This week, Bitcoin dove and then came roaring back above the $100k mark. We think people who believe higher Treasury yields will crash Bitcoin are correct in the short-term, but are missing the big picture regarding the reason for higher yields. Confusing? Don’t worry:  We explain. DKI also believes quantum computing could be a cryptography threat to the entire system. For some reason, many market participants like to act like this is only a problem for Bitcoin. We put ourselves in the shoes of a Bond villain and explore the topic with you. The CPI rises, but a 0.1% drop in the still-too-high Core number causes markets to celebrate. DKI says the celebration is premature, but we’d love to hear your opinion. The big banks have fantastic quarters. Higher bond yields aren’t hurting them and equity markets near all-time highs are helping. Finally, we get an excellent reader question about options for Bitcoin self-custody. We share some things to avoid and offer some practical solutions.

This week, we’ll address the following topics:

• Will 5% Treasury Yields Disrupt Bitcoin?
• Who Will Feel the Wrath of Quantum Computing: Banks or Bitcoin?
• The CPI is High and a Huge Relief!
• Bank Earnings Are Up Big (Bigly?).
• Bitcoin Self-Custody Options – Reader Question.

This week’s 5 Things represents further contributions from new DKI Intern, Josh Reaves. In addition to selecting topics, writing clear analysis, and producing graphs, he’s demonstrated an impressive work ethic. With me traveling in Vietnam right now (12 hours ahead of NYC), he’s worked some late nights with a tireless attitude. I’ll reiterate that anyone concerned about the supposed softness in our younger generation should spend a day or two with the DKI Interns. You’ll feel better about the future.

Ready for a week of Bitcoin news? Let’s dive in:

1) Will 5% Treasury Yields Disrupt Bitcoin?:

Recently, U.S. 10-year Treasury yields have been on the rise, peaking at over 4.8% before ending the week at 4.6%. With round numbers grabbing attention, a 5% yield has been feared due to concerns that the CPI is understating inflation (current and future). Some investors think that a 5% yield would cause drop in the Bitcoin market. That could happen, but we think the impact is likely to be temporary. Bitcoin has a declining issuance schedule, compared to fiat currencies that can and are being printed in unlimited amounts. This means Bitcoin is a deflationary asset that can be used as a hedge for inflation.

Higher yields in the Treasury market is telling you there’s a lack of trust in the CPI.

DKI Takeaway: We have mixed thoughts on this analysis. We believe that if the 10-year crosses 5%, it’s likely to be a negative for the equity markets. Bitcoin often trades as a high beta proxy for the NASDAQ which is just a fancy way of saying if the NASDAQ falls, Bitcoin tends to fall more. However, smart Bitcoiners were quick to point out that the reason for a market drop is important. Should the stock market fall due to higher bond yields caused by inflation fears, then this is a long-term tailwind for Bitcoin. As inflation and the price index increases, the purchasing power of our dollars decreases leading to higher prices for Bitcoin. For those of you who find this macro analysis confusing, we can sum it up easily: hodl.

2) Who Will Feel the Wrath of Quantum Computing: Banks or Bitcoin?

Quantum computing has been a hot topic in the news recently. Tech giants like Jensen Huang of $NVDA and Mark Zuckerberg of $META have commented on the technology, stating that useful computers are more than a decade away. Quantum-related stocks took a dive after these public comments but shot back up after Microsoft $MSFT sent out a directive to be ‘quantum ready’ by 2025.

While the feasibility and effectiveness of quantum computing can continue to be debated, the potential impact is huge. Bitcoin relies on complex algorithms to secure transactions, which are unbreakable with regular computers. Theoretically, quantum computers would be able to break these algorithms. On the optimistic side, no computer like this exists yet, and quantum-proof technology is being developed.

Image from ChatGPT. Cryptography fears are widely available.

DKI Takeaway: We’ve been reading articles expressing substantial concern that once these quantum computers are fully operational, they’ll be used to break blockchain encryption and make the world’s Bitcoin worthless. Now, let’s put ourselves in the shoes of one of these Bond villains armed with a code-breaking quantum computer and bad intentions. Would we take aim at the $2 trillion Bitcoin market, or would we begin with the $10 trillion of assets under management at Blackrock, the $14 trillion in assets being administered at Fidelity, the $7 trillion at the US Federal Reserve, the US Treasury market valued at tens of trillions, and then proceed to raid the Bank of England, the EU Central Bank, and the Bank of Japan? Quantum cryptography code breaking is a risk for all assets not held in cash in your wallet (or mattress), not just Bitcoin. Let’s hope the people using quantum computing to secure our digital assets are just a bit better and faster than those looking to steal them.

