Professional Investor Report - October 2022

This was originally published November 4, 2022, and was part of a paid newsletter for professional investors interested in bitcoin or bitcoin credit facilities. The price of bitcoin was $21,000. This is being republished for archival purposes. They will also be referenced in future writings.

This month we got some good data from big firms like Fidelity and Bloomberg on investor sentiment and digital assets. We saw a massive amount of bitcoin move, and it cost nearly nothing. Investors are happy with recent SEC involvement. Accounting rule changes will make holding bitcoin as a treasury asset much easier. The lightning network displayed resilience in the face of software bugs. We follow up on charts, data, and models discussed in previous reports.

TL;DR (Too Long; Didn't Read)

• ~67% of high-net-worth investors and financial advisors positively perceive digital assets.
• Binance moved $1,600,000,000 (bitcoin), and it cost them $0.70
• The US Dollar Index beat everything, including bitcoin.
• 65% of retail and 56% of professional investors said they are more likely to invest in crypto given greater enforcement.
• Public and private companies hold 574,000 bitcoin.
• The FASB (the people who make GAAP) propose new accounting rules for bitcoin.
• The lightning network squashed bugs.
• A new lightning accelerator from NYDIG is taking applicants.
• Data points draw certain conclusions on market cycles, but I'm not convinced.

Financial Advisors and Institutional Investors

In a recent Fidelity report, 1,052 financial advisors, HNWIs, family offices, and pension funds were surveyed about their opinions of digital assets and their place in a portfolio.

• 74% of American institutional investors believe digital assets should be a part of a portfolio.
• 80% of HNWIs and 72% of Financial Advisors reported being familiar with digital assets. 74% and 58%, respectively, have a positive perception.
• 88% of Financial Advisors reported they have plans to buy digital assets in the future. 86% of HNWI reported the same.
• 59% of those surveyed (in the US) reported price volatility as an obstacle to investing.

Without surprise, investors want a Bitcoin ETF. 43% reported a Bitcoin ETF as appealing.

81,000 Bitcoin are on the move

The cost-effective power of the bitcoin network was on full display this month. Binance shifted coins from one of its cold storage wallets to another. They moved 81,842 coins, valued at over $1.6 billion, with a total transaction fee of 0.00003392 bitcoin, equivalent to 70 cents.

Binance moved $1,600,000,000 and it cost them $0.70

The 81,842 bitcoin were sent to a known Binance address and another yet-to-be-identified address. The known recipient, another Binance wallet, could be their OTC desk, as most of the transactions are over $250k in value, the standard minimum for OTC desks.

The other is more than likely a new Binance cold storage address. Although unlikely, it is possible this was an entity that purchased 51,000 bitcoin (over $1 billion) from Binance. I don't believe this to be the case, as we would see other movements in connection with such a large buyer. These coins remain unspent as of writing. If you would like to track them, here is the address; 33qFJKZyN6yNd68z2zZLcXT9MFmBhjmGbc

Bitcoin (barely) outperforms everyone, except DXY

Q3 saw a decline in nearly everything, including bitcoin, except the US Dollar Index (DXY). Bitcoin did beat out gold, crude oil, and the S&P, just barely.

This did not carry into October. The S&P and Bitcoin regained mid-September price levels.

Although in the short term these look good, bitcoin is still the worst performing of everything measured YTD. The CoinGecko report is great if you care about "crypto" and macro.

Investors see SEC enforcement as favorable

Bloomberg published a survey where they asked retail and professional investors about their views on crypto. The highlight of the survey was the question about greater enforcement against crypto. 65% of retail and 56% of professional investors said they are more likely to invest in crypto given greater enforcement.

The recent SEC probe into Yuga Labs, a penalty against Kim Kardashian for not disclosing payment while promoting a token, and the ongoing investigations of Celsius and Three Arrows Capital, are likely helping investors justify adding digital assets to their portfolios. Especially professional investors with risk tolerances, compliance departments, and attorneys providing input on the legality of certain unregistered quasi-securities token-like assets. I think the times of wild west crypto offerings and operations are coming to an end. It's going to take a few years to fully settle in, but we are on the downhill.

The survey also asked if investors would buy more digital assets in the next 12 months. Retail was nearly split 50/50. Sell-side traders responded with 58% saying, yes. Sell-side traders are the ones building the offerings for investors. Sell-side reporting they will be buying indicates new offerings are hitting the market next year. The other half, the buy-side, responded 43%, no. A nearly perfect mirror between the buy and sell side.

Public Companies and Accounting Rule Change

As Q3 financials are being published, we can see which (non-digital-asset industry) public companies continue to hold their bitcoin.

