The Rake Review: August 2020

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.

 

The Silver Lining

Another month of 2020 and another disaster. We've had Bushfires in Australia, Locust Plagues in Africa, Pandemic and lockdown around the world, Protests and Riots in the US, more lockdowns and now an enormous explosion taking out a suburb of Beirut after Lebanon already faced financial ruin. Maybe we should just reboot 2020 and start again? 

Well we can't. However, there is always a silver lining. Countries around the world are focusing on medicine, people everywhere get to spend more time with their families and reset their goals and economies can shed unproductive business and focus on the future. Economically speaking, this pandemic has exposed central government's inability to make real microeconomic productivity changes and instead default to what they know, which is spending and printing more money. The amount of money printing in the US is staggering and Goldman Sachs has warned that the USD risks losing its world reserve status. 

As a result, Gold, Silver and Bitcoin are on a tear. All 3 have considerably increased against the USD as we have predicted constantly. The reason they are rising is because Gold Silver and Bitcoin are all harder money than Fiat currencies. Bitcoin is the hardest and most technologically advanced taking the good aspects of Gold and digitising the process. More on this later but the silver lining may be that this pandemic may lead to Bitcoins assent to the next level as a global incorruptible decentralised currency and store of value. 

Equity markets are overinflated due to artificial support from central banks so may not form a good investment at this stage in the cycle. Property has also not reduced from debt inflated highs so where can investors store their hard-earned money? Well maybe we should follow the smart money.

 

Video of the week

Raoul Pal has a flawless resume. At the age of 36 he retired after being a hedge fund manager. At Goldman Sachs Raoul Managed the Hedge Fund Sales Business in Equity and Derivatives in Europe. He now runs RealVision as a public research business. Here he talks about Elite investors such as Hedge Funds and Family Offices investing in Bitcoin and why. 
 

 

Markets 

What an incredible month it has been. Altcoins led by DeFi (Decentralised Finance Tokens) have rallied dropping Bitcoin Dominance under 60% for the first time in 13 months. Then Bitcoin rallied and is now almost 12,000 up from 9,200 USD during the month. That's almost 40% at one stage and 28% M2M. Bitcoin reached a high of $12,100 this month which is the highest price since the boom of 2017. In fact, Bitcoin has only ever traded above that price between 27 November 2017 and 15 January 2018 so we are heading towards rare territory. ETH has flown due to its DeFi link and ETH 2.0 changes. Its returned 65% for the month and 87% for the Quarter. Chainlink and Cardano are up over 150% for the quarter with Cardano's major changes coming soon.
 

* Top 8 Coins by Market Cap thanks to Coin Gecko

 

In the NEWS

 

Goldman Sachs new head of digital assets

There's been no lack of institutions ready to criticise Bitcoin and decentralised finance but if you look over time you can see that narrative is slowly changing. Institutions that were once critical of crypto are now installing key roles for the management of digital assets such as Goldman Sachs' Matthew McDermott as the new head of digital assets.

JPMorgan publicly decried Bitcoin and announced cryptocurrencies in general “are not a real thing” to then launch a cryptocurrency of their own less than two years later.  (See Jamie Dimon's reversal)

It is not unusual for incumbents to criticise new technology that aims at disrupting their industry. Let us not forget when Blockbuster laughed at Netflix's offer for a $50m acquisition

I'll also remind you of the well esteemed Institutional investor Paul Tudor Jones' recent reveal he has almost 2% of his assets in Bitcoin. 

Crypto Around the World (Russia to Iran) 

The Russian Duma (lower house) approved a new legal status for cryptocurrencies, but ban their use as payment. 

While banning the use of crypto as payment is rather bearish for crypto the law stopped short of an expected ban on ownership and exchanges. It will now be expressly legal to own, transfer and sell cryptocurrency in Russia. In a country expected to be hostile to crypto this is actually quite positive.
 

Power Plants in Iran mining Bitcoin.

In Bullish news more hash power into the system with Iran using excess power to mine crypto in a cheap way. The argument that Bitcoin mining is hurting the planet takes another hit as we see further evidence of miners finding ways to use excess power that would've been wasted. Countries that make it easy for their citizens to acquire and trade Bitcoin will see significant competitive advantage in the future as weaker money systems fall away and hard money comes to the fore. History has taught us that hard money always wins (Ala Gold vs Silver backed currencies of the world).

 

Ethereum Pumping!

