Deconstructing BTC Price Performance: Trump’s Trade and Bitcoin’s Glass Ceiling

Original author: The Giver

Original compilation: TechFlow

This is a very long thread intended to record the process of the rise in the price of Bitcoin since October 15th. I will reiterate the original views I expressed when I was a guest on the @ 100 0x Pod.

Before we begin, I want to make it clear that this is not a recommendation to long or short any coins, especially since the open interest and positioning situation is extremely crowded in the coming week. We have a very high, if not very likely, probability of challenging the all-time high (ATH). This could bring about significant right-tail effects. Specifically, I think managing a new short position here could be very difficult. That said, here goes -

Today, I hope to define the nature and intensity of the capital flows into Bitcoin since mid-October. I will discuss how BTC has added $2.5 trillion since the Bitcoin low of $59,000, the total crypto market cap has added $4 trillion, and describe what I see as constrained capacity in Q4 2024 that I don't believe will be substantially breached.

I have two main views: 1) new capital is still constrained, which is a necessary premise; the strong inflows we've seen over the past two weeks have been speculative capital; 2) the excess liquidity needed to generate the kind of parabolic move we saw in 2021 does not exist.

However, I believe the following principles are severely overlooked and under-discussed, mainly because the price rise analysis is very superficial and only gets attention when prices are falling.

You need to believe:

1) The direction of the election does not drive price-dependent outcomes; instead, Bitcoin is currently being used as a liquidity tool to hedge a Trump victory.

2) The "easing conditions" needed to make new all-time highs today are not there. Interest rates and other popular heuristics have far less correlation with faction liquidity than popular narratives suggest, suggesting prices are ultimately being suppressed rather than price discovery taking place.

Reiterating Previous Views

When Bitcoin broke above around $61,000/62,000 during the Columbus Day holiday, it prompted me to revisit the events at the time. So starting from that week (which I'll present on @ 100 0x Pod later), I predicted the following, which I'll summarize here:

1. BTC.D increases (while BTC itself may challenge $70,000 before the election results)

2. Concurrently, major coins and altcoins generally decline relative to BTC - because the speculative capital in point 1 is only focused on BTC as a hedge against a Trump victory

3. The initial inflows (with a cost basis in the $61,000 to $64,000 range) will be sold off before the actual election, leaving new directional capital (and speculative capital)

4. Through the effects of 1 to 3, Bitcoin will decline in the medium term, regardless of who wins

So I recommended going long BTC, short "everything else".

Why do the capital flows have a mercenary nature?

My understanding of this positioning has three main aspects:

1) Microstrategy is the preferred vehicle for large-scale investment and risk exposure: rapid expansion is often accompanied by local tops.

2) The market consensus view on the "Trump trade" is wrong; its impact is not causal, i.e., an increase in Trump's odds does not linearly create opportunities for BTC's performance, but rather the basket of assets that rallied this month reflects a low estimate of a Trump victory.

3) A new participant has emerged in this cycle - this capital is different from previous participants - it has no intention of recycling capital within the ecosystem; native crypto capital has already been fully deployed, and the likelihood of spot follow-through is low.

The Microstrategy Case Study

I believe Microstrategy is one of the most misunderstood investment vehicles currently: it is not just a simple BTC holding company, but more like a FIG (where NOLs are covered by new capital raises), with a core business centered around generating non-liquid net interest income (NIM).

NIM is a concept that can be most easily understood through insurance companies seeking returns on long-term deposits, often in the form of a liquidity premium (like bonds), where ROE exceeds ROA.

In the case of MSTR or any other stock, the two aspects to compare MSTR on are:

1. Expected BTC price appreciation (can be defined as BTC yield)

2. Weighted Average Cost of Capital (WACC)

Microstrategy can be said to be an under-leveraged enterprise with a relatively light asset burden - the company's obligations are largely covered before BTC reaches $10-15K, so its capital efficiency is very high:

It is able to access the credit markets efficiently, having arranged over $3 billion in convertible bonds, typically using the same structure:

So we can visualize MSTR's overall cost of capital from a credit perspective, using the implied probability assigned to achieving a 1.3x MOIC using a blended convertible bond instrument.

