Disclaimer: Your capital is at risk. This is not investment advice.
ByteTree Market Health Update; Issue 67
I have long argued that Bitcoin has links to tech and social media stocks (SOCL) in particular. That’s hardly a revelation, nor controversial, because Bitcoin is a network effect situation that rose from the internet. Bitcoin has performed spectacularly over the years, leaving social media stocks for dust.
Bitcoin leaves social media stocks for dust
Source: Bloomberg. Bitcoin and Solactive Social Media Index since 2012.
The relative chart shows this more clearly. Taking the black line from above and dividing it by the blue line, we get the relative chart below. When Bitcoin peaked in 2013, it took over three years before it was ahead of SOCL again. The same thing happened again in 2017, and Bitcoin recently made a decisive all-time high against SOCL, which has also been a fabulous trade, at least in old school terms.
Bitcoin makes an all-time relative versus social media
Source: Bloomberg. Bitcoin relative to the Solactive Social Media Index since 2012.
Less discussed is Bitcoin’s head start over other asset classes because pre-2013, the Bitcoin network value was miniscule. It crossed $1 billion for the first time in March 2013 and $10 billion in November 2013. Compare that to SOCL, which held companies such as Facebook ($128bn end 2013), Tencent ($118bn end 2013), and Alphabet ($376bn end 2013) and many others. I’d hazard a guess that in late 2013, SOCL had a combined market cap somewhere close to a trillion dollars, roughly where Bitcoin is today (assuming no coins have been lost - ByteTree view: knock off 25%).
In contrast, SOCL’s constituents are collectively worth $5bn today. The smaller asset with higher growth had a huge advantage. Now they are both large, which means it will become a fairer fight in the next decade.
It isn’t just performance which I have followed, but correlation. If you analyse the daily price moves, you won’t find much. But if you zoom out and look at the direction and scale of price moves by calendar year, it’s striking how much Bitcoin and SOCL have had in common.
Performance by year
Source: Bloomberg. Bitcoin and the Solactive Social Media Index performance by year.
The best three years (dark blue) are aligned, as are the two worst years (tan). The others are steady bulls on their different trajectories. If you think about it, Bitcoin has created a trillion dollars of value in a decade, whereas SOCL has created four.
Going from zero to one is a much bigger leap than going from one to five. The latter is 5x, whereas the former is infinite. I suspect the next decade for Bitcoin will look more like the last decade for SOCL. There will be good years and bad years, but both will be dampened by Bitcoin’s vibrant history. Bitcoin could do better than 5x, maybe 10x or even 20x, but it won’t do 800,000x again; I promise you that.
Recall, SOCL also started at zero, as did all companies at some point. The stockmarket never gets to see the early benefits in the same way Bitcoin did, as Facebook and the like routinely IPO in the tens of billions. The first Bitcoin price was around 6 cents implying a network value of a little over $100,000. That sort of thing doesn’t come around very often, but it happens every day in start-ups. Bitcoin was essentially a public start-up.
Will Bitcoin detach itself from tech?
This is the most important question. As I have discussed before, Bitcoin enjoys the current macroeconomic environment as it is a hard asset that benefits from rising inflation. It also likes risk-on conditions, which are reflected by rising bond yields. In contrast, tech prefers risk-on conditions when inflation is low, often described as “goldilocks”.
Why? Because tech stocks are expected to make huge profits in the future. If those profits are inflated away, that’s less interesting than in a hard money environment. Consider how many growth stocks you would like to own in Venezuela, Argentina or Turkey? In those countries, better to own hard assets, which would shrug off inflation.
The past year has seen the ARKK ETF (the high growth gang in one ticker) do even better than SOCL. Between mid-February and Monday’s close, SOCL was down 17% and ARKK, 29%. These are big moves, and the canary in the coal mine is that inflation and bonds yields rose in tandem.
Bitcoin detaches itself from tech
Source: Bloomberg. Bitcoin, Solactive Social Media Index and ARKK past year.
This environment that is hurting tech seems to be pleasing Bitcoin. Other assets that benefit are industrial commodities and financials. Looking ahead, Bitcoin has seemingly more in common with them than tech stocks; after all, you might say the early adoption phase is complete.
Recall gold is not an industrial commodity but a precious metal. It has been under pressure, not because of inflation but rising bond yields. I dive into that here.
Bitcoin is not without risk but is proving to be the leading risk-on inflation hedge. In contrast, gold likes risk-off inflation, as described in the piece. I keep coming back to this simple idea that gold and Bitcoin are perfect offsets for an inflationary environment. Many see Bitcoin replacing gold, but they are wrong. It doesn’t need replacing, because it plays a completely different role. If inflation remains high but the economy cools, do not be surprised to see gold starting to outperform Bitcoin. When the shit really hits the fan, I would always turn to gold.
I started covering Bitcoin’s link to tech several years ago. It is only now that there is growing evidence of decoupling. The big money will take notice, and as they realise the scale of the opportunity, they will invest. I have stated that with a million BTC being mined by 2024, a $50,000 BTC price will cost $50 billion in miners’ revenue. If the institutions come aboard, that really becomes change.
In 2020, when 10,000+ stocks were going up, Bitcoin didn’t truly stand out. But as it detaches itself from the old world and rising stocks become a rarity, Bitcoin will get noticed. One by one, the institutions will come. Much could go wrong, but however you look at it, Bitcoin has just passed one of the most challenging tests with distinction.