Bloomberg Crypto Outlook – August 2019 Edition

Bitcoin Riding a Rising Tide ‒ Bond Yields, Stock Volatility Give Bitcoin `Digital Gold' Luster

‒ Bitcoin Price Indicators Show Back-and-Fill Foundation Building

‒ Bull Market in Bitcoin Buy-and-Hold Indicators: GBTC and Futures

‒ The Futures Tail Is Increasingly Wagging the Bitcoin-Bull Dog

‒ Libra's Death Exaggerated? Facebook Has to Mollify Policy Makers

CONTENTS

2 Overview

2 Improving Macro Foundation

3 Bitcoin Companions Back-&-Fill

4 Futures Tail Wagging the Dog 5 Facebook Crypto

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Bloomberg Crypto Outlook – August 2019 Edition

Data and outlook as of August 5

Mike McGlone – BI Senior Commodity Strategist

BI COMD (the commodity dashboard)

Similar to Gold, Tide Is Rising for Bitcoin vs. Risk Assets Performance: Bloomberg Galaxy Cypto Index (BGCI) July -15.5%, 2019 +86.9% thru August 5 Bitcoin July: -4.3%, 2019 +221.4% thru August 5

(Bloomberg Intelligence) -- Bitcoin should remain a primary beneficiary of growing demand for its store-of-value, quasi-currency asset properties, similar to gold. Favorable macroeconomic fundamentals -- plunging bond yields and rising stock-market volatility -- appear to have endurance and should further differentiate Bitcoin from other crypto assets, much as gold is gaining luster vs. most commodities. Bitcoin's big-picture price action has been a non-story, with this year's range within those in 2017-18. A consolidating bull market is our takeaway, with simple retracement of the 2018 decline its initial mission. Our indicators point to further back-and-fill for the first-born digital currency, allowing some reversion in lofty volatility and lower means. Futures are holding much stronger sway and provide insight for what is likely a bull market.

Improving Macro Foundation

Bond Yields, Stock Volatility Give Bitcoin `Digital Gold' Luster. A six-year high in old-guard gold sets a good example for relieving last year's bear-market hangover in Bitcoin's progression as a digital equivalent. Improving macroeconomic conditions for the quasi-currencies are coming on the back of a broader base of investors looking ahead to an increasingly digitized world.

Trends Gaining Momentum Support Bitcoin. The more significant question for the Bitcoin outlook is what it might take to reverse macroeconomic trends that favor greater price appreciation. Our graphic depicts Bitcoin recovering along with gold and increasing levels of negative-yielding debt. This rising tide appears to have endurance, though some volatility and retracement toward the upward-sloping 20-week average near $8,200 may occur.

Improving macro conditions come on the back of increasing institutional interest in the first-born crypto, as evidenced by rapidly increasing futures open interest and volume. The Bloomberg Galaxy Crypto Index is advancing, but we expect this gauge of the top 10 assets to continue to fall further behind the performance of Bitcoin.

Bitcoin and the Improving Macro Landscape

Our graphic depicts potential early reversion in the strong-dollar trend. Flat for the fourth year, the ratio of the Bloomberg Commodity Spot Index vs. MSCI World gauge should be a primary beneficiary of a dollar peak. In the past 20 years measured annually, the dollar has a positive 0.73 correlation to the S&P 500 vs. World ratio, and as negative a number vs. the Bloomberg Commodity Index (BCOM).

Tariffs Just Another Log on Fire for Amigos Gold, Bitcoin, Bonds. The path of least resistance for gold, Bitcoin and bond prices is emphasized by the ease with which they rallied on word of new China tariffs on Aug. 1. The latest round of U.S. tariffs on Chinese imports adds fuel to the gold-rally fire, in our view, with Bitcoin and Treasuries remaining close companions. Spot gold appears to be retracing the 2013 decline, which began near $1,700 an ounce. Gold's foundation is solid on the back of multidecade-low annual volatility just a few months ago.

Gold, Bitcoin and Bonds Appear on Bullish Mission

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Bloomberg Crypto Outlook – August 2019 Edition

Bitcoin also appears intent to retrace last year's decline. Our graphic depicts 2018 price lows in gold (August), bonds (October) and Bitcoin (December).

