There has been much consternation in traditional markets of late, with a variety of reasons to blame. First, the Bank of Japan raised interest rates to combat the falling yen, causing traders to unwind yen-carry trade positions. Second, worries around U.S. economic growth came to the fore after a series of disappointing releases, especially the latest employment report. And finally, fears of a wider war in the Middle East arose after Iran vowed retaliation for the assassination of a Hamas political leader.

Such financial, economic, and geopolitical uncertainty caused widespread panic, resulting in, for example, Japan’s Nikkei recording its largest single-day drop since 1987 and many large U.S. tech stocks falling by double digits over several days, just to name a few.

Cryptocurrencies, which would have been expected to fall by a greater amount than equities anyway, had their own negative drivers, including impending Mt. Gox fallout, mixed spot digital asset ETF flows, a rising appreciation that pro-crypto Trump candidacy isn’t a lock, and reports of a large market maker dumping hundreds of millions of dollars of crypto during the panic’s peak. All in, Bitcoin touched $49,200, down 30% from just a week earlier, while Ethereum fell below $2,200, dropping 35% over that time.

Towering Bull Tenets and Fading Risks Offer Chance at $1m BTC

Despite the downturn, we remain as convinced as ever in the bull thesis, with its core tenets towering in place:

Oh, and these near-term bull tenets say nothing of crypto’s supreme driver, which is what it will, over decades, ultimately become.

Global Liquidity vs. Bitcoin Price, Year-Over-Year Growth

Source: The People’s Bank of China, Federal Reserve, European Central Bank, Bank of Japan, Investing.com, Glassnode, GSR

Note: Converts local currency M2 to US dollars and aggregates before taking year-over-year growth. Note that different countries may define M2 slightly differently, but the general concept of M2 is that of a measure of the money supply that includes cash, checking deposits, and non-cash assets that can easily be converted into cash.

And, while there may always be a black swan event, it’s hard to identify many large and likely risks. For example:

All in, should the bull tenets materialize, risks fade, and crypto make strides towards its endgame – perhaps with a dapp that goes mainstream or Bitcoin/Ethereum’s adoption as the world settlement layer – we believe Bitcoin would easily surpass $1m, skewing the risk-reward exceedingly positive at just about any odds of the above occurring. Imagine, instead of Bitcoin as “digital gold,” gold becomes relegated to “physical Bitcoin.”

The Dip as a Gift - Time to Buy

Ultimately, we see the recent dip as a gift, offering a solid entry point and pushing crypto to its greatest risk-reward in years. Indeed, ETH is lower than prior to the SEC’s stunning about face on the Ethereum ETFs, while Bitcoin is down from prior to the U.S. changing its stance towards crypto. Yes, we’re in a very different macro environment than before, but it’s hard to argue these catalysts are priced in any major way.

So while 30%+ drawdowns are indeed disconcerting, they create compelling opportunities. And while it’d be easy to come away negative after the events of last week, using price to inform one’s view of the underlying fundamentals is a recipe to buy high and sell low. Instead, the best analysts check whether the cause of any adverse price movements invalidated their thesis, and if not, they grow the position given the now-much-greater upside.

So with the bull tenets squarely in place as risks fade, a legit chance of $1m Bitcoin, and greater potential upside after the recent dip, the risk-reward has rarely looked so compelling. Time to BTFD.

- Brian Rudick, senior strategist, GSR

Bitcoin's economic design compels miners to minimize costs due to a halving stress-test every four years. Miners seek cheap energy, leading to two strategies: being in front of the meter (I.e., grid-tied) and being behind the meter (i.e., direct co-location with power generators).

The grid-tied model allows for economies of scale, as large-scale miners may obtain cheaper energy rates based on the load size they bring onto the grid, and participation in “Demand Response” and ancillary services, enabled by the interruptible nature of this type of compute.

The co-location model feeds on deadweight loss and mismatches between energy demand & supply, targeting intermittent renewables (e.g., solar & wind) and baseloads (e.g., hydro, nuclear, geothermal). Being behind the meter entails business models such vertical integration, partnerships, and joint ventures, enabling miners to engage in energy arbitrage and generating Renewable Energy Certificates (RECs).

Hashrate as a commodity

Bitcoin hashrate, the computational power securing the Bitcoin network, is emerging as a unique commodity with intriguing investment potential. Its fungibility, divisibility, durability, and scarcity make it an attractive asset class.

Hashrate offers investment opportunities for individuals to participate in Bitcoin mining without owning hardware. In addition, derivatives allow for hedging against price fluctuations, providing risk management tools for miners and investors. The value of hashrate is tied to the demand for Bitcoin mining, influenced by Bitcoin price and mining profitability, but is susceptible to regulatory challenges. Despite these challenges, Bitcoin hashrate presents a compelling case as a novel commodity with unique investment and trading opportunities. As the Bitcoin ecosystem evolves, the role and significance of hashrate as a tradable asset are likely to grow, attracting further attention and innovation within capital markets.

Hash price vs. Hash cost

Hash price and hash cost are key metrics influencing the Bitcoin mining landscape. While often confused, they represent distinct aspects of mining profitability.

Hash price, the price per unit of hashpower, reflects the current market value of mining power. It's calculated by dividing the total daily mining revenue by the network hashrate. A higher hash price indicates greater profitability for miners.

Hash cost represents the cost of producing one unit of hashpower, encompassing expenses like electricity, hardware, and maintenance. A lower hashcost signifies a more efficient and profitable mining operation.

The difference between hash price and hash cost determines mining profitability. When hash price exceeds hash cost, miners reap profits. Conversely, when hash cost surpasses hash price, they operate at a loss. High hash price attracts more miners, increasing competition and potentially driving down hash price. Conversely, low hash price may discourage miners, leading to a decrease in network hashrate and potentially pushing hash price back up.

The availability of ASICs also has an impact on the relationship between hash price and hash cost. These mining machines and the current kW/h wholesale price of electricity drives network hashpower, which drives mining difficulty. Where ASICs aren’t readily available, hashpower becomes more valuable, and therefore the delta between hashprice and hashcost should expand, creating profitable opportunities for miners.

Understanding the relationship between hash price and hash cost is crucial for miners to make informed decisions. The delta between hash price and hash cost will also influence a miner’s ability to raise capital. Miners aim to lower hash cost for increased profitability, impacting their capital-raising ability. A smaller hash price-hash cost gap makes miners susceptible to Bitcoin price factors like energy costs and mining difficulty. Conversely, a larger gap suggests resilience. Lenders assessing loan risk will scrutinize this gap, pressuring inefficient miners seeking capital due to their preference for low-risk returns.

For example, Runes, a recently released way for Bitcoin to create non-fungible tokens, temporarily increased Bitcoin blockspace demand, leading to higher transaction fees and longer confirmation times. During this time, hash price futures were trading in Contango vs the spot price suggesting that the market had a high likelihood of increased future blockspace demand.

This situation prompted Bitcoin miners to sell hash price futures, locking in future revenue; that was a decision that proved prudent as blockspace demand cooled post-halving. The availability of hashrate linked products now also provides more financial data points to predict network events impact on blockspace demand and transaction fees.

– Sadiq Jaffer (KPMG U.K.) and Kunal Bhasin (KPMG Canada)

Here's some news worth knowing, from Ben Schiller, head of Consensus Magazine at CoinDesk: