“It’s subtle, you’ll feel it,” said my guide, backcountry, Wilson Wyoming. “Just a thin layer of crust, eight inches down, it’s not much, but could spark a slide.” We pushed the handle of our poles gently into the snow. She was teaching me the science of avalanches. I was recounting my case for digital assets, a thought piece from early 2021 [see here]. Taking turns talking, cold air, thin. “Sometimes the risks are visible on the surface, but they’re usually buried, and you need to understand how the snowpack has developed, the layers, the history, the breakpoints.” So it went for three thousand vertical feet, 4hrs up, 1hr down. Altitude, solitude.

Overall: Crypto prices exploded higher, sucking the oxygen out of other markets, few of which moved all that much. There was no announcement from a CEO that propelled bitcoin upward, because of course, it has no management team, or any other form of traditional corporate governance. It is managed by immutable math. There were no central bankers or treasury secretaries who meddled. These markets operate independently of the interventionist elite. When they suffer, there is no buyer of last resort, no bailout fund, no TARP, no debt jubilee, no safety net. There were no commodity cartels to announce an expansion of productive capacity, because, at least in the case of the Bitcoin network, there is no way to increase the pace of its production. No matter how high the price rises or how low it falls, the pace of new bitcoin supply is fixed and will decline through time. No other commodity in the known universe has this quality. Digital scarcity is such a counterintuitive concept, such an oxymoron, that it is far from fully appreciated, and thus remains underpriced. But markets in their infinite wisdom clearly sensed something, and this leaves us searching for signs. Risk assets, in general, are at historic highs despite interest rates remaining elevated relative to recent decades. Housing prices are firm at nosebleed levels. US equities are at unprecedented heights. Credit spreads remain historically tight. Institutional investors are wildly overexposed to illiquid private equity and credit. The hyper-financialized economy continues to perform well too, although it is not entirely clear whether this is supporting such high asset prices, or perhaps, it is the other way around. Atop this base, sit $6trln in money market funds, which pay 5% or so, the proceeds of which cascade back into asset markets. And the US government continues to issue new net debt at the pace of $1trln every 100 days or so. Just imagine the pace of deficit spending in a deep recession. And all this borrowing creates additional interest expense, which the government honors by issuing more debt. And more debt. As the powder piles up.

Week-in-Review: Mon: Sweden to join Nato after Hungary signs off, ECB’s Lagarde says has not yet achieved infl target and wage pressures remain strong, Houthi’s narrowly missed US-flagged tanker over wknd, Koch back PAC will cut off funding for Haley following defeat in S. Carolina primary, reports of progress on Israel/Hamas ceasefire, Israel CB unch at 4.50% (25bp cut exp), Japan PPI 2.1% (2.4%e), US New home sales 661k (684k e), US Dallas Fed mfg -11.3 (-15e), S&P -0.4%; Tue: ECB’s Lagarde says not there yet on inflation and must sustainably get to 2% before easing, Biden and congressional leaders hold intense Ukraine talks, Biden says Gaza ceasefire is ‘close’ / Hezbollah will halt if Israel/Hamas agree to ceasefire, Hungary CB cuts 100bp as exp, Apple canceled work on EV to focus efforts on AI, Fed’s Bowman reiterates view that it’s too soon to begin rate cuts, PBoC says they would “use monetary tools in full and use them well”, Japan CPI 2.2% (1.9%e) / Core 3.5% (3.3%e), Germany cons conf -29 as exp, France Cons conf 89 (92e), EU M3 0.1% (0.3%e), Brazil IPCA 4.49% (4.54%e), US Durable goods orders -6.1% (-5.0%e), US Case Shiller house prices 6.13% (6.05%e), US Cons conf 106.7 (115.0e), S&P +0.2%; Wed: RBNZ unch as exp / struck dovish tone by talking down the chance of future hikes, China phasing out popular quant strategy deemed responsible for recent market sell off, BTC crosses 60k for first time in 2y with little fanfare, Fed’s Williams and Collins see easing ‘later this year’, ECB’s Nagel says cutting too early would be ‘fatal’, McConnel to step down as Senate GOP leader in November after ~2 decades, Biden and Trump win Michigan primary but signs of weakness for both emerge, Australia CPI 3.4% (3.6%e), US 4Q GDP (2nd) 3.2% (3.3%e) / Personal cons 3.0% (2.7%e), Russia Ret sales 9.1% (7.0%e) / Unemp rate 2.9% (3.0%e) / IP 4.6% (4.1%e), S&P -0.2%; Thu: US PCE 2.4% as exp / Core 2.8% as exp, both House & Senate pass stopgap funding bill to avert partial gov’t shutdown / kicks the can down the road to 3/8 & 3/22, BoJ’s Takata says 2% infl target within sight and would call for policy chg, Putin warns Nato of a potential nuclear confrontation over Ukraine, Japan Ret Sales 2.3% (2.0%e) / IP -1.5% (-1.6%e), Turkey 4Q GDP 4.0% (3.5%e), France CPI 3.1%as exp / GDP 0.7% as exp, Germany Unemp 5.9% (5.8%e), India 4Q GDP 8.4% (6.6%e), Mexico Unemp rate 2.85% (2.80%e), Brazil unemp 7.6% (7.8%e), Germany CPI 2.7% as exp, Canada GDP 1.1% (1.6%e), US Personal income 1.0% (0.4%e) / Spending -0.1% as exp, US Initial claims 215k (210k e), US Chicago PMI 44 (48e), S&P +0.5%; Fri: EU CPI 2.6% (2.5%e) / Core 3.1% (2.9%e), BoJ gov Ueda says stable price target is not yet in sight, Musk sues OpenAI’s Altman for violating the firm’s mission statement, NYCB identified ‘material weakness’ with its loan review process, Japan Jobless rate 2.4% as exp, China PMI mfg 49.1 (49.0e) / non-mfg 51.4 (50.7e), China Caixin mfg PMI 50.9 (50.7e), Eurozone PMI mfg 46.5 (46.1e), Italy Unemp rate 7.2% as exp, UK PMI mfg 47.5 (47.1e), EU Unemp rate 6.4% as exp, Brazil 4Q GDP 2.1% (2.2%e), US mfg PMI 52.2 (51.5e), US ISM mfg 47.8 (49.5e) / Prices paid 52.5 (53.0e), US UofM final 76.9 (79.6e) / 1y infl 3% as exp / 5-10y infl 2.9% as exp, S&P +0.8%; Sat: Navy men’s lacrosse beats Boston University 16-9.