Ethereum is on a tear with a combination of upcoming ETH 2.0 changes (Proof of Stake) and being caught in the DeFi craze. ETH has broken $400 USD up over 2/3 in a month. That's the highest price since July 2018 but still a long way to its all-time high. If it does reach its all-time high during this run it will be up another 3.5X. 

Not everyone is excited by ETH with Bitcoin Maximalists Adam Back and Tone Vays coming out saying ETH 2.0 will fail and proof of work is not secure. 

 

 

Perth Mint Gold used for new Gold backed Crypto 

A consortium including Crypto Wallets and Exchanges has partnered with Australian Government owned Perth Mint to start a new Gold-backed Crypto-currency. This means you can invest in Gold that's digitised, portable and can be used easily as payment. It also means we can offer this to our clients. Another good step forward in our opinion. Let the market decide what has the most value. 
 

Bitcoin Network Utilisation

 

Stock to Flow Valuation:

Current Long-Term Stock to Flow (StF) Price: $17,153 AUD vs Current Price - $16,423 AUD. Market price is lower than the historical trend suggesting that Bitcoin is undervalued today. However, the StF model also shows an increasing price every day for the next year to $140,000 AUD. According to the efficient markets hypothesis, a rational investor would buy today and wait for the $140,000 AUD price to materialise if you trusted the model. That’s why we rate Bitcoin as a Strong BUY

 

 

Crypto Class: Education

Our Collective Bias in Valuing Assets

Many pundits have noticed that the ASX has had a V shaped recovery from the coronavirus pandemic which seems illogical and overvalued when businesses are shut down. Companies are still laying off staff and the immediate future looks bleak.

Let's take a look at the ASX index as we know it:

After the pandemic hit share value in April it has quickly recovered with most stocks at pre pandemic highs. That seems counterintuitive and completely disconnected with reality of company confidence and demand.

The issue here is we are used to valuing assets based on AUD as the base. We don't even think about this because it's also how we value property and other investments. Here's the thing though, AUD is not the only way to value assets. Also, the sharemarket is and share valuations are not meaningful on their own. Everything is valued against something else. We are more used to valuing currencies against other currencies (currency pairs) but in fact everything can be valued in pairs.

Here is the same graph of ASX value but this time I've valued it vs Gold.

 

Wow, doesn't that look different? We are almost at the absolute low achieved in April. How can we understand this? Well basically, Shares listed on the ASX have actually fallen significantly in the last 6 months when priced in Gold. If we remember what we've written at the start of this newsletter, money has been printed both in the US and Australia. As AUD quantity increases the value of AUD falls as a proportion of Shares and Gold and everything that has a finite supply. 

Here is a graph of AUD/GOLD

Clearly now we can see the value of the Australian Dollar falling compared to Gold. This is directly driven by AUD inflation and indirectly by Gold gaining momentum through being an asset that wins when risk is high. The main point here is that everything only has value relative to something else. That means you need to view assets as compared to other assets not just AUD. 

That brings us to the most important graph of all.

This shows BTC vs USD over 5 years. This is the fastest growing asset over 5 years rising against everything else. But at the same time, we need to consider that this also shows the debasement of Fiat currency (USD). Either way the lesson is clear. Don't hold USD under your bed for you will surely lose out in the long term.
 

Your Position: Mark to Market

Just a reminder that this is now being sent out by our system so will no longer appear in the newsletter. Please let us know if you have any feedback.

 

Monthly Memes 

Fiat currencies have lost value over time, but we don't really think about it. Here's a visual explanation.
 

 

 

 

 

Until next month, Happy Investing!

Stormrake Team

custody@stormrake.com

General Advice Warning 

The information provided in this newsletter is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information contained here you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant Product Disclosure Statement (PDS) of the product provider to make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice. You can get a copy of relevant PDSs from Stormrake by email custody@stormrake.com. 
 

Disclaimer 

All statements made in this newsletter are made in good faith and we believe they are accurate and reliable. Stormrake does not give any warranty as to the accuracy, reliability or completeness of information that is contained here, except insofar as any liability under statute cannot be excluded. Stormrake, its directors, employees and their representatives do not accept any liability for any error or omission in this newsletter or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided in this newsletter is owned by Stormrake. You may not alter or modify this information in any way, including the removal of this copyright notice.

Copyright © 2020 Stormrake Pty Ltd, All rights reserved