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There was blood in the streets a year ago. March 12, 2020 will be a day that financial investors will never forget. Bitcoin fell over 50% in a single day. Every other asset was in a free fall as well.
Circuit breakers were tripped every few hours it seemed. Investors were full of fear. They couldn’t sell every liquid asset in their portfolio fast enough. The pandemic had hit full stride. The NBA was shutting down. Countries around the world were going into lockdown. The S&P 500 dropped 7% the second it opened. The Dow Jones was down over 8%. Oil and gold were both suffering a similar fate.
It was ugly.
But not everyone was scared. The liquidity crisis was actually quite obvious to those who understood how investor psychology and markets interact. The morning of March 12th I wrote a letter to each of you titled “The Liquidity Crisis Will Drive Monetary Stimulus, Which Will Force The Adoption Of Sound Money Properties.”
I started the letter off with the following:
“We are watching history unfold. There will be books written about the events that are transpiring in financial markets right now. Every day feels like a month. Fear and panic are dominating the minds of most people. As I wrote earlier this week though, like most things in life — this too shall pass.”
Next, I highlighted a simple framework for investors to think through what was happening:
COVID-19 has officially been labeled a pandemic by the World Health Organization. The necessary response requires social distancing and shutting down of large gatherings or various forms of economic activity.
The virus is grinding economies around the world to a halt.
The structural flaws in various markets are exposed when economies slow down, including too much leverage and lack of liquidity.
The key piece to preparing investors for what was about to happen in the coming days was the identification of the liquidity crisis. Some people saw fear. But fear is a psychological concept and a liquidity crisis is a market structure manifestation of the fear. I went on to write:
“Unfortunately, we are watching a liquidity crisis play out in real-time. These liquidity issues are well understood structurally, but feel much worse than expected when they occur in reality. A liquidity crisis means that investors all rush to the exit doors at the same time, but there are so many more sellers than buyers that investors actually have a hard time offloading their assets for cash. Quite literally, investors begin aggressively lowering the price they are willing to accept for each asset in exchange for the cash which they are desperately seeking right now.
This is why you are seeing any asset with a liquid market tanking so hard right now.”
As if that wasn’t enough to grab people’s attention, I went on to show what had happened to gold during the 2008 financial crisis.
“During the 2008 global financial crisis, gold dropped in price by more than 30% leading into the depths of the real pain. This isn’t because gold is a bad store of value or that it had lost safe haven status after 5,000 years. It is because gold has a liquid market and investors needed liquidity over anything else.”
“Even though gold fell 30% during the 6 month liquidity crisis, the asset still went from approximately $650 in 2006 to over $1,800 in 2011. Why? Because people ran to gold when they feared that the United States would default on debt, that the US monetary policy measures were a bad idea, and/or that inflation was rising. Simply, gold served as a store of value and safe haven asset over the full timeline of the crisis, but it succumbed to the liquidity crisis during the worst 6 months.”
So let’s take a look at what actually happened to Bitcoin during the liquidity crisis. Simply, it was in free fall just like every other asset.
The difference is that bitcoin is a more volatile asset, so while other assets went down 15-30% in price, bitcoin was down 50%. As I always say, volatility is not inherently bad. It is a positive thing when it works in your favor and a negative thing when it goes against you. You need volatility for prices to move upwards if you’re long. But the week of March 12, 2020 was a bad volatility period for the holders of the digital currency.
Here is the funny thing though — if you Zoom out and look at bitcoin’s price chart from about a year before the liquidity crisis till today, you can barely even see that 50% drop in price.
As we continue to discuss in this letter, long term holders have a significant advantage over the weak handed short term traders. Humans are emotional. We succumb to fear and greed. But if you have deep conviction in a thesis and refuse to allow the short term price movements to affect your decision making, you will do fairly well over the long term.
My favorite analysis is the holistic comparison of various assets across financial return, volatility, compound growth, and sharpe ratio.
The folks at casebitcoin.com highlight just how attractive of an asset the digital currency has become. Lastly, don’t forget about the safe haven status that everyone was contemplating over the last few years. The big question was what would happen to bitcoin in a market downturn? Would it survive? Would it thrive?
We now have the answer to that question — Bitcoin was the single best asset that you could have held during the market uncertainty and chaos. The return, sharpe ratio, and overall reduction of risk in a portfolio are unrivaled. Pretty crazy to think about in hindsight.
Bitcoiners have done the work. They understand the asset and the market. The conclusion of bitcoin’s dominance is not that of a religious zealot, but rather the product of a deep analysis of all options. They are being proven accurate in that analysis, which can be frustrating to those who reached a different conclusion years ago. That doesn’t mean that it is over though. Bitcoin is actually just getting started in all likelihood. Time will tell how far into this journey we really are.
Have a great start to your week. I’ll talk to everyone tomorrow.
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For one thing, contemporary art prices have outperformed the S&P by 152% from 1995–2020 according to data from Masterworks. They were the first platform to let you invest in paintings by the likes of Basquiat, Kaws, and Haring. But what about returns? They’ve got that too: they recently sold their first painting, a Banksy work, for a cool 32% annualized return to investors.
With results like that, it’s no wonder there’s over 25,000 people on the waitlist. Just use my special link, tell them we sent you, and you’ll be good to go.
Australia’s Government Allocates $5.3M for Blockchain Pilot Projects: The government of Australia has allocated AU$6.9 million (US$5.3 million) to the Department of Industry, Science, Energy and Resources (DISER) to investigate the role blockchain technology could play in regulation. The money will be spent on two pilot projects intended to show how cost reductions in regulatory compliance are possible with the use of blockchain, ZDNet has reported. Read more.
Ripple Execs Ask Court to Block SEC Requests for Personal Financial Records: Two senior executives of Ripple have asked the court to quash requests for access to their personal financial records by the U.S. Securities and Exchange Commission. In a letter to the Southern District Court in New York on Thursday, Ripple CEO Brad Garlinghouse and Executive Chairman Chris Larsen asked Judge Sarah Netburn to block subpoenas sent to multiple banks seeking eight years’-worth of their financial information. Read more.
Argo Blockchain Takes 25% Stake in $40M Crypto VC Fund: Crypto venture capital firm Pluto Digital Assets has raised a $40 million fund with U.K.-listed Argo Blockchain as its lead investor. In an announcement Wednesday, Pluto said it now has $50 million in assets under management after launching earlier this year. Argo Blockchain will be maintaining a 25% stake in the new fund with an investment of $10 million. Read more.
Start9 Labs to Build on Its Self-Sovereign, Private Internet Solutions With $1.2M in Funding: Start9 Labs recently closed a $1.2 million funding round spearheaded by Collider Ventures, Ten31 and Erik Voorhees, CEO of the decentralized exchange ShapeShift. The money will drive additional Embassy developments including additional apps for its decentralized app store, further open-source development by contributors and the “killer of all messaging apps.” Read more.
Binance Faces CFTC Probe Over US Customers Trading Derivatives: Cryptocurrency exchange Binance is being investigated by the Commodity Futures Trading Commission to determine if U.S. residents traded derivatives on it in violation of U.S. rules, Bloomberg reported. Binance hasn’t been accused of any wrongdoing and the CFTC may not bring an enforcement action, according to the report, which cited people familiar with the matter. Bloomberg also did not outline a time period for this alleged trading.Read more.
Zach Herbert is founder and CEO of Foundation Devices, which is building open devices for a sovereign internet powered by Bitcoin.
In this conversation, Zach and I discuss:
Open source wallets
Future Foundation products
I really enjoyed this conversation with Zach. Hopefully you enjoy it too.
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