What the Kate Middleton story tells us about bitcoin

The mess surrounding Kate Middleton’s apparent disappearance from the public eye tells us absolutely nothing about bitcoin.

Uproar around an edited family portrait released by Kensington Palace of Catherine, Princess of Wales, and bitcoin’s recent surge to a record high are in no way connected. Suggesting otherwise would be opportunistic and crass.

To be sure, the British monarchy and bitcoin are both powerful brands that have fervent supporters and detractors. Their values rely on intangible qualities formed around their histories, governance protocols, and extensive infrastructures. Their fortunes are inextricably linked with media attention. Their inner workings are magnets for conspiracists.

But the monarchy of the United Kingdom is a constitutional authority and bitcoin is a decentralised cryptocurrency. All similarity ends there.

Bitcoin’s rally can be linked not to royal intrigue but to the halving, a once-every-four-years event that reduces rewards for bitcoin miners. Halvings were built into its closed-loop monetary system to reduce the risk of inflation, meaning the token might stay useful as a way to pay for stuff.

Bitcoin’s current value is measured not in purchasing power, however, but by the amount of fiat that’s being made available to mine or purchase each token. Halvings serve only to increase scarcity, so the number tends to go up, as outlined in a recent note from Deutsche Bank.

In the 30 days prior to the November 2012 halving, prices rose by 5%. A more substantial 13% gain was seen ahead of the July 2016 event. Most recently, there was a sizeable 27% price increase in the month before the May 2020 halving.

How significant these moves really are in context is a matter of debate, since the longer-term pattern around halvings has been for bitcoin to peak then crash. It’s just about possible to see in Deutsche’s supplied graph . . . 

. . . though a table makes things easier:

• 2012-15: up 1400 per cent then down 85 per cent.

• 2016-18: up 1990 per cent then down 82 per cent.

• 2020-21: up 800 per cent then down 71 per cent.

With bitcoin up 39 per cent in a month, some optimism around a halving due in April has probably been pulled forward, though it’s difficult to separate this effect from spot-ETF hype and traditional demand-side stimulus like Chinese new year and wall-to-wall media coverage. The only thing certain is that it’s all about flows, not lore. People are buying bitcoin because people are buying bitcoin.

Citigroup analyst David Glass wrote last week that nearly 70 per cent of bitcoin’s year-to-date rally could be explained by ETF flows. (We’ve very lightly edited the extracts below).

We are currently in a macro environment in which the Fed has all but guaranteed cuts despite not having complete conviction that inflation is converging towards the 2% target. The combination of easier monetary policy — not only do we believe cuts are coming, but they will occur almost regardless of how strong growth is — and a Fed that does not seem too concerned that we will see an inflation resurgence is a broadly supportive environment for limited supply, non-interest-bearing assets (ie gold has also rallied). Specifically, crypto traders may view this as a central bank that is somewhat ignoring a potentially longer-term inflation problem, thus underscoring the importance of decentralised financial institutions, and therefore drawing more attention to crypto. Additionally, in part due to the Fed’s dovish shift, risky assets have generally been well-supported as of late, and this sentiment has certainly bled into the crypto space as well.

But . . . 

While the simultaneous run-ups in Bitcoin and gold have sparked the recurring “monetary debasement” narrative, we would not go that far just yet. We note that fixed income markets (nominal rates and inflation breakevens) certainly do not share that concern.

The correlation between crypto and the gold price has been picking up, albeit from historic lows at the end of 2023, Citi notes. Ditto the correlations between crypto and equities, which probably reflects the former’s move towards the regulated investment mainstream.

And stablecoin market caps are once again trending higher. The collapse last year of SVB, where Circle had deposited some of its stablecoin reserves, and Binance’s withdrawal of BUSD in February probably caused some churn in the crypto ecosystem that has benefited Tether. Total values now suggest fresh money is once again entering the system after a long period of withdrawals:

Which, according to Citi, can largely be tied back to spot ETF:

Whether Bitcoin returns are regressed against these macro variables in a univariate or multivariate manner, we find they explain very little variance in recent crypto price action, especially compared to ETF inflows. The beta of ETF inflows — in units of $bn — has been ~0.08. Taken at face value, this suggests that $1bn of inflows leads to ~8% returns for Bitcoin. We note that, as of March 6th close, total ETF inflows have been ~$8.9bn, and Bitcoin has returned ~45%, which has underperformed the estimated ~72% from the regression.

Overall, we expect flows to continue driving BTC so long as the macro backdrop does not change drastically, before macroeconomic variables start to take back the wheel as crypto becomes a more widely accepted, and widely traded, asset.

So. Might a British constitutional crisis affect the macro backdrop in such a way that the conditions supporting bitcoin’s recent gains are undermined, reversing the speculative flows that created its recent surge? Almost definitely not. But crypto reporting is a very crowded field, so we have chosen not to dismiss the possibility entirely.

Further reading:
— UK monarchy suffers an impairment to its goodwill (Reuters)
— The Kate Middleton Mess Should Terrify Brands on Social Media (Bloomberg)