Weekly Close: S&P 500 +0.9% and VIX -0.64 at +13.11. Nikkei +2.1%, Shanghai +0.7%, Euro Stoxx +0.1%, Bovespa -0.2%, MSCI World +0.9%, and MSCI Emerging -0.4%. USD rose +1.4% vs Turkey, +0.7% vs Indonesia, +0.5% vs Australia, +0.4% vs Canada, +0.1% vs Sterling, and flat vs China. USD fell -17.4% vs Bitcoin, -14.0% vs Ethereum, -1.7% vs Russia, -1.4% vs Chile, -1.0% vs South Africa, -0.8% vs Brazil, -0.6% vs Mexico, -0.3% vs Yen, -0.1% vs Euro, -0.1% vs Sweden, and -0.1% vs India. Gold +2.3%, Silver +0.8%, Oil +4.5%, Copper -1.0%, Iron Ore -0.6%, Corn +2.7%. 10yr Breakevens (EU +7bps at 2.01%, US +3bps at 2.32%, JP +2bps at 1.24%, and UK +8bps at 3.57%). 2yr Notes -16bps at 4.53% and 10yr Notes -7bps at 4.18%.

Feb Mthly Close: S&P 500 +5.2% and VIX -0.95 at +13.40. Nikkei +7.9%, Shanghai +8.1%, Euro Stoxx +1.8%, Bovespa +1.0%, MSCI World +4.1%, and MSCI Emerging +4.6%. USD rose +4.0% vs Chile, +2.9% vs Turkey, +2.8% vs South Africa, +2.1% vs Yen, +1.1% vs Russia, +1.1% vs Australia, +1.1% vs Canada, +0.5% vs Sterling, +0.3% vs Brazil, +0.3% vs China, and +0.1% vs Euro. USD fell -33.4% vs Ethereum, -31.6% vs Bitcoin, -0.9% vs Mexico, -0.4% vs Indonesia, -0.2% vs Sweden, and -0.2% vs India. Gold -0.6%, Silver -2.2%, Oil +3.4%, Copper -2.1%, Iron Ore -8.5%, Corn -6.3%. 10yr Inflation Breakevens (EU +10bps at 2.03%, US +8bps at 2.32%, JP -1bp at 1.26%, and UK +8bps at 3.59%). 2yr Notes +41bps at 4.62% and 10yr Notes +34bps at 4.25%.

2024 Year-to-Date Close: Turkey +14.7% priced in US dollars (+21.8% priced in lira), Japan +11.9% priced in US dollars (+19.3% in yen), Denmark +11.8% in dollars (+14.1% in krone), Argentina +8.8% in dollars (+13.5% in pesos), NASDAQ +8.4% in dollars, Greece +7.8% (+10%), S&P 500 +7.7% in dollars, Ireland +6.5% (+8.7%), Netherlands +6.3% (+8.6%), Italy +6.3% (+8.5%), MSCI World +6.1% in dollars, Euro Stoxx 50 +6% (+8.3%), Philippines +6% (+7.3%), Israel +5.6% (+5%), Saudi Arabia +5.5% (+5.5%), Colombia +5% (+7.6%), Hungary +3.8% (+9.2%), Germany +3.7% (+5.9%), India +3.3% (+2.8%), Poland +3.2% (+4.7%), France +3% (+5.2%), Russia +2.8% (+5.4%), Russell +2.4% in dollars, Malaysia +2.3% (+5.7%), Taiwan +2.2% (+5.6%), China +0.4% (+1.8%), Canada +0.2% (+2.8%), Sweden -0.1% (+2.7%), Indonesia -1.5% (+0.5%), UK -1.5% (-0.7%), Czech Republic -1.5% (+3.3%), Switzerland -2% (+3.2%), Belgium -2.3% (-0.2%), Spain -2.4% (-0.4%), Australia -2.5% (+2%), HK -2.9% (-2.7%), UAE -3.1% (-3.1%), Austria -3.7% (-1.6%), Mexico -3.7% (-3.2%), New Zealand -4% (-0.2%), Korea -4.1% (-0.5%), Finland -4.4% (-2.5%), Chile -4.8% (+4.6%), Norway -4.8% (-1.1%), Singapore -5% (-3.2%), Brazil -5.6% (-3.7%), Thailand -7.9% (-3.4%), South Africa -10% (-5.9%), Portugal -12.1% (-10.2%), and Venezuela -15.6% (-14.9%).