If you collect $1 per year (no redemption) over 5 years, then for the lender, to balance between providing the convertible bond and paying the $6/year coupon, this means a $5 gap per year must be filled by a one-time $30 payment in year 5.

So we can derive the formula: 5 + 5/( 1+x)^ 1 + 5 + 5/( 1+x)^ 2 + 5 + 5/( 1+x)^ 3 + 5 + 5/( 1+x)^ 4 must equal 30/( 1+x)^ 4. This works out to around a 9% cost of capital, while the current debt-to-market value ratio implies an equity cost of around 10%.

In simple terms: if the BTC yield, i.e., the expected annual growth rate of BTC, can exceed 10%, then MSTR's premium should expand relative to Net Asset Value (NAV).

Through this framework, we can derive an understanding that the premium reflects overly exuberant sentiment, or expectations of imminent BTC expansion - so the premium itself is reflexive and patient, rather than lagging.

So when we overlay the premium onto the BTC price, we see two periods where the premium exceeds 1 - the first half of 2021 (when BTC first approached $60,000), and the peak in 2024, when we previously approached $70,000+.

I believe, as the stagnant premium ends tomorrow, the stock market understands this and expects the earnings to be used to buy BTC, expressing this expectation in two ways:

Buying MSTR in advance, anticipating the premium will re-calibrate to ~1-2x, as Saylor may buy more BTC;

Buying BTC directly, not only to capitalize on a Trump victory, but also Saylor's buying intent (through IBIT inflows).

This theory aligns with the options market (biased towards the short-term), which has seen increasing activity, expecting BTC to reach $80,000 by year-end, matching the implied BTC yield created by MSTR's purchases (1.10x $73,000 ≈ $80,000).

However, the question is: what type of buyer is this? Are they here to discover prices of $80,000+?

How did this new capital impact the price action in October?

While there was initially some correlation through algorithms and perpetual contracts, apart from BTC, almost all assets lacked sustained follow-through, suggesting the current bidding is merely through inflows to MSTR and BTC ETFs.

We can draw a few conclusions from this:

1. ETH ETF: Despite over $3 billion in new inflows to ETH ETFs since mid-October, there has been virtually no net inflow. Similarly, the open interest (OI) in ETH CME also appears unusually muted, leading us to conclude: these buyers are not inclined to diversify, they are only interested in Bitcoin.

What changed for Solana on October 20? I believe the growth of SOL (+$10 billion) mainly reflects the unexpected repricing of meme assets (observing the GOAT charts and the underlying AI space, these phenomena are abundant on Solana). Users must purchase Solana to enter the ecosystem, and convert to Solana when they profit, which is consistent with the L1 long-tail theory, reflecting a broader trend we've seen this year in APE and DEGEN. During this period, I believe around $1 billion in wealth was created and passively held SOL during the election.

4. For the first time this year, there has been a decrease in stablecoins, leading to a lack of self-generated dollar demand (slowing) beyond what is created today.

In traditional markets, we've also seen similar repricing phenomena - we can observe how this demand has emerged through the case study of Trump Media & Technology: the stock is $50 today, whereas it was around $12 on September 23, with no new earnings or news releases. To better understand, Trump Media's current market cap is comparable to Twitter - an $8 billion increase in a month.

So two possible conclusions can be drawn:

1. The use of Bitcoin as a liquidity proxy merely reflects election betting capital, and does not reflect the sustainable long-term holdings implied by other narratives (e.g. rate cuts, easing policies, and a productive labor market). If the latter, the market's performance should be more consistent, with other risk proxies (gold when the dollar depreciates, otherwise SPX/NDX) exhibiting more uniform strength this month.

2. The market has fully priced in a Trump victory; this capital is not stable and unwilling to engage with the broader ecosystem, although today's holdings suggest it should/will. This fractal is not what crypto natives are prepared for, as this type of buyer has not existed in the past.

