Blockware Intelligence Newsletter: Week 144

Bitcoin on-chain analysis, mining analysis, macro analysis; overview of 8/17/24 - 8/23/24

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General Market Update

1. Powell Confirms Cuts are Coming

Jerome Powell delivered his annual speech from Jackson Hole, Wyoming. Powell confirmed that rate cuts are indeed coming at the September meeting, stating: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Now that cuts are confirmed, the question the market is asking is “how aggressively?” 

Among the reasons for the change in policy, Powell cited a diminishing risk of higher inflation, with confidence that CPI is on track to reach the Fed’s target rate of 2%. Shrouded in the cloud of Powell’s confidence and four consecutive months of (mild) disinflation is the fact that the latest CPI print of 2.9% is still 45% higher than the Fed’s (arbitrary) target rate of 2%. Moreover, congress is operating a highly inflationary budget deficit of $1.8 trillion annualized. So cuts are coming into an environment that is already objectively inflationary. Scarce assets, notably Bitcoin, will perform well in this months and years ahead while those that save wealth in dollars will see their purchasing power evaporate.

2. Treasury Market

The bond market - which was already pricing in cuts - is giddy after Powell’s speech, with yields falling across the board. We’re still watching for the coveted “uninversion” of the 10-year and 2-year yield curve. The 2-year yield remains above the 10-year by ~13bps.

Yields on short-duration treasuries are higher because for the past year plus, treasury auctions have been skewed heavily towards short-duration treasuries in order to avoid a blowout of long-duration yields. After the banking crisis of March 2023, in which underwater long-duration treasuries resulted in solvency issues for major banks, the treasury has been wary of dropping a large supply of long-duration treasuries onto the market. While this has protected long-duration treasury holders, it consequently forces the treasury to refinance sooner at shorter maturities & higher rates, raising their total interest expense, and widening the already large fiscal deficit.

3. CME Fed Funds Futures

Fed Funds Futures have taken Powell’s comments and ran. The odds of a 50bip cut at the September meeting rose from 25% last week to now 34%. Take Powell’s speech as you wish - his signaling of cuts generally does not exactly exude desperation or a desire to cut aggressively. Rather, Powell is being transparent and is unlikely to throw a curve-ball. Right now Powell is justifying cuts as to get out in front of any troubles in the labor market - a 50bip cut would signal that there are problems while a 25bip can be reasonably passed off as preemptive.

4. US Stock Market

Equities enjoyed Powell’s comments from Jackson Hole this morning. The S&P gapped up on the open and is now within 1% of its all-time high. Risk assets are thriving in this environment - without a care for the future state of the labor market. Disinflation, fervent hope for a soft landing, and rising net liquidity are driving this equity bull market.

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Bitcoin: News, ETFs, On-Chain, etc.

5. BTC to $62,000

Everyone’s favorite orange coin enjoyed Powell’s speech just as much as other assets. After a 5% gain on the week, BTC is now knocking on the door of $62,000. It’s great to see a green candle for the week, however, a 5% gain is peanuts in the Bitcoin market. We still have our eyes on Q4 as for when BTC makes a convincing breakout above previous highs. Between now and the election in November there is likely too much uncertainty about the future for the market to make a convincing move up or down.

6. Perpetual Futures Funding Rate

The futures market is screaming “uncertainty.” The funding rate for perpetual futures contracts has flipped negative. The funding rate is similar to a “spread” in gambling - traders get paid or have to pay based on the direction of their bet in order to incentivize people to take the non-consensus side of the trade, and ensure that there is an equal number of people on both sides. Negative funding means that traders are now paying to short Bitcoin; a strong sign of the fear and doubt within the market. Historically, negative funding has strongly coincided with local BTC bottoms. It is our base case that this will hold true again this time around.

7. Realized Profit/Loss

Speaking of indicators commonly seen at local bottoms, the market is now realizing losses in the aggregate. In other words, coins being moved on-chain are now being done so, on average, at a price lower than that at which they were last moved. We saw a surge in realized profits when BTC hit ~$70,000, followed by lower highs in realized profits each time price made a push. The “profit takers” in this region appear to be washed out. Next time BTC makes a run at new highs it is likely to finally break through to the other side.

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Bitcoin Mining

8.  Total Miner Revenue

We’ve had a surge of new subscribers recently so I want to take a minute to address one of the most common questions we get from newcomers when it comes to Bitcoin mining: “what happens when all of the Bitcoin is mined?”

1. That won't take place until 2140 (we'll all be dead)

2. There will be another ~1,000,000 new BTC mined between now and 2035

3. Miners also make revenue from transaction fees. Fee revenue will grow over time as demand for L1 increases.

4. Mining Revenue in $ terms is going up despite the block subsidy going down (higher highs & higher lows)

The chart below is fascinating because it really highlights the growth and cyclicality of Bitcoin mining. Despite decreasing block subsidies, Bitcoin miners still experience surges of massive revenue growth. The extreme bull/bear markets of spot BTC are even more pronounced within mining - which presents the opportunity for miners to experience tremendous upside benefits as spot BTC gears up for its next bull market.

9.  Energy Gravity

At a typical hosting rate today, new-gen Bitcoin ASICs require ~$47,400 worth of energy to produce 1 BTC. The green line shows the average cost to mine 1 Bitcoin using the latest-generation Bitcoin mining rig. The orange line shows how many $ (output) miners are able to earn for each kWh of power (input). To learn more about Energy Mass & Energy Gravity, read our report at the link below.

Read the Energy Gravity report here.

All content is for informational purposes only. This Blockware Intelligence Newsletter is of general nature and does consider or address any individual circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal, business, financial or regulatory advice. You should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.