Bitcoin Companions Back-&-Fill

Bitcoin Price Indicators Show Back-and-Fill Foundation Building. Bitcoin's primary price indicators support our view of an extended consolidation period. Transactions and active-address counts remain on clear upward trajectories, but have pulled back sharply from initial spurts. A transition to an enduring uptrend is more likely following the initial flip from bear to bull market.

Transactions on Similar Footing as 2015-16 Recovery. Bitcoin has made the shift to price appreciation, but further back-and-fill is likely, with historical transactions as a guide. The 10-day average of dollar transactions from Coinmetrics, one of the most robust Bitcoin companions, has clearly turned higher, similar to the 2015-16 bottom. What's different now is the price and transaction recoveries are a bit ahead of themselves vs. four years ago.

A repeat is possible, with signs pointing to further consolidation around the halfway mark of the 2017-18 decline near $11,300. Our graphic depicts the very similar 20-day averages of our transactions metric and the Bitcoin price rather extended above the 200-day mean, notably vs. the more-orderly 2015-16 recovery. Futures' growing prominence and wider adoption support similar price appreciation, as we see it.

Bitcoin Back-and-Fill Warranted With Transactions

2015-16

Address Backup Indicates Bitcoin-Bull Caution. The sharpest downturn in addresses used since the 2018 bear market merits caution for an advancing Bitcoin price. The plunge in active addresses was a precursor for last year's weaker Bitcoin value. A similar-velocity decline in the 30-day average of addresses from Coinmetrics as in 1Q18 coincides with Bitcoin's pullback from the June high. Unlike the more-price-correlated transactions measure, addresses are just a general guide. The bottom line is that they're higher in 2019.

Bitcoin Back-and-Fill More Likely – Addresses

Our graphic supports Bitcoin's potential to revisit support near $8,000, toward the upward-sloping 20-week average and with further back-and-fill the more likely outcome. This year's spurt in address totals preceded the transition to a bull from a bear market. More-enduring adjustment to the uptrend provides a firmer foundation.

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Bloomberg Crypto Outlook – August 2019 Edition

Bull Market in Bitcoin Buy-and-Hold Indicators: GBTC and Futures. The steadily increasing premium in the Grayscale Bitcoin Trust (GBTC) indicates increasing demand for the first-born crypto. GBTC's premium over its underlying net asset value, about 34% on a 30-day average basis, compares with the historical mean of 43%. What's different this time is the more moderate pace of the increasing premium since almost touching zero at the end of 2018. GBTC, Futures Indicate Increasing Bitcoin Demand

Rapidly increasing futures open interest and the amount of Bitcoin represented by assets in GBTC indicate the trend in more buy-and-hold investors. The 30-day average (almost 230,000) of Bitcoin equivalents in GBTC is the highest ever, up about 40,000 from a year ago. CME-traded futures open interest is similar. The 30-day average has about doubled, too, near 27,000 Bitcoin equivalents. Futures Tail Wagging the Dog The Futures Tail Is Increasingly Wagging the Bitcoin-Bull Dog. Bitcoin's footing is getting stronger in terms of price and mainstream adoption, with futures-market activity dictating the first-born crypto's direction. An increasing premium in the futures' trading prices is indicative of growing buy-and-hold interest. Volume and open-interest trends remain favorable. Futures Indicate Bitcoin Price Is Too Low. An increasing premium in the Bitcoin futures price is lifting the market and indicates more institutional buy-and-hold interest. The 30-day average of the CME-traded Bitcoin futures vs. the Bloomberg-disseminated price reflects the highest premium ever. Our graphic depicts futures averaging about 2% above the Bloomberg

price (XBTUSD). Near the bottom of the bear market in February, futures reached a discount of about 1%. Bitcoin Futures Premium Supporting Rally

The 30-day averages of the Bitcoin price and the futures premium/discount demonstrate similar-trending patterns. Our graphic auto-scales these measures. End-of-day prices can vary, but we find the 30-day average sufficiently filters out the noise. CME Bitcoin futures settle the CF Bitcoin Reference Rate, which aggregates Bitcoin trading activity across major Bitcoin spot exchanges. Favorable Volume and Open Interest Trends. Increasing futures volume and open interest support the Bitcoin price and its evolution as a digital version of gold. Clear upward trajectories in the amount of futures contracts and open interest based on the digital currency traded on the CME recently reached new highs. Due to the nascent stage of Bitcoin futures (December 2017 launch), upward-sloping measures appear to be agnostic to the price, but support its maturation into the mainstream of more institutional investors and traders. Migrating Into a More Institutional Marketplace

