This will be the last update for 2019, we’ll return to action on updates in mid January. It seems then, that this is a suitable time to review some price action. Bitcoin has had (as usual) a very volatile year, ending up around 95% while having six times the volatility of the S&P500.
Using something known as the Sharpe Ratio we can adjust returns for volatility and compare performance. Bitcoin does well, but has under-performed the S&P500 on that metric. That feels intuitively right too, the feeling from this year is like 2015, something is happening, but it’s not that exciting yet.
It sounds ridiculous to be disappointed with the sorts of gains we have seen this year but we do have to adjust for volatility and we do have to conclude that the year was just OK, perhaps a five out of ten.
If we look at the price side of the equation, bitcoin has almost always set a higher low (with the exception of 2015, which also happened to be a year before a halvening). We set a higher low again this year but it’s hardly anything to write home about.
A lot of infrastructure has been built for bitcoin this year and is now ready and operating. Institutional storage is here and live (and cheap), futures products are here and live (and not cheap). So everything is in place for steady inbound flows and that’s exactly what we have had but we haven’t had the flood of money that equities have.
The problem for newcomers is the new supply of bitcoin will halve in May, perhaps the market knows that and is positioned accordingly. I very much doubt it though and we are about to find out.
Progress, but not for everyone
With the price up significantly, bitcoin mining power is up around 200% this year with a huge investment in mining around the world, particularly the new plants in the USA. Total wallet users was up around 50%, although this excludes people that use third party wallets like cash app, so its likely very much higher.
Over the road at Ethereum though the story is rather different. They have enormous challenges ahead next year including a very complicated transition from one blockchain to another. What is more, the faith of the crypto exchanges is starting to wobble. In the UK, Coinfloor, one of the oldest exchanges in the country has announced they are delisting the forked version of bitcoin known as bitcoin cash and Ethereum at the end of the year.
This happens to bitcoin cash a lot and as a consequence its liquidity has declined markedly, it does not happen to Ethereum. At least not until now.
We can’t sign off for the year without poking fun at the European Central Bank.
I really am looking forward to the Christine Lagarde era as ECB President. There is no politician in the world that has a teflon coating like hers. Ms Lagarde oversaw the 2018 $50 billion loan to Argentina. This was the 21st IMF bailout of the country and rather predictably, they are in the process of defaulting.
In 2008 the canary in the coal mine was the inter-bank lending market. Everyone knew someone was bankrupt, but who? Rather than run the risk of finding out the banks decided, probably sensibly, not to lend to anyone at all. Cue seizure of credit, Lehmans etc.
The authorities have learned something since then, specifically that the wider consequences of a disorderly banking insolvency are far more costly that the incident itself.
As we approach year end, it’s clear that the Federal Reserve is anticipating some sort of banking credit crunch. Most US banks have a reporting date on 31 December and so they pull numerous (legal) tricks to make their operations look as pretty as possible. These include not lending to each other on that evening because they don’t want to have to report credit exposures to other banks that might fall over. So, spanning the 48 hours of the year end from New Years eve until the Thursday (Wednesday being a Public Holiday on New Years Day) the Federal Reserve will make $150 billion available in overnight money. It’s perfectly natural in many ways that this happens, the Fed is America’s lender of last resort and it is an official part of their role. In fact the Fed has claimed that these are not lender of last resort operations, but “technical smoothing”
I was able to source a definition from the ECB’s website. Interestingly, it perfectly describes the position in US inter-bank lending market. There is of course no definition of “technical smoothing”.
As you will no doubt recall, Northern Rock eventually went bust. You only go to the Lender of Last Resort window when it’s game over. Northern Rock’s loan from the Bank of England was about $40 billion before it finally fell over, suggesting that with loans of $175 billion are not a good sign.
Perhaps though, this whole repo operation is technical and in no way has a parallel to 2008. I certainly am not predicting a repeat of those events but I can’t see how once US banks get addicted to giant repo operations that they are ever able to get off them and once again we are left with hundreds of billions of dollars created out of thin air at the expense of everyone and to the benefit only of the recipient bank and its shareholders. In all likelihood these operations will continue and get bigger and bigger.
The story of this repo operation is really this – 2008 is not going to happen again. Central Banks will provide any amount of liquidity needed to make sure that it doesn’t happen. In Europe this week Banca Popolare di Bari was bailed out to the tune of €900 million. It barely even made the news – did you hear about it? I’m guessing not, because it is simply expected these days that banks will never go bust again.
Money is simply printed and delivered to where it is needed, nobody protests and most importantly it works. The money makes its way into bonds and equities, prices rise, everyone is wealthier, it’s easy really.
Fidelity Digital Assets
Fidelity Digital has launched a new European arm this week to service cryptocurrency demand for its European clients. Chris Tyrer, a former managing director of Barclays’ investment bank has been named as the Head of Fidelity Digital Assets Europe, he actually joined in April 2019 and has apparently been sourcing institutional clients since then. Fidelity added they are looking into opening an Asian arm to their digital business in future.
Whichever way you look at it, the biggest fund manager in the world is in crypto for the long haul.