MW Gold and bitcoin bulls are just getting started
By Daryl Jones
All-time highs frequently indicate strong fundamentals and tend to attract more investors
We may now be at a tipping point in bitcoin's acceptance. The longer-term trends of deficit spending and money supply growth potentially make bitcoin one of the hardest forms of money.
When the price of a stock or asset class is at or near an all-time high, it's natural to assume you may have missed the opportunity. In some cases, you may indeed be late to the game, but often, new highs signal just the opposite. Rising prices frequently indicate strong fundamentals and tend to attract more investors. Gold (GC00) and bitcoin (BTCUSD) are currently in this position, albeit for slightly different reasons, but with one common driver: U.S. deficit spending.
Bitcoin and gold are reaching all-time highs as the U.S. deficit continues to set records. That isn't a surprise. In 2020, the U.S. deficit hit its highest level ever of $3.1 trillion, largely due to the global COVID-19 pandemic, which caused a massive economic downturn and required substantial government support.
The U.S. economy contracted in the last three quarters of 2020 but began to grow again in early 2021. Since then, GDP has exceeded its long-term average growth of 2%. Despite this economic recovery and above average growth rate, the federal government has continued its path of deficit spending, with the deficit reaching more than $7 trillion in the past four years and $1.86 trillion in fiscal 2024 alone. The interest owed by the federal government annually on its $36 trillion in debt now more than doubles the deficit.
If you spend more than you earn, you need to borrow to cover your expenses. The federal government does this on a massive scale.
While we don't yet have a clear picture of the new administration's plans for spending, it's likely that these deficits will persist, if not increase. Heading into the election, the Committee for a Responsible Federal Budget, a bipartisan group, projected that President-Elect Donald Trump's administration would potentially run a deficit of between $7.5 and $15.2 trillion.
The issue with massive deficit spending is that it requires printing more dollars. Without diving too deep into monetary policy, the analogy to personal finance is straightforward: if you spend more than you earn, you need to borrow to cover your expenses. The federal government does this on a massive scale by issuing debt and printing dollars to pay it back. This is a global phenomenon with most industrial nations growing their monetary supply at a faster rate than the U.S. central bank.
As the money supply increases to support growing deficits, the value of the U.S. dollar (DX00) declines relative to assets like gold and bitcoin, which have limited or fixed supplies. These assets effectively become a store of value compared to the dollar because their purchasing power increases as the dollar's purchasing power decreases.
Gold has served as money and a store of value for thousands of years. Since 1999, gold has appreciated at an average annual rate of 10.4%, outpacing M2 money supply growth, which averaged just over 6%. Gold has both history and performance on its side as a hedge against monetary debasement. Central banks understand this too, with roughly 64% of central banks planning to increase their gold holdings based on a recent survey.
'HODLers' - investors with such strong confidence in bitcoin that they don't sell, is at the highest level in six years.
Bitcoin, though much newer, has gained traction over its 15-year existence as both a currency and store of value, despite the fraudulent schemes in the broader crypto world. We may now be at a tipping point in bitcoin's acceptance.
Hedgeye has been bullish on bitcoin since our quantitative Risk Range$(TM)$ Signals went bullish on October 23, 2023. Since then, Bitcoin is up 208%. Last week, our Digital Asset team added bitcoin to our "Best Ideas" list, laying out their fundamental thesis for the world's largest cryptocurrency. While the asset has recently surged, making it seem like now might not be the ideal time to buy, the longer-term trends of deficit spending and money supply growth potentially make bitcoin one of the hardest forms of money.
There are three key attributes to "hard money": finite supply (bitcoin has a maximum of 21 million coins); difficulty in creating more (new coin issuance is halved every four years), and security (bitcoin's decentralized ecosystem has been running successfully for 15 years). Bitcoin has these attributes in abundance, though unlike gold, it lacks a long history. However, its legitimacy is rapidly increasing.
The chart below shows bitcoin's illiquid supply, which continues to reach new highs, with over 74% of coins held by "HODLers" - investors with such strong confidence in bitcoin that they don't sell. This is the highest level in six years.
One of the biggest potential endorsements for bitcoin, and a likely catalyst for its price, would be central banks adding bitcoin to their reserves alongside gold. This idea might have seemed improbable weeks ago, but it's now within the realm of possibility, given the new administration's apparent support for bitcoin's sound money principles.
In a world of rapidly devaluing currencies due to deficit spending and money printing, hard assets have a critical role in any investment portfolio. Having a reasonable allocation to bitcoin and gold is increasingly seemingly like common sense.
Daryl Jones is the Director of Research at Hedgeye Risk Management. Follow him on X here.
More: Will bitcoin keep going up? 3 warning signs it could start dropping soon.
Plus: Why these 'Trump trade' ETF winners are fading - and what it says about the financial markets
-Daryl Jones
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November 15, 2024 13:15 ET (18:15 GMT)
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