During a legendary performance in HBO’s “True Detective,” Matthew McConaughey’s character unsettlingly states that “Time is a flat circle. Everything we've ever done or will do, we're gonna do over and over and over again.” The line led to a memory of data found in the initial transaction on the Bitcoin blockchain on January 3rd, 2009 – a reference to the front page of the UK Times, pictured below. Israel was preparing to send military assets into Gaza, and central banks were preparing to ease and unleash bailouts for failing financial firms.
Fast forward nearly 15 years and one might mistake the image above for a newspaper today. While bailouts may not be the financial soup du jour, the US has added about $22 Trillion in debt since that day, delivering sustainability fears combined with forced liquidity injections due to regional bank pressures. At the same time, geopolitical instability in the Middle East, Eastern Europe, and Asia are all rising in both hot and cold war fashion.
Alongside a plethora of significant risks, many question the recent resiliency of BTC, which currently sits at an 18-month high and has outperformed not only other crypto assets, but also every investable asset class. Bitcoin is back in the spotlight as a “flight to quality” asset, as BlackRock CEO Larry Fink described it – a statement that took many, including us, by surprise.While we have always seen the value of BTC as both a hedge against fiat weakness and a global store of value, hearing it from the world’s largest asset manager is a testament to how far that idea has come. To be clear, we don’t root for fiat debasement or a shift away from the US Dollar standard, but as spending and debt burdens increase, and as foreign actors seek alternatives to US Treasury holdings and USD-denominated trade, bitcoin becomes an increasingly attractive alternative.
On August 2nd, we published a piece titled "The Start of the Next Cycle,” which laid out historical price cycles for crypto and the reasons our bullishness was amplified on the broader crypto ecosystem. While that appears to have been about a month early, we have started to see a broadening of return participation from crypto assets beyond bitcoin.
Sticking with BTC for a moment, there is renewed interest in the first spot bitcoin ETFs potentially arriving to the US market this quarter, which is earlier than expected. A few clues lead us to believe approvals are imminent, including BlackRock and ARK registering CUSIPs (security identification numbers) and making trivial amendments to their filings – a sign the SEC has provided guidance on any outstanding requirements. We do believe the potential size of new inflows from a spot ETF is in the billions within the first year or two, at a time when bitcoin available on exchanges is low and the price impact of new inflows is large. For reference, we estimate that the Registered Investment Advisory (RIA) market alone covers roughly $5-6 trillion in assets under management. Just a few basis points of portfolio allocation from this segment of the market can be enough to move bitcoin significantly higher. Galaxy Research published numbers for reference below. As noted in our last piece, bitcoin typically leads, and the rest of the market follows, and we anticipate a similar cycle as we have already seen major fund issuers file Ethereum ETFs in anticipation of bitcoin’s approval.
Beyond bitcoin and ETFs, traditional markets are focused on when the Fed will pivot to loosen policy, yet a part of the crypto market is about to experience easing of its own. Arbitrum is a scaling solution for the Ethereum blockchain, offering faster and cheaper transactions for users interacting with applications onchain such as Decentralized Finance or Gaming. The Arbitrum organization has approved roughly $50MM in grants to specific companies that will be released early November and must be distributed throughout the ecosystem by January. We believe this amount of capital in a $2B ecosystem will drive more liquidity, more users, and attractive investment opportunities in the coming weeks and have positioned accordingly. Since the grants were approved last week, we have already seen a significant tick up in capital inflows to Arbitrum and expect that to continue.
Weekly Onchain Transaction Volumes (Source: Defi Llama 10/25/23)
In conclusion, we reiterate our belief that we are seeing the start of the next cycle and remain quite optimistic for the rest of this year into 2024.
Please do not hesitate to reach out with questions, comments, or feedback!
Sincerely,
Motus Capital Management
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