With Bitcoin’s Overhang Removed, U.S. Elections Should Add Another Boost (BTC-USD)

Investment Thesis

After a blistering start to 2024, Bitcoin’s (BTC-USD) price activity seems to have moderated, now entering its third month of price consolidation as markets turn the corner to August. The bullish sentiment that initially began with SEC approvals of Bitcoin ETFs at the start of the year, followed by a surge of ETF inflows into these bitcoin funds, elevated the optimism around Bitcoin.

However, since creating all-time highs in March this year, Bitcoin has been unable to keep up the momentum. The rapidly changing narrative of rising interest rates through April seemed to weigh in on Bitcoin at the time, putting downward pressure on the digital asset. Further, the initiation of Mt. Gox creditor repayments presented Bitcoin with a bearish sentiment weighing over the markets.

As the Mt. Gox repayments continue to be made to its creditors, I believe that the overhang over Bitcoin will be removed, creating favorable sentiment for markets to turn bullish on Bitcoin again. In addition, comments coming from both sides of the U.S. presidential campaign point to a wider acceptance of regulating Bitcoin, which adds a strong regulatory boost to Bitcoin.

The convergence of these two developments bodes well for Bitcoin. I recommend a Buy on Bitcoin.

Bitcoin Holds Steady Despite Mt. Gox Repayments

Mt. Gox was one of the earliest cryptocurrency exchanges and, at one point, was considered the world’s largest Bitcoin exchange at its peak. The Tokyo-based cryptocurrency exchange fell prey to a string of cyber hacks between 2011 & 2014. Since then, various sovereign entities around the world, including the U.S. government, have successfully seized Bitcoin in its custody and finally began repaying creditors starting last month.

When the intention to begin repaying ~127k creditors was announced this year, a Mt. Gox Trustee wallet account was set up to consolidate all the seized Bitcoin, which totaled ~140k coins, or $9.2 billion, according to Arkham Intelligence via Bloomberg, which represented ~1% of Bitcoin’s total coins in circulation. Since the announcement, fears that creditors would immediately liquidate their balances have crept in, leading to volatility since May, as shown in Exhibit A.

As can be seen in Exhibit A above, those fears started to really put pressure on Bitcoin; the price fell just below $60k earlier this month but has since recovered right around the time Mt. Gox Trustee began paying creditors in the first week of July. Since then, Kraken has announced the completion of creditor payments on behalf of the Mt. Gox creditor, and Bitstamp has announced it will begin payments to creditors as well. There still remain ~80k bitcoins worth $5.4 billion that need to be redistributed to creditors, as noted in Exhibit B below, which I estimate to be ~0.4% of Bitcoin’s $1.35 trillion market cap or ~30% of Bitcoin’s $18.15 billion 24-hour volume at the time of writing this note.

Interestingly, a few on-chain metrics are indicating signs of strong consolidation, suggesting Bitcoin would be primed to move higher from current levels.

First, I note an uptick in the number of active addresses that are actively participating on the bitcoin network on a daily basis. This is illustrated in Exhibit C below by the 7-day moving average of the volume of active addresses, which saw an uptick in early June preceding the recovery in Bitcoin’s price this month that was observed in Exhibit A. In my view, increased active bitcoin wallets are a sign of confidence in the engagement levels of users with Bitcoin’s network, which eventually leads to higher prices.

Second, the number of Bitcoin wallet addresses holding balances over $1k has been steadily rising through July. As per Exhibit D below, there are ~10.6 million wallets holding Bitcoin worth >$1K, 19.5% higher than since the start of this year. Even better is the number of wallets holding bitcoin worth over $10k, which was 3.6 million at the last count and has risen 32% since the start of the year. The rise in volumes of both of these wallet cohorts indicates higher levels of fund accumulation, despite Bitcoin prices remaining moderately volatile since April.

I view this as a continued growth of small addresses or retail users accumulating and saving bitcoin, which implies elevated adoption levels among retail users who are bullish for bitcoin. Note that balances in wallets have been increasing despite the payouts that have been going to Mt. Gox creditors, implying sustained bullishness and no impactful signs of creditors rushing to liquidate their Bitcoin holdings yet. I, myself, have increased my holdings of Bitcoin over the past week based on this data that has been shaping over the past few weeks.

How U.S. Elections Will Shape Bitcoin’s Price Trajectory

The overall view of Bitcoin from both presidential candidates currently seems to be bullish toward Bitcoin. Most recently, Republican candidate Donald Trump appeared at the Nashville Bitcoin Conference over the weekend, announcing his clearest plans yet for Bitcoin. At the conference, Trump revealed that his administration would hold all Bitcoin that the U.S. government either currently holds or acquires in the future as part of a “strategic national bitcoin stockpile.” As of April, the U.S. government holds ~210k bitcoin, which at current levels would imply a total value of ~$14.4 billion.

On the other hand, Democratic candidate Kamala Harris reportedly dropped out of the Nashville conference at the last minute, but her campaign has been reaching out to the crypto industry to build a robust regulatory framework and be more crypto-friendly than the current sentiment that prevails among digital asset enthusiasts against her administration.

In my view, crypto will play a role in the U.S. elections, with both sides adopting a favorable outlook for Bitcoin, which would boost its prospects in 2024. Plus, some of the presidential candidates have already started accepting Bitcoin as campaign donations, which should add to the bullish perspective of Bitcoin.

Risks to Bullish Thesis

Bitcoin is a highly volatile asset class and is susceptible to large swings in prices. One of the key forces that influence Bitcoin and will continue to influence it this year is monetary policy. As I had noted earlier, the odds for rate cuts had been decreasing through April and May, as seen in Exhibit F below, as inflation suddenly surprised on the upside in April.

The expectations for 1-2 rate cuts have risen again in the last month or so, as noted above, which is favorable for Bitcoin. However, were the interest rate narrative to suddenly reverse course, it would provide headwinds for Bitcoin again.

Takeaway

The Mt. Gox bitcoin repayments had caused some headwinds to Bitcoin’s price in Q2 of this year, but with on-chain network activity and wallet balances remaining steady, Bitcoin could be set to move higher in 2024. In addition, with cryptocurrency increasingly becoming an important policy item in the upcoming U.S. elections, where all candidates are voicing positive perspectives on Bitcoin, expect the U.S. elections to raise the favorable outlook for Bitcoin in the coming months.

These developments in Bitcoin’s network and in the community are viewed positively, in my opinion, and I recommend a Buy on Bitcoin.