The Bitcoin Halving Is Not A Buy

Weekly Investor Letter: Macroeconomic Update

By Leah Wald and Steven McClurg

We are not buying Bitcoin into the halving.

Bitcoin has rallied to over $10,000 from around $6,000 just a month ago, adding more than $1.4 billion in value. As of the release of this piece, Bitcoin is $8586. Bloomberg, CNBC, along with top technical analysts are covering the price action and attributing the surge to the upcoming halving and excitedly pulling up countdown clocks on their shows. The media is rampant with bull-run hype and moon shooting price targets.

Hope is good for mankind but hope is not an investment strategy.

As an asset manager, ethically protecting and growing endowments, pension funds, and families’ retirement funds, gambling is not a possibility. The halving is a lucrative tradeable event. However, as a value investor, for now, it is not an investable event.


The most prevalent bullish reasoning is citing historical precedent. Prior post-halving rallies have averaged 446 days and triggered prices to rise 81 times and 30 times in the 18-month period after the 2012 and 2016 halvings respectively. However, the fundamentals of the first halving on November 28th, 2012, and last halving on July 9th 2016 are different from our current environment.

The last halving was before the ICO mania, crypto legislation, and before derivatives and other sophisticated investment vehicles entered the market. These instruments provide the opportunity to speculate on the underlying asset but never owning bitcoin itself. This, in itself, affects the price of Bitcoin differently as well as the experiences that traditionally sophisticated investors enticed into joining the cryptocurrency space have.

Paul Tudor Jones learned the hard way today that with a 24/7 market, where traditional rules do not apply, you can awake in the morning to a very unpleasant surprise. A couple of hours ago when Bitcoin experienced a flash crash from $9881 to $7995, it became abundantly clear how owning derivatives, rather than a physical spot, can work against you.

There has been much excitement generated by news and media. Given it is primarily retail participants in the market trading this halving then the emotions and sentiment are going to be more strong of a driver than ever.

Much of Bitcoin’s extreme price action has historically been dictated by FOMO. That is why in 2017, Bitcoin ran up to almost $20k then quickly reversed into a nosedive, in a frenzied bubble.

Sentiment by itself is unsustainable.

But this halving is a completely different event because the world is facing an unprecedented pandemonium over COVID-19.

The COVID-19 Halving:

“This is a crisis like no other,” Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), said at a teleconference last week. “Never in the history of the IMF have we witnessed the world economy coming to a standstill,” she said. “It is way worse than the global financial crisis [of 2009].”

Due to COVID-19, we believe the S&P could drop to 1200.

Bitcoin is correlated with the S&P as a risk asset.

However, there are more statistically relevant correlations to examine given the FAANG stocks make up nearly 28% of the S&P. It is true that these are technology companies however if you run a comparative analysis to publicly traded fintech firms and equal-weighted technology indexes, such as the Invesco S&P 500 Equal-Weight Tech ETF (RYT) to tamper the FAANG weighting, correlations are much higher, between 70% and 80%. We will write our next piece about the correlations we have discovered.

The cryptocurrency market is currently filled with retail investors. Exchanges lost institutional volume and revealed over 100,000 BTC withdrawals after March 12th. Speculative retail investors are buying however they are focused on Grayscale Bitcoin Trust (OTCMKTS: GBTC) alongside small and mid-cap financial technology companies that are not the large institutional names.

Many similar speculators bought in October of 2018 when they thought BTC was “cheap enough”. These same speculators are with us now but the weak retail hands will capitulate when the broader tech market declines.

Given Bitcoin’s high correlation to these small and mid-cap stocks, ceteris paribus, it is in for volatile times ahead. Right now stocks are not a buy and therefore neither is Bitcoin.

The halving may provide a lucrative opportunity for short-term traders to gain from upside action and volatility. And as long as equity markets stay in the green, then Bitcoin will likely continue the upward momentum.

However, as soon as equity markets begin to erode, as we are calling for due to high unemployment, weak consumer sentiment, and unsustainable corporate leverage, Bitcoin will swiftly depreciate with it.

Whilst we said above that the correlation to the S&P is not as statistically significant as to the small and midcap stocks, from an emotional perspective when investors see blood in the streets of the major indexes, this will create bedlam and Bitcoin has the potential to nosedive. This potential alone is enough for a prudent institutional investor to stay out.

The US Economy is Caught in a Maelstrom

Let’s fast forward to after the COVID-19 curve when the markets are truly feeling the pain of the stark reality of the global economy. People are able to emerge from lockdown but the hope that everything will return to a sense of normalcy has disappeared; widespread unemployment and corporate defaults have actualized.

The Bureau of Labor Statistics (BLS) reported that the US economy lost 20.5 million jobs in April and that the unemployment rate has soared to 14.7% with 23.1 million people counted as unemployed. This statistic does not include the 2.3 million people who are have looked for a job in the last 12 months rather than the last four weeks as well as the 10.9 million people who worked part-time. The U-6 unemployment rate, which includes underemployment, surged to 22.8% in April. As we recently wrote, Q2 GDP could lower as much as 40% YoY, creating a much more severe recession than 10 years ago.

