2024 Bull Fuel: Bitcoin's Next Cycle (Pt. 3)

Five reasons why I am tremendously bullish on bitcoin (Pt. 3)

Last week, I published “2024 Bull Fuel: Bitcoin’s Next Cycle (Pt 2).” Today’s article is a follow-on piece to share two more reasons why I am tremendously bullish on bitcoin.

I’d encourage you to go back and read parts 1 & 2, as it will only take ten minutes, and it’s the positive outlook needed during the depths of the bear market. 

Right now is proving to be an excellent time to accumulate bitcoin before these five bullish catalysts kick in.

Before getting into today’s research, I want to thank you for being here. I appreciate you carving out time from your busy day-to-day activities to read the latest write up from “The Fiat Cave.”

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Ok, now let’s round out the five reasons why I am tremendously bullish on bitcoin.

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#4 A Massive Generational Wealth Transfer

If you’re a boomer reading this, congratulations. Your generation has amassed an unfathomable amount of money and assets, and I hope that includes you.

Boomers are estimated to own $78 trillion in assets, but how did they end up with this colossal amount of wealth? There are many reasons, but here are a few key ones:

• Economic boom following World War II

• Low Housing Prices When Entering the Workforce

• A 40-Year Bull Market for Financial Assets 

The Baby Boomer generation was born between 1946 and 1964 during the birth rate spike following the end of World War II. 

They came into adulthood during and after the inflation of the 1970s. To combat the roaring inflation, Federal Reserve Chairman Paul Volcker hiked rates to an unthinkable 20% in 1980. Chairman Volcker may have yet to learn that his monetary policy decision would also be the foundation from which the Boomer generation would accumulate levels of wealth never seen before.  

The Federal Funds Rate was subsequently lowered by Fed Chairmans over the decades from the zenith of 20% in 1980 to 0% in 2008. From the Great Financial Crisis until 2021, Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) reigned supreme. 

The secular trend of declining interest rates over forty years paired with money printing (QE) served the Boomers well. Their homes, real assets, brokerage accounts, and retirement accounts grew tremendously.

This is because most asset classes have an inverse relationship with interest rates:

• Rates down, home values up → All else equal, a lower interest rate allows someone to purchase a more expensive home. 

• Rates down, equities up → Equities are valued on future cash flows discounted to the present. When the discount rate (interest rate) declines, future cash flows are worth more, thus making the company more valuable.

• Rates down, bonds up → Most bonds have fixed coupons. When rates decline, a bond with a higher coupon than the market rate will increase in value.

There's no doubt in my mind that my Boomer subscribers are sharp people. I mean, cmon, you're reading "The Fiat Cave." How could you not be?

However, the generation's wealth can largely be attributed to being in the right place at the right time - if someone had a good job and put their excess cash flows into assets over the past forty years, they did well. Nothing wrong with that.

So, Boomers, I commend you. You've got a nice nest egg. $78 trillion is nothing to sneeze at; however, the youngest of you are entering your 60s, and the oldest are entering your 80s. I know that many of you are planning to pass down your share of that $78 trillion (Right Dad?) - which by the way, is the largest generational wealth transfer ever (source). This massive transfer of wealth will prove to be a secular tailwind for bitcoin.

Although Boomers largely have dismissed or ignored bitcoin, it's likely that their children have already purchased it or are at least curious. In fact, 94% of crypto buyers are Generation Z or Millennials, while only 1% are Boomers (source). According to a Bank of America study, 75% of investors between the ages of 21 and 42 are looking beyond stocks and bonds, and 47% already own cryptocurrency.

Crypto buyers by generation - source

Additional findings of the report are bullish for bitcoin:

• Gen Z buyers outnumber Gen X buyers by 3.5x and Boomer buyers by 14.3x.

• Millennial buyers outnumber Gen X buyers by 15.5x and Boomer buyers by 62.9x.

In the next decade, there will be tens of trillions passed down from Boomers to Millennials and Gen Z. And where’s a lot of that money going? You guessed it, bitcoin.

The $78 trillion of wealth passed from old to the young over the coming years will result in unfathomable demand for the world’s scarcest asset. As Millennials outnumber Boomers buyers of crypto by 63x, it’s safe to say we’ve only seen a fraction of flows into the nascent asset class.

#5 Fair Value Accounting is Coming to Bitcoin

“Fair value accounting is coming to bitcoin. This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of BTC as a treasury asset.”

- Michael Saylor, September 6th, 2023

“Three massive catalysts that cause an acceleration of bitcoin adoption - those three things don’t take us to $500,000 a coin, they take us to $5,000,000.