• Tesla still holds 9,720 bitcoin (Tesla Q3 Report).
• MicroStrategy holds 130,000 bitcoin (MicroStrategy Q3 Report).

Public and private companies hold 574,000 bitcoin. While ETFs (and ETF-like products) hold 808,688 bitcoin.

The adoption of bitcoin as a treasury asset is going to be slow relative to its adoption as a speculative investment. Volatility isn't attractive to a CFO managing hundreds of millions in assets. The accounting for bitcoin on a balance sheet, in accordance with GAAP standards set by the Financial Accounting Standards Board (FASB), has been difficult for everyone involved. This is likely to change as the FASB, the Board, made a tentative action to modify the accounting for fungible crypto assets.

As of now, if a company buys bitcoin, it is recorded on the balance sheet as an intangible asset. Intangible assets are typically things like patents, goodwill, copyrights, broadcast rights, trademarks, formulas and compounds, and media rights. Not the best place to classify highly liquid money. The purchased bitcoin is then displayed on the balance sheet at its historical cost, which means the price it was acquired. It is not displayed at the current value like other assets such as liquid securities or derivatives.

This month the Board made a decision that would require entities to;

• Measure crypto assets at fair value.
• Recognize increases and decreases in fair value in comprehensive income each reporting period
• Recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (unless the entity follows specialized industry measurement guidance that requires otherwise).

A company would then be allowed to recognize changes in the value of their bitcoin and accurately display the value of their holdings.

The Board was strategic in its definition of "crypto assets" to exclude things such as governance tokens and the numerous not-a-security/quasi-securities available on the market.

The Board has a lengthy process before this accounting standard becomes practice, until then, we will be tracking and reporting progress.

Lightning Network Growth, Bugs, and New Capital

The lightning network continued to grow for most of the month. Nodes continued to add capacity while the number of nodes and channels remained stable. Channels and some nodes came offline due to bug patches, but most importantly, liquidity did not leave the lightning network.

The lightning network received two emergency updates this month following the discovery of bugs that caused nodes to reject large multi-sig transactions and a bug that caused malicious channel closures. Both bugs were patched on the same day, and the network appears to have updated quickly.

lnd Issue #7002: Fail to chain sync on testnet3 & mainnet, errors relating to: script witness item is larger than the max allowed size

This month, a new accelerator for lightning startups from Stone Ridge Holdings Group, the parent company of NYDIG, was launched. Wolf, is accepting applications until the end of the year for a program start date in April 2023. The program offers $250k in seed funding, an exclusively non-remote program in NYC, and the demo-day winner gets an additional $500k. If I were an early-stage company building on lightning, I would apply for this in a heartbeat.

Supply, Charts, and Metrics Update

As always, we monitor liquidity on exchanges and the growth of the smallest market participants with less than 1 bitcoin.

Exchange balances are still going down. Small-holders are still holding. The blip in exchange inflows discussed last month was short-lived, as expected. Price action tested lows of $18,800 then found stability at $20,000.

Also, continuing from last month, the cumulative supply in profit vs. loss and the historical significance of when those converge is moving in the right direction. October started with 2.4 million coins of separation, the month closed at 1.8 million coins of separation.

Large wallet inflows continue to glow like an October Christmas tree.

From our August Report, we looked at the Big 3 valuation models, how well they have performed, and how they can fail. As of writing, they have not failed.

My opinion has not changed, but I felt an update is necessary as I see many people screaming "bottom!" and pointing to technical analysis to validate their new long position.

If these models are holding strong, liquidity is drying up on exchanges, long-term holders are not selling, big buyers continue to purchase, and we are converging on market net neutral position returns, it leads to the obvious question, 'Are we at the bottom of the cycle?'

In some ways, the feelings from early 2015 and early 2019 are coming back. Parts of the industry feel sparsely populated and slow, while others are vibrant and full of progress. The market washed out most short-term participants, and dedicated long-term entities are left continuing to advance the network. Granted, the macro environment is wildly different, and there is more money, more eyes, and more involvement than ever before.

As much as I would love to place my "market cycle bottom confirmed" tweet right here, right now, I continue to go back and look at the bitcoin/S&P-500 correlation.

No amount of on-chain metrics, TA, or crypto wizard guru magic can make this correlation less important. Unfortunately, to a significant enough extent, bitcoin price action is on a leash, with the other end being public markets, the Fed, and global economics.

To answer it bluntly, are we at the bottom of the cycle? I would bet, no.

If you are bullish and can continue building your position, this is an amazing time to add, what I believe will end up being, incredibly low-cost basis coin.

I hope this report is valuable to you.

Sincerely,
Johnny DeMaddalena