But Different: It was like back in 2020, but different. We were all on Zoom this week, a quiet group of institutional investors, allocators, from the top firms across the globe. I’d been asked to present my thoughts about digital assets. Back in 2020 I had a bit of an aversion to using the term crypto. It felt somehow dirty for this kind of crowd. Not sure quite why. But that was before the 2022 avalanche, the great cleanse that swept away trees with shallow roots, overleveraged speculators, Luna, Celsius, crooks, frauds, SBF. And now in 2024, crypto feels okay to say.

But Different II: Bitcoin has now recovered from its 7th cycle low. In the depths of each, the critics danced on its grave. With every recovery, it has emerged stronger. Ownership has broadened, adoption increasing, network effects expanding. Upgrades to the protocol will make it more useful in the years to come. Ethereum has had various upgrades too, proof-of-stake, improving speed, reducing costs. So many new ideas have been attempted that it’s not possible to track them all. Most of these innovations will fail. But not all. And the builders build on. And on.

But Different III: Most still view crypto as worthless. They are not wrong. In the aggregate, crypto assets can be created just as easily as the Federal Reserve credits banks with digital dollars, which is to say that they can be created at no cost and in unlimited amounts. But it appears increasingly obvious to even skeptics that faith is being concentrated into a narrow set of crypto assets, expanding the network value associated with them, boosting their market cap. And it is utterly evident to all, that the supply of dollars and debt is expanding at an accelerating pace.

But Different IV: Bitcoin has no reference value. This makes it profoundly unique. No matter how its price rises or falls, the pace of production follows a preset path, halving every 4yrs until ~2140 when the last of the 21mm bitcoins will be mined - for all eternity. When gold prices rise abruptly, production increases. If the bitcoin price rises 5x or 25x, production will not increase. Period. And this creates one of the more fascinating inversions in today’s inverted world: an asset with finite supply, but no intrinsic value, could become priceless, if only we imagine it so.

But Different V: Might a range of crypto assets, engineered to have finite supply, with an expanding global network of users, and a growing range of use cases, surge in value over time? Might an increasing number of investors allocate at least some of their capital to such assets in a world where there appears to be no major economic block on the planet willing or capable of pursuing orthodox monetary and economic policies? Might blockchain technologies replace slower, more costly, less secure incumbent systems? It’s easy to imagine. And it’s my base case.

But Different VI: I’ve got a pretty active imagination. It’s a good thing for a risk manager and has helped us profit from numerous avalanches. But imagination is also vital for envisioning upside. Bitcoin is the most secure network in human history. Few realize that and even fewer can imagine what it may be used for in coming decades. The global financial system will be rebuilt on Ethereum, and the various protocols built on/around it. Our team is 3yrs into building something called Project Diamond on it - remaking global market infrastructure.

Anecdote: My first trade ever was in the corn pit. 1989. Don’t remember if I bought or sold, but I lost money on the trade. Losing on trade #1 was supposed to be good luck, and that’s probably right. If you learn to take a loss right out of the gate, you’ve at least got a shot. Lots of people say markets go up because there are more buyers than sellers, and vice versa, but that’s not right. There are always the exact same number of buyers and sellers in the pit. What matters is whether one side is more motivated than the other. The best trades are ones where you can see that there are a large group of aggressive sellers who will soon realize they not only need to buy back their short positions but will then want to get aggressively long. Or the inverse. And if you spend your career looking only for such setups, you’ll be in the company of the very best investors in the world. So, when people ask for crypto price projections, which is what most tend to want, I instead go back to my early pit-trader framework. It’s what I know best and is more valuable than the multitude of valuation metrics that humans invent to give themselves comfort in a system that is inherently unstable, prone to avalanche (melt ups too). So here goes: The SEC approval of the bitcoin ETFs gave a massive group of buyers the ability to easily invest in bitcoin. The addition of bitcoin to a range of model portfolios at the large investment houses meant that there is a motivated buyer, and because there is no way to accelerate the pace of new bitcoin supply, the price must rise until a seller is willing to part with his position. Rising prices ignite imaginations, and such buying can quickly become reflexive, self-reinforcing. And no doubt, there will be plenty of two-way volatility ahead, but the biggest institutions have barely even started to build their long positions.

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, converse with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.