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Bloomberg Crypto Outlook – August 2019 Edition

Thirty-day average volume of about $470 million indicates the improving ability to support a futures-based exchange traded fund, as we see it. Open interest and the number of contracts traded have increased about 50% from a year ago. {BI COMD} Cryptos, Under Data Library

Facebook Crypto

Ben Elliott | BIO, BI Government Analyst David Ritter | BIO, BI Senior Industry Analyst

Libra's Death Exaggerated? Facebook Has to Mollify Policy Makers. (Bloomberg Intelligence) -- Even with harsh rhetoric from Congress this week, we don't think Facebook's Libra proposal is doomed. Senate Republicans' restrained response may be a win for the social media giant. Libra can easily comply with existing law, in our view, though the PR fight may not be worth it. If successful, the reserve fund alone could add billions to Facebook's revenue. Libra's Best Defense? Partisan Politics. Facebook has more leverage to launch a cryptocurrency than most observers

have so far acknowledged, in our view. At the most basic level, financial regulators likely lack authority to stop the launch without additional legislation. We don't believe House Democrats and Senate Republicans will be able to agree on the scope of potential legislation during this Congress, which runs through January 2021.

{CRYP} Page on the Bloomberg Terminal

Key Points:

The America-first argument Libra offered to Senators on July 16 is likely, in our view, to resonate with Republicans enough to insulate the crypto project from its harshest critics. We expect Facebook will do everything possible to assuage regulators' and lawmakers' concerns before launching Libra -- likely pushing back the launch date beyond the initial one-year time frame. Senate Banking All Bark No Bite for Libra. The Senate Banking Committee was all bark and no bite during its July 16 hearing on Facebook's proposed cryptocurrency, in our view. U.S. financial regulators simply don't have the necessary authority to prohibit decentralized financial services or true digital currencies. That said, the SEC could

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Bloomberg Crypto Outlook – August 2019 Edition

deem some aspects of Libra a securities offering, subjecting it to typical - and easily managed - financial regulations. Facebook's perceived hubris in expanding into financial services could still be the straw that breaks the camel's back and leads to new legislation in 2021 or beyond.

Senate Banking Libra Hearing Replay

While Treasury takes the potential abuse of Libra for money laundering or terrorism financing very seriously, there is little regulators can do to preempt the project until it violates the law.

Libra Token Aims to Democratize Dollars, Euros, Etc. Banking for the global unbanked seems to be Libra's core value proposition, but its potential to disrupt sovereign money supplies is being taken seriously by regulators globally. Libra investors will earn the spread off token users' cheap funding by creating a user-friendly cryptocurrency reserved by safe central bank assets. Libra takes aim at cross-border payments and remittances and the underlying high-fee financial market infrastructure of correspondent banks. The addressable market is global capital flows, rather than any one nation's e-commerce or digital payments, and the potential pitfalls rise to those faced by nation-states.

Company Website

Libra's future may prove more mundane: regulation as a payment system and money-market fund sponsor. Libra tokens will be runnable money-like instruments, attracting huge regulatory scrutiny.

Libra Association May Limit Facebook's Control and Liability. A Swiss nonprofit owned by Libra's initial investors will own the infrastructure and control the reserve of currencies and government securities that form the core structure of Facebook's cryptocurrency. The association will sell Libra Investment Tokens to raise initial reserve funds, creating a corresponding supply of Libra. Future returns from the fund, which at scale could be substantial, would be distributed by the association and as dividends to Investment Token holders.

Key Points:

Facebook's subsidiary Calbira controls the association through this year. Control of Libra will subsequently be determined by so-called validator nodes' relative ownership of Libra Investment Token. The efficacy of concentration limits and other controls will be important for the product's regulatory acceptance.

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Bloomberg Crypto Outlook – August 2019 Edition

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