This surge in risk-taking is mirrored in the current state of credit spreads. Both high-yield and investment-grade spreads remain at cycle lows. Confidence in corporate creditworthiness is persistent with spreads as tight as they are. The Fed's political imperative to maintain favorable conditions in an election year doesn’t hurt, either.

This election-year and fiscally dominant backdrop that we’ve been hammering here at TBL for months now leads me to believe the market will remain stable and choppy in an upward direction as we move through the summer months and into November despite Treasury issuance putting pressure on the yield curve, long-term rates, and potentially risk markets themselves. Even though spreads are at cycle lows, I believe they can stay here for some time:

Shifting gears to bitcoin movement on chain, the explosion in risk-taking is also very apparent. Let’s look at a metric called the Value Days Destroyed Multiple created by our good friend TXMC.

The Value Days Destroyed (VDD) Multiple is an on-chain metric that helps us gauge the state of bitcoin cycles by comparing recent spending behavior to the yearly average. When older coins are increasingly spent and eventually overpower demand, it signals a market top may form. When accumulation dominates and older coins remain dormant, market bottoms may form. Unlike Coin Days Destroyed, VDD accounts for both the age of coins being spent and the economic impact of their value, offering a better view of market overheating or undervaluation.

VDD printed a high of 4.1 back in March a couple of weeks after bitcoin hit $70,000—very overheated. This spike marked a near-term peak but doesn’t necessarily mean the market has topped. Past cycles showed similar overheated VDD and only marked corrections, like during the 2017-18 bull where VDD spiked twice and bitcoin still had 5x more upside, and in 2021 where bitcoin still had 1.5x more upside. It is now declining as bitcoin enters 10 weeks of consolidation. Going off of history, bitcoin likely still has one or a couple of final runs left in it before it calls it quits for this cycle:

Let’s shift gears and look at miners. The Difficulty Regression Model estimates the all-in-sustaining cost of bitcoin production. Currently, bitcoin’s market price is trading at a big premium to its production cost. This is a favorable environment for miners, even after an event like the halving in which rewards are cut in half, with stable profit margins giving them plenty of breathing room. Miners are operating comfortably, and as long as bitcoin’s price remains largely where it is, we won’t see a capitulation event wherein miners are forced to shutter their operations or sell BTC to keep the lights on any time soon:

Miner revenue is slashed in half after bitcoin halvings, placing added strain on their operations in a very competitive, already tight-margin industry. The upcoming difficulty adjustment 9 days from now is set to reduce the mining difficulty by 2.15% to account for the drop off in hash rate which came after the halving as miners shut off their under-profitable machines. This will speed up block times closer to their ~10-minute target, helping miners.

This adjustment will help mitigate the impact of reduced block rewards by making it easier to mine new blocks, albeit only slightly. Despite the challenging environment, we've managed to avoid a miner capitulation event thanks to bitcoin’s price holding steady. No major miners have had to shut down operations or liquidate significant bitcoin holdings to stay afloat. If we can tough it out for a little over one more week, it will stay that way:

Occam’s Razor is a rule of thumb that says the explanation that posits fewer variables is preferred to the explanation that posits more. Basically, don’t overthink it. We view bitcoin in a bull flag, and with the macro backdrop during an election year, with a government that is spending like crazy and a central bank with one finger hovering over the stimulus button in case of an emergency, we’re in for upward stairstep chop for the summer at the very worst:

Until next time,

Joe Consorti

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