1. Spot ETF approval (aka Digital Gold Rush)(coming).

2. Banks custody and lend against Bitcoin as collateral (here in part).

3. Fair value accounting rules from FASB (here).”

- Michael Saylor, November 10th, 2021

Long awaited, fair value accounting is coming to bitcoin. Bloomberg Law reports:

Under new rules expected to be published by year end, companies that hold or invest in cryptocurrency will be required to report their holdings at fair value, a measurement that aims to capture the most up-to-date value of an asset—including rebounds in value after prices dip. While the new standard will inject volatility into the earnings of companies that are heavily invested in crypto, the ability to record recoveries will be an improvement over the current practice, companies and accountants have told the Financial Accounting Standards Board for months.

So what does this mean for corporate treasuries and bitcoin adoption?

FASB guidance to date has categorized bitcoin as "indefinite-lived intangible assets." The implication for corporate treasuries is that if they acquire bitcoin on their balance sheet when bitcoin trades down, they mark the value of the bitcoin down; however, when it goes up, they cannot show a gain, which means that corporations cannot recognize the current price of bitcoin on their balance sheets.

Not only that, but the gain or loss of an intangible asset, such as bitcoin, is netted against the company's operating profits. So a company, such as MicroStrategy, could have a quarterly operating profit but, due to losses on bitcoin, would show negative operating income. A lack of segregation between a company's operating P/L and an asset such as bitcoin's performance can severely obfuscate the financial picture. 

Michael Saylor has not let the" intangible" treatment of bitcoin prevent MicroStrategy from purchasing 153,800 bitcoin over the past three years. Nonetheless, he described the intangible asset treatment of bitcoin to be "toxic for the balance sheet" in an interview with The Bitcoin Layer for these aforementioned reasons. 

The reality is that CEOs/CFOs have enough going on. They get paid to make sound business decisions and be conservative with the corporate treasury - they don't want to touch a "toxic" asset. 

But that is soon to change. With fair value accounting, bitcoin will be treated as a financial asset on a balance sheet. This means companies will recognize unrealized losses and gains in earnings reports.

"Significance of fair value accounting coming to bitcoin is that it makes the asset non-toxic for a company that uses GAAP accounting to hold, and it also makes the performance of bitcoin transparent." - Michael Saylor, The Bitcoin Layer

What are the implications of this change for the next bitcoin cycle?

Nothing to see here, just another bullish development for bitcoin adoption coinciding with the upcoming halving in April 2024.

Fair value accounting treatment will be mandatory for all public reporting companies in December 2024. And sometime between the beginning of 2024 and December 2024, it will be optional for companies to adopt fair value.

Widespread corporate adoption of bitcoin will not happen all at once, but fair value accounting treatment paves the way for public companies to adopt bitcoin in a clean, transparent, and optimal way. Allowing companies such as MicroStrategy to report gains on their bitcoin holdings will pique the interest of other CEOs/CFOs of publicly traded companies. 

Here’s a fun thought experiment from Jesse Myers’s latest piece “Why the FASB accounting guidance is very bullish for Bitcoin"

Here’s where it gets crazy.  Let’s say that the 2024 Bitcoin halving catalyzes a 2024-25 bull market, as I continue to expect will happen.  If the price soars to ~$150k/Bitcoin (which I think is very possible), that would mean a ~6x in the value of MicroStrategy’s Bitcoin holdings.

With the new accounting standards, MicroStrategy would mark-up the value of their holdings accordingly each quarter.  With ~$4B in Bitcoin holdings today, this could mean recording an average mark-up of $4B for five quarters in a row.

Depending on the timing of the bull market, this could mean MicroStrategy reporting an outrageous string of quarterly profits.  MicroStrategy has a ~$5B market cap today.  In this scenario, they could deliver ~8 quarters in a row of profits in the billions. 

There’s no way around it, that becomes a big story.  The financial media loves a splashy narrative, and MicroStrategy’s winning ways would be a magnet for attention.  Everyone loves a winner, and everyone wants to copy winners.

Jesse, excellent and thoughtful analysis as always - thanks for the bull fuel! And I’ll add to your bullishness —

As the dollar and all fiat currencies continue to devalue at an accelerating rate, corporations must find a better way to protect their capital.

As Saylor stated in the The Bitcoin Layer interview, corporate treasury strategies focus on liquid, fungible, low-risk assets, primarily the dollar. However, due to the 7% annualized money supply growth over the past 100 years, corporations have sought out sovereign debt, particularly US Treasuries, to offset some of the inflation.

But what better way to hedge the debasement of the dollar than bitcoin?

I suspect that as more corporate executives learn of bitcoin's absolute scarcity (21 million units) and increasing scarcity (halving), they'll be compelled to defend their balance sheets against the debasement of the dollar and sovereign debt with this digitally scarce commodity.

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That concludes the “2024 Bull Fuel: Bitcoin's Next Cycle” Series. To summarize, here are the five reasons I am tremendously bullish on bitcoin:

1. The Halving is Coming

2. The Digital Gold Rush

3. The Return of Easy Money

4. A Massive Generational Wealth Transfer

5. Fair Value Accounting is Coming to Bitcoin

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