What does this new buyer refer to?

When analyzing the composition of participants, history typically includes the following categories:

1. Speculators (short-term/medium-term, often causing deep capital troughs and peaks, very sensitive to prices and rates)

2. Passive bidders (through ETFs or Saylor, although he is in large-scale purchases) insensitive to prices, willing to support pricing, as they have entrenched HODL behavior in a typical 60/40 portfolio construction.

3. Arbitrage bidders (insensitive to prices but sensitive to rates) - employ capital, but overall have no impact on prices, may have been the initial drivers of the early-year momentum.

4. Event-driven bidders (create open interest expansion within specific time periods), such as the ETH ETF and the Trump summer activities, which we believe we are now seeing.

The 4th category of bidders has a summer playbook, which can be expressed through my previous tweet about Bitcoin as a partisan lever (next tweet).

This suggests that the buying behavior is indeed impulsive and jumpy, but this buyer does not care about the election outcome (which can be interpreted as a lack of linear correlation between Trump's odds and Bitcoin price). They may engage in de-risking, involving closed-end funds of BTC/ETH, similar to the Greyscale bidders when the ETF went live.

BTC as a Partisan Lever

(See tweet for details)

How do interest rates affect Bitcoin's price?

In June/July (next tweet), I assumed it would be difficult to view rate cuts as a simple aspect of easing policy. In this tweet and subsequent content, I will debunk this theory and discuss what I believe is a key missing variable that has led us to overestimate Bitcoin's demand: excess liquidity.

First, let's compare Bitcoin's price over the past 5 years independently with historical SOFR (interest rates). This shows that the correlation is very strong in 2022 and 2023, while in 2020, 2021, and 2024 it appears to exhibit a more dispersed trend. Why is that? Shouldn't lower rates make borrowing easier?

The issue is that, unlike those special years, the lending market in 2024 is already quite robust, signaling that rate cuts are imminent. A unique mechanism is that lower-grade average debt has shorter maturities (thus maturing in 2025-2027), which can be traced back to the "high carry" years preceding.

You can also check out the debt index created by @countdraghula (ignoring quantitative easing) to outline actual debt growth.

Similarly, the stock market's performance has been exceptionally strong: "The S&P 500 has exceeded any consecutive rally over the past decade, totaling 117 weeks" (with no -5% returns). The previous longest rally was 203 weeks, when the economy was recovering from the depths of the Global Financial Crisis.

In other words, credit and equity markets have created a massive recovery rebound without a recession occurring.

My reasoning is: we experienced unique mechanisms in 2021 and 2023 (COVID and SVB failure) that led to liquidity injections. Leveraging the power of the Fed's balance sheet to build new facilities.

The Business/Liquidity Cycle Has Been Broken

(See tweet for details)

Bitcoin and M2 Correlation: Arguing How Emergency Measures Create Growth and Volatility

Bitcoin's growth is often viewed as the ultimate cause, however, since 2022, the correlation between Bitcoin and M2 has been weakening (and is starting to resemble the 2021 peak again). I believe this is closely related to the current government's willingness to open up the use of its balance sheet to achieve financial stability. This is a no-holds-barred approach.

So the key question is - what is Bitcoin exactly? Is it a leveraged stock? Is it a chaos asset? With the underlying market (around $2 trillion) already so large, almost matching the TOTA L1 high we saw in 2021, what conditions must arise for price discovery to occur?

I don't think these questions are likely to be answered during this year's office transition.

How Emergency Measures Supported Bitcoin: The 2021 COVID-Driven Quantitative Easing

I believe using the 2021 fractal to visualize future price action is flawed. In 2021, at least around $2 trillion was injected through various projects. The maturity of these projects is very interestingly aligned with Bitcoin's price action (PA).

On March 15, 2020, the Federal Reserve announced a plan to purchase $500 billion in Treasuries and $200 billion in mortgage-backed securities. This ratio doubled in June and began to slow down in November 2021 (with the speed doubling again by December 2021).

