestors are trapped within a system they believe is real

Probably everybody reading this is familiar with Plato’s “Allegory of the Cave”. Those who aren’t may recognize it in many of its contemporary variations: seminal blockbusters like “The Matrix” or lesser known cult classics such as “Dark City”, even the memetic thought construct of the “Simulation Hypothesis” – they are all expressing the same concept:

That what we think is The Real World actually isn’t, it’s just a flattened projection of reality. The common folk  are like prisoners, chained in a cave, wherein observed events are largely acts of puppetry, choreographed from behind their field of vision.

In Plato’s allegory, the manufactured existence is quite literally the projection of shadows: what is taken for reality is really just images on a wall – a screen – if you will. Behind the captives, if one could make their way out of the cave, they could perceive reality for what it is – in the splendour of the full light of day.

The philosopher goes on to describe the difficulties an escapee would have, if they were to re-enter the cave and try to explain to those who are still captives what “reality” is really like.

The Allegory is timeless and open to never-ending interpretation, but one thing it takes aim at is a key observation which society increasingly loses sight of: that depictions of truth, renderings of it – even “reasonable facsimiles thereof”, are not reality. The “map is not the territory”. The thing that depicts, and the thing depicted, is not the thing itself.

In fact, the latter may be missing an entire dimension of truth that renders it a muted, faded simulacrum of what is real (I’ve always drawn attention to how the images on the cave wall were two-dimensional, and that the difficulty the returning escapee would face in explaining reality, is that it is 3D.  What is “real” contains an entire additional dimension that is near impossible to describe).

The Cave is the Fiat Banking System

Inside the monetary cave, what passes for “reality” are just projections. They’re spreadsheet models and financialized derivatives of rehypothecated paper assets.  Through these constructs, financial institutions can create renderings of assets which they claim are “economically identical” to the real thing. That phrase (“economically identical”) was proffered as an objection to my article of several years ago about Bitcoin Futures ETFs and why you shouldn’t buy them.

In the fiat cave, a synthetic derivative that is more or less correlated with the price action of an underlying asset is the same thing as the underlying asset. This mindset is so baked-in, it’s part of our zeitgeist: other fields, like Artificial Intelligence, have glommed onto it – if an AI can demonstrate behaviour just like human intelligence, then the AI is intelligent.

Neither proposition is true, a piece of code that can pass a Turing Test is not sentient, it’s just code; and having a derivative is not the same as owning the underlying – and if the recent David Rogers Webb book “The Great Taking”  is right about anything (which I reviewed here), it’s that.

Bitcoin ETFs are not Bitcoin

The anticipation around the coming Bitcoin ETFs in the US,  is euphoric (we’ve had them in Canada for years, and they’re actually better than the ones coming in the US, as we’ll note below). They’ve made believers out of skeptics. They’ve proved Bitcoin is an unstoppable force.

In my article about Bitcoin Futures ETFs, I listed four reasons not to own them

1. Counterparty Risk
2. Dilution
3. Decay
4. Divergence (from the spot price)

While spot ETFs will in theory obviate reasons 2 thru 4, the number one reason, counter-party risk, still looms large.

Owning shares of a Bitcoin ETF is just that – shares, units, claims. All of the US applicants had to modify their applications to the SEC to allow for cash settlement – both on fundings and redemptions (that’s the key difference from the Canadian spot ETFs, where there is at least a theoretical option to redeem units for in-kind Bitcoin, typically on one day a year – “Redemption Day”).

Whether we’re talking futures, US or other spot ETFs, when it comes to Bitcoin, none of these vehicles are self-custody of Bitcoin, with possession of your own keys, and in the case of the futures – may not even accurately track the price action of the underlying (they disclose this right in the prospectus).

The spot ETFs have their own challenges – if there’s a hard fork (say this ordinals and inscriptions business and the BRC-20 craze leads to one), the ETFs will apparently be forced to choose which fork to follow, and they may choose wrong (I don’t take seriously the conspiracy theories that the spot ETFs are a play to “take over Bitcoin” and force a hard-fork into something like ₿lackcoin.)

Make no mistake, Bitcoin ETFs, whether they’re spot or futures, while sure to open the floodgates to institutional enthusiasm for Bitcoin – is best left for institutions, funds and endowments – all of which would still be better off holding BTC directly.

There is one advantage that the spot ETFs have over the futures, and it’s a big one. They’ll provide a pathway to holding long term positions that won’t get chewed by decay, at least not beyond the management fees. Allocators just have to bear in mind that they aren’t holding Bitcoin long term – they’re placing long term bets on the price trajectory of Bitcoin using a vehicle that is collaterized by it.

Buying into these ETFs won’t make the lumpenvestor into a HODL-er. Not by a long-shot. (I have visions of people adding laser eyes to their Twitter avatars and listing the ticker symbols for all these ETFs in their bios…)

The extra dimension of Bitcoin is math

Those who have been in Bitcoin before now, got there because they had “left the cave” so to speak.

We left the cave because of math:

The math that says (among other things), that:

• We’re in a debt bubble we can never pay off or even meaningfully reduce
• Our currency is backed by nothing and is actually steals from people with every new unit printed
• We can’t stop expanding either bubble (money supply & debt) because if either contracts it will crash the global financial system

And we use a specialized area of math (public key cryptography) to assert property rights in the real world:

• Bitcoin is a specialized expression of mathematics, secured by energy
• Private keys can be represented in a memorizable seed phrase
• The Bitcoin protocol is implemented through zero-trust mechanisms
•  Any alteration to the protocol, such as the 21M hard cap, would create (fork) a challenger, rather than change Bitcoin

In cave world, this all sounds cray-cray to the inmates. “Hard money secured by energy”, they scoff, “You mean tulips backed by nothing! AmIRite? Checkmate”.

We can’t fault them for this. It’s a kind of institutionalized Stockholm Syndrome. They’ve never done the work to peer outside the cave.

Remember what I said earlier about how hard it would be for anybody coming back into the cave to explain the existence of an entirely new dimension over and above the 2D flatscreen shadows they assume is reality. (Ever read “Flatland”?)

So for the time being, more people will pile into Bitcoin ETFs because their approval will signal to the world that “Bitcoin is a legitimate asset class” – better late than never. And the funds will have to buy actual Bitcoin to meet inflows, in a macro environment where most actual Bitcoin HODLers are have moved their coins off the exchanges and are digging in the for the long haul.

As I type this, Bitcoin is still under a trillion dollars in total market cap, what I think will be interesting to watch going forward will be the ratio of total AUM of the Bitcoin spot ETFs measured against the overall market cap. My guess is this will provide hints in the future around cycle tops and bottoms.

My forthcoming ebook The CBDC Survival Guide will give you the tools and the knowledge to navigate coming era of Monetary Apartheid. Bombthrower subscribers will get free when it drops, sign up today.

Follow me on Nostr, or Twitter.