If Bitcoin does not appreciate and retain stability then it will not have the crucial elements needed to be a safe-haven asset. This does not bode well for Bitcoin’s chances to be picked over gold, treasuries, the Japanese yen, or the greenback, nor does it provide an opportunity to decouple from the traditional markets and act inversely to their dangerous downward spiral. It is also possible that many investors and traders will be hoping to cash out after the halving in search of these aforementioned safe-haven assets.

If Bitcoin is still ranging around current levels then the retail investors who have remained in the space will begin to think that Bitcoin mining will implode. Then, there will be a big crash. Hopium will be gone. FOMO will be gone. People will get out.

Chinese Bitcoin Miners Move Markets:

McClurg wrote a paper on July 6, 2018, entitled Bitcoin is No Longer an Uncorrelated Asset in which he proved the strong correlation between South Korea’s KOSPI and Bitcoin from 2016–2017 and the Shanghai Composite Index (SSE) from 2016- 2018. He noticed the 2018 relationship between SSE markets and Bitcoin was 72% correlated, as the poorly performing Chinese economy created a risk-off trade in both local equities and digital assets.

At this time, the SSE was the worst-performing country index for the first half of 2018, mostly due to tensions around US-China trade policies, which negatively affected Bitcoin’s price. The People’s Bank of China (PBOC) originally was a cryptocurrency enthusiast in 2013 before doing a volte-face in 2017 when they banned ICOs. Immediately following the announcement of this ban Bitcoin dropped 6%. Actions in China affect Bitcoin’s price.

We posit that the same irrational emotional mindsets “Animal Spirits” that drove the SSE also drove the Chinese miners to hold or sell. Miners are affected by economics similar to any other business.

With the halving in two days, the onus is on the importance of mining. However, the prevalent conversation is around the technical workings of a bitcoin halving. Instead, it is important to understand and prepare for the power miners have in driving up or down prices. And watch for how they may control the price action in the days and weeks to come. The University of Cambridge has reported that 65.8% of bitcoin mining is still based in China, while the U.S. and Russia lag behind at 7%.

Bitcoin’s halving will force weak miners off the network, increasing the power of Chinese miners. As inefficient miners go out of business on Monday, a more efficient mining operation will buy their mining equipment. In China, there are favorable financing options for mining, especially for receiving loans.

There is a historical precedent of miners hoarding coins to drive up prices to ensure that the halving is financially advantageous before selling. Bitcoin is money and miners are running a business. Miners model in the halving in terms of their returns. Miners will sell when they believe it is the right opportunity to sell.

While traders buy and sell Bitcoin, miners only sell. They are not dogmatic. They are capitalist.

However, as the Chinese economy continues to suffer during this global pandemic, miners may need to sell in order to fund operations and this will drag Bitcoin prices with them.

Zhu Jun, the director of the international department of the People’s Bank of China announced last week that “The possibility of a ‘Great Depression’ cannot be ruled out if the epidemic continues to run out of control, and the deterioration of the real economy is compounded by an eruption of financial risks.”

Few companies are spared during an economic recession, let alone depression, there is no reason to believe that Bitcoin mining companies will be the exception, especially given their statistical correlation to the broad market indexes.

Dry Powder

Bitcoin is thinly-traded, volatile, and easily manipulated. Narratives are the market makers. With the emotionality of the cryptocurrency market, it is of utmost importance to remember that there is another person on the other side of your trade. Never underestimate who it may be.

Money management demands the recognition of shifts between asset classes. When an asset class is outperforming, it will be emphasized and adopted. However, when an asset class begins underperforming relative to other asset classes or has too high of a risk-reward for the risk tolerance of a company or firm, it must be de-emphasized or ignored.

Don’t treat a bear market as an inverse of a bull market. You need to take steps to protect your assets. Act accordingly.

Our money is liquid and our powder dry for when Bitcoin presents itself as a buying opportunity. However, a prudent investor is patient. And as a value investor, we are not afraid to miss an opportunity if the price is not right.

Valkyrie Funds

Steven McClurg — CIO
Leah Wald — CEO

Valkyrie is a discretionary global macro investment management firm. By analyzing fundamental macroeconomic, geopolitical, and social factors we are able to listen to the markets and effectively manage risk and generate alpha.

Valkyrie believes that shifts in government economic policies, political climates, currency exchange rates, international trade, international relations, and interest rates impact all financial markets. Utilizing this expertise of the global economy and financial markets, ExI has constructed unique portfolios with a dynamic macro edge that includes exposure to emerging asset classes.

Together, Steven and Leah utilize macroeconomic strategy to structure and manage portfolios.

About Steven McClurg (CIO):

Steven McClurg is the Chief Investment Officer at Valkyrie. He was a managing director at Galaxy Digital, through the acquisition of his previous company, Theseus Capital, where he was a founding partner and CEO/CIO. Steven started his asset management career at Guggenheim Partners, a leading global investment and advisory financial services firm, where he was managing director and portfolio manager, including oversight of Emerging Markets and Sovereign Credit.

About Leah Wald:

Leah Wald is the CEO at Valkyrie. She was a Partner at Lucid Investment Strategies, an asset management firm specialized in investing in macroeconomic trends. Prior to joining Lucid, Leah was at Vital Financial analyzing investment strategies for Japan, Asia, Middle East energy, and global macro strategy. Leah started her career working at the World Bank Group reporting directly to the former Vice President of the Africa Region.


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