Against the backdrop of an unprecedented macroeconomic situation, Anthony Pompliano, co-founder of the Morgan Creek Digital hedge fund, wrote the following letter to investors and subscribers.
The Fed has reduced the interest rate to 0% and has no plans to raise it in the foreseeable future. The numerous stimulus packages that have been implemented under the quantitative easing policy since the beginning of this year have totalled more than $3 trillion. An additional 2 trillion dollars infusion is on the way. The Federal Reserve’s balance sheet has increased by 75% since the beginning of the year. Although there is a strong argument that quantitative easing will not increase inflation due to the current deflationary environment, the Fed has nevertheless publicly refused to support a 2% inflation rate.
The average investor is afraid of inflation right now, whether or not we are already seeing it in reality. This fear has caused capital inflows into assets that hedge inflation risks: gold, bitcoin, real estate, etc. Manipulation of asset prices by the Fed, combined with the fear of inflation, has resulted in the yield of gold and Bitcoin being significantly higher than that of stocks and commodity assets.
In this letter, I would like to express my opinion on the expected return on Bitcoin over the next 15 months. Many investors, looking at the historic rise in the BTC price, will think that this opportunity has already been missed. In my opinion, this is very, very far from the truth. I think that we are at the beginning of another bullish cycle in which the bitcoin can grow 10-20 times over the next 15 months.
Let’s look at the demand side first in the known price equation. The macroeconomic environment is extremely favourable. Bitcoin has risen by more than 50% since the beginning of the year. The continuation of the zero rate policy and quantitative easing will continue to stimulate demand. In addition, you can already see traditional asset management companies starting to invest in bitcoin. Fidelity Investments has recently published an article on the positive impact of 1-5% placement in Bitcoin Revival on clients‘ investment portfolios. Stone Ridge, which manages $10 billion worth of assets, now owns $115 million worth of bitcoins. Paul Tudor Jones talked about 2% of assets placed in bitcoin. Many US government pension funds now have access to Bitcoin through fund managers. Grayscale, the largest company managing digital asset investments, experienced a record flow of more than a billion dollars in the third quarter of 2020 and now has a total of almost $6 billion under management.
The list can be continued and continued. Wall Street began trading on the bitcoin market. But the increase in demand is not only due to traditional asset managers. Today we can also see the emergence of a new trend: corporations are beginning to use bitcoin as a reserve asset for some – or even most – of their free cash. This started with public companies that focus on digital assets, such as Galaxy Digital and others. Following them, MicroStrategy, a public company with a capitalisation of over $1.2 billion, has invested 85% ($425 million) of its cash reserves in bitcoin. More recently, Square announced that it has acquired about $50 million worth of bitcoins (approximately 1% of its assets).
In my opinion, this is just the beginning. We can list all the leading and progressive firms in just two paragraphs. In the end, they will be followed by the others. The projected demand is strong and shows signs of acceleration in the first half of 2021.
This brings us to the supply side in the price equation.
The final supply of Bitcoin is limited to 21 million units. Of these, around 18.4 million have already been put into circulation. New bitcoins are put on the market on a predetermined schedule, which is written in the software protocol code of the network and cannot be changed without the consent of 51% or more users (the probability of change is extremely low). This pre-programmed emission schedule has been in force since 2009, when 7,200 bitcoins were issued daily. This has been the case for 4 years until this number was reduced to 3,600 new bitcoins per day. Four more years later it was already 1,800 units. More recently, in May of this year, another ‚halving‘ took place, resulting in a reduction in the growth rate of available supply to 900 Bitcoins per day.
Historically, such supply cuts have led to a significant (approximately twentyfold) price increase in the 18 months following the halving. So, to summarise, we have a significant increase in demand and a significant reduction in supply, which historically led to a price increase. Even the combination of only these two factors seems convincing enough to single out a 1 to 10% portfolio for Bitcoin. Hardly any other asset in your portfolio can offer an asymmetrical risk/return ratio.
But there is also a third factor to understand and which further strengthens the bullish scenario for Bitcoin for the next 15 months or so. Over 60% of all coins in circulation have not changed their owner in the last 12 months. This means that most Bitcoin investors have experienced several double-digit price movements in both directions, continuing to hold onto the asset. They survived even a 50% fall during one day of the liquidity crisis in March – they did not sell even then. So the likelihood that the 11+ million bitcoins held by „strong hands“ will be traded in the market in the short term is very low.
In summary, the current situation can be described as follows: (a) demand is growing significantly; (b) supply shock makes the bitcoin even more scarce; and (c) the number of bitcoins available in the market is much smaller than people generally assume. From this I conclude that by the end of 2021 we are likely to see a strong upward movement in the BTC price. My base case scenario is about a tenfold increase to $100,000 and the bullish scenario is about $250,000 per bitcoin.
However, bitcoin is a volatile asset and it will not rise in a straight line. There will be many 15-30% drawdown along the way, but I am convinced that these levels are achievable in the next 15 months. Finally, if you look at the bitcoin in an even longer term perspective, it becomes even more interesting.
Both gold and Bitcoin today act as the embodiment of solid money principles. Gold is an analogue application of these principles, and Bitcoin is digital. The market capitalisation of gold is 8+ trillion dollars, Bitcoin is only 200+ billion. It is very likely that Bitcoin’s capitalisation will compare with gold over time and then surpass it. This scenario implies a 40-fold increase in the price of Bitcoin. If market cycles continue to play out according to historical data, we should expect a significant, double-digit price increase over the next 15 months, followed by an unpleasant 50% decline and a prolonged bear market, followed by another round of explosive growth that will bring us closer to the market capitalisation of gold.
But my goal in this letter is not to convince you of Bitcoin’s ten-year outlook. It is a rather complicated issue that requires a lot of input and assumptions in order for the forecast to claim to be correct. Instead, I encourage you once again to consider placing a 1 > 1 portfolio in Bitcoin for the next 15 months. I myself have invested a larger share (50%) and I believe it is necessary to share my viewpoint with you.
In the investment game, the final arbitrator is the market and he insists that bitcoin must be kept.