PDCF and MMLF (providing loans to high-quality money markets through stabilization funds) expired in March 2021.

Direct lending fell from 2.25% in March 2020 to 0.2%. Direct lending to companies through PMCCF and SMCCF was introduced, ultimately supporting $100 billion in new financing (increased to $750 billion to support corporate debt), and bond and loan purchases were made. This will gradually slow down between June and December 2021.

Through the Cares Act, the Federal Reserve is preparing to provide $600 billion in 5-year loans to consumers, while the PPP program will end in July 2021. According to a report in December 2023, about 64% of the approximately 1,800 loans at the time were still outstanding. As of August, 8% of these loans were delinquent.

The speed of this monetary injection and creation is very unique. This is also clearly reflected in the price trend of 2021 - reaching a peak in the first and second quarters, declining in the summer (when many programs ended). Ultimately, when these programs completely stopped, Bitcoin experienced a massive downward swing.

Further easing in 2023: Bank failures

According to the Federal Reserve's balance sheet, as of March, BTFP loans totaled $65 billion, and the peak of the discount window reached $150 billion. The Federal Reserve also lent about $180 billion to bridge banks to resolve the crises at Silicon Valley Bank (SVB) and Signature Bank.

To better understand, during this period, the Federal Reserve's lending to banks was about 6.5 times the level during the pandemic.

The reason is clear: all of these held-to-maturity (HTM) securities on bank balance sheets are unrealized losses. These losses do not need to be reported under FASB accounting standards. In 2022, U.S. banks' HTM investment portfolio grew from $2 trillion to $2.8 trillion, mainly due to reclassifying them as HTM. This is usually acceptable (the market value of long-term fixed-income securities is affected by persistently higher interest rates), but the actual depositor demand led to bank runs, forcing liquidity to be realized - which involves writing down these securities.

Since March 2023, Bitcoin's price discovery has been essentially fluid, with the launch of this program - which stopped new lending in March 2024 - being the period when crypto assets became overheated and experienced a short-term correction.

Glass ceiling: Why it exists

Overall, I believe the sequence of operations is:

1. Capital is activated, likely after U.S. government (central bank discount) and MSTR pre-trade sales, through premium expansion to push the price from $59,000 to $61,000.

2. The rise from $61,000 to $64,000 was generated during the long weekend, mainly due to the impact of Trump's hedging. Some funds exited as the price adjusted downward to $65,000 this week, leaving some specific buyers with a very high cost basis (over $70,000).

3. Driven by Trump's directional opportunity, ETFs continue to support the spot price (although Bitcoin's Beta has not risen), while laggards, despite expanding their positions, continue to lag, lacking capital recovery.

4. Bitcoin's buying pressure remains static within its own ecosystem and is unwilling to "participate" elsewhere.

Why I don't think there will be strong price discovery in 2024:

1. Lack of re-pledging (measured by DeFi total locked value compared to 2021).

2. Overconfidence in the actual degree of floating after interest rate cuts.

3. Lack of very strong government stimulus (emergency injections).

4. Weakening reactions in other markets (such as stocks, gold, etc.).

In fact, the last part - some potential upside risks (some of which I've already considered, some of which I think are irrelevant within this timeframe)

• The total earnings of the S&P 500 this week are about $15 trillion. If they perform well (most companies' growth was hard to beat a month ago), some of this new capital may flow in and invest in Bitcoin and related assets. I believe Alphabet was up $10 in after-hours trading earlier today.

• China's stimulus measures (which I believe have already been reflected in Bitcoin's investments) continue to expand beyond previous statements.

• The impact of the primaries remains sticky, however, the results of the 75 elections show the opposite and more severe view: link.

• Inflation hedging unwinds from infrastructure (performed very strongly during the Democratic-passed IRA Act) and turns to Bitcoin and gold for a longer period during the Trump administration.

Overall, I believe that if Trump wins, the market will reach a higher level, while Harris (as another candidate) may be undervalued in the market valuation. Therefore, even with the above risks, the expected market value can still be guaranteed.