Blockware Intelligence Newsletter: Week 147

Bitcoin on-chain analysis, mining analysis, macro analysis; overview of 9/14/24 - 9/20/24

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General Market Update

1. Fed Funds Rate

As you’ve likely heard by now, the Federal Reserve cut the Federal Funds Rate for the first time in over four years, cutting by 50 basis points. Given that there is no immediate indication of recession, the market has responded positively to this rate cut. 

Sometimes as analysts, we get things wrong. That is us right now, and we’ll take it on the chin. We were admittedly caught off guard by a 50bp cut instead of a 25bp cut. Going into the meeting this was the. At the time of last week’s newsletter, the market was split dead even with a 50/50 chance of 25 vs 50bp cuts.

Powell’s words and actions are not entirely aligned right now. On Wednesday he said, “I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated,.” However, a 50bp cut suggests otherwise. Given The Fed’s dual mandate of managing inflation and unemployment, the fact that they have claimed victory in the battle against inflation inherently means recession and a slowing economy is their main concern at the moment. If Powell sensed a zero % chance of recession in the near future, he wouldn’t need to cut so aggressively. Powell was notoriously late when it came to raising interest rates a few years ago - perhaps he is trying to get out in front of cuts hard and early.

It’s important to remember that the effects of changing monetary policy are lagged - meaning the economy will not immediately feel the effects of loosening monetary policy. Granted, the market reaction happens immediately as investors and traders are forward. But were a recession to come, the benefit provided by looser monetary policy would not happen immediately after cuts.

Recession in 2025 is certainly a possibility, but in all honesty it is not our base-case. Why? Fiscal Dominance.

Despite restrictive interest rate policy, dollar liquidity has been on the rise over the past year with the primary driver being the persistent budget deficit from the US Government. Annual deficit spending is already at nearly $2 trillion through August, and it is on pace to be the 3rd largest annual deficit in history, only behind the covid-spending years of 2020 & 2021.

High government spending does three things that can mask a “technical recession”:

1. Increases net liquidity, which can result in a higher nominal GDP (“Real GDP” adjusted for inflation is iffy because they use the flawed measure of CPI)

2. Increases public sector employment

3. Increases private sector employment

This powerful driver of liquidity could ultimately make The Fed’s victory lap on the war against inflation short-lived. Moreover, we have seen the Fed tactically use non-interest rate policy tools to stimulate liquidity into the market. Notably was the creation of the “Bank Term Funding Program” in 2023 to provide liquidity support for insolvent banks.

Ultimately, 20 vs 50 for this cut is relatively meaningless. Far more important than the size of the first cut is the fact that we are cutting at all, and the cuts that are set to take place over the next year. On a forward looking basis, the futures market has a 96% probability of at least 125 basis points in ~additional cuts~ by September 2025. With the 1-year & 2-year treasury yields at 3.9% and 3.4% respectively, the treasury market certainly agrees: many more cuts are coming.

12+ months of easing monetary policy is unbelievably bullish for Bitcoin.

2. Blockware Podcast

Yesterday Blockware Head Analyst, Mitch Askew, interviewed Joe Consorti about the Fed’s decision to cut 50 basis points and what this means for Bitcoin going forward. This is a timely discussion jam-packed with data and insights you won’t find anywhere else.

You can watch that on the Blockware Youtube Channel here, or look up “Blockware Podcast” on your favorite podcasting platform.

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

3. Bitcoin Making a Move

Bitcoin has responded well to the rate cuts and is back above short-term holder realized price, with its sights set on surpassing the 200-day moving average (~$64k). If we get a convincing breakout above these levels then we are likely off to the races. Moreover, going above the 200-day moving average would simultaneously result in a higher-high, which is bullish for near-term price action.

The past six months of choppy, sideways price action is likely coming to an end here shortly. Our near-term lens is focused on the November Fed meeting (day after the election) as where things may really start to take off. At this point the one thing keeping the lid on this market is uncertainty. This week’s decision by the Fed helped greatly with alleviating that, and between now and then we will get even more points of uncertainty cleared.

• Additional data into employment & inflation

• Another Fed policy decision

• Knowledge of next US President (relieve geopolitical uncertainty)

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Bitcoin Mining

4.  Cathedra Bitcoin - Corporate Bitcoin Strategy

Canadian based public mining company Cathedra recently announced their intention to follow MicroStrategies footsteps in a primary business focus of increasing “Bitcoin-per-share.” They have already begun to take action as this week they announced a “LIFE offering” - which is the issuance of additional equity. They plan to use the funds to purchase Bitcoin directly as well as purchase “bitcoin producing assets.”

Read here: https://www.cathedra.com/news/news/cathedra-bitcoin-announces-non-brokered-life-offering-of-c25-million

5. Bitcoin Mining Difficulty

After a difficult past few weeks, Bitcoin miners are about to earn a much appreciated negative difficulty adjustment. Combined with this week’s price and miners will be looking at a much higher hashprice in the interim. So far post-halving, $0.04 has been a solid floor for hashprice. Miners that have remained profitable with hashprice at 4-cent are poised to read tremendous benefits over the next 12 months.

6.  Lagging Hashrate Growth

The bull phase of the Bitcoin cycle is right around the corner. Once six-figure Bitcoin prices are the standard, many of you will wish you had ASICs plugged in as, due to the inherent lag in difficulty growth, the margins for Bitcoin miners will be enormous. We discuss this concept in detail in our latest report. Check it out.

Read the Report: https://mining.blockwaresolutions.com/report

Watch Blockware Report Breakdown:

7.  Energy Gravity

At a typical hosting rate today, new-gen Bitcoin ASICs require ~$61,500 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.