3) The CPI is High and a Huge Relief:

The December Consumer Price Index (CPI) report showed an overall increase of 2.9% for the last year and 0.4% for the month (annualizes to 4.9%). That’s above last month’s 2.7% and above the prior month’s 2.6%. It was in-line with expectations. The Core CPI which excludes food and energy was up 3.2% vs last year and up 0.2% from last month. Those figures were down 0.1% from last month and slightly below the 3.3% expected. Despite a continued trend towards a higher CPI, the market got excited by the 0.1% decrease in the Core number. With food inflation still understated at a rising 2.5%, energy prices up substantially from last month, and constantly sticky services prices up 4.4%, American families are still feeling a lot of inflation pressure despite Wall Street’s celebration. Auto prices are rising again, and as we covered in last week’s 5 Things, housing remains unaffordable for most.

CPI continues to rise. Market excited by the tiny decline in Core.

Back below 2%, but the Fed keeps saying rates are “restrictive”.

 

DKI Takeaway: The productive private market economy is weak while the government continues to supply stimulus funds by the trillions. DKI warned all summer that the Fed was cutting rates prematurely. A bigger concern for me is that the Fed has started to appear openly political. Cutting the fed funds rate just before the November election gave the appearance of political favoritism. Almost everyone at the Fed subscribes to the current MMT school of unlimited money-printing, and their disdain for President-Elect Trump is an open “secret”.

Recent Fed minutes indicated several Governors think they need to raise rates to deal with the coming inflationary policies of President Trump. DKI said many times in 2024 that both parties spend too much, both parties pursue inflationary policies, and that no matter who won the election, we’d have more inflation and a continuation of our ever-climbing debt problem. Cutting rates during the massively inflationary policies of the current White House while expressing public concern about the likely inflationary policies of the future White House makes the Fed look partisan. It will make a wobbly institution appear to be less trustworthy during future policy decisions.

Long-term bond yields continue rising as investors start to include higher inflation in their expectations. DKI has said recently that if/when the 10-year Treasury hits 5%, it’s not likely to be positive for the equity markets. The real solution to all of this isn’t going to be action by the Fed; but rather, reduced spending out of Washington DC. That’s not going to happen so make sure your portfolio is prepared for more coming inflation.

4) Bank Earnings Are Up Big:

Major investment and commercial banks posted earnings last week with profit booms across the board. While individual explanations vary, banks are benefiting from higher interest rates and an incoming administration that is signaling lenience on antitrust regulations.

JP Morgan $JPM posted record annual profits, boasting more than $14 billion in net income in the fourth quarter of 2024. This was a 50%+ increase, with EPS and revenue showing big gains primarily from a 49% increase in investment banking fees.

Goldman Sachs $GS saw a 118% in earnings per share as their investment banking revenues jumped 24%. The bank has seen a large uptick in activity within their IPO and leveraged finance desks benefitting revenue.

Morgan Stanley $MS reported combined revenue of its investment banking and trading divisions up over 49%. Morgan benefited from a large uptick in deal-making revenue, and the equities and fixed-income trading desk doubled its revenue to $3.3 billion.

Wells Fargo $WFC also benefited from higher deal-making volume, with investment banking fees surging 59%. This was driven not only by higher advisory fees but also by increasing equity and debt capital market business.

Citigroup $C edged out analyst estimates of $1.22, posting earnings per share of $1.34. The bank has benefited from a leaner posture, selling off some of its businesses and consolidating its business groups.

It was a good month to be holding the big banks.

DKI Takeaway: This was one of the best quarters for the big banks we’ve seen in a while. Trading and deal-making revenue are all up on markets trading at or near all-time highs. The money-center banks also have less exposure to deteriorating consumer credit that is becoming an issue for the credit card companies and auto loan firms. Finally, there is hope that the incoming Trump Administration (officially in-office by the time you’re likely to be reading this) will take a lighter regulatory and anti-trust approach which would benefit the deal-making, financing, and M&A departments of these firms. We’ll be watching for the effect of rising yields in the future. On one hand, higher yields reduce the value of these firms’ bond portfolios which tend to be leveraged. The offsetting benefit is banks tend to be much faster in raising their loan rates than in increasing the amount they pay on your deposits. This leads to higher net interest margins and increasing profits.

5) Bitcoin Self-Custody Options:

DKI reader, JB, writes in asking us if a digital wallet is the only way to hold his Bitcoin. This is a great question. We start by reminding readers to please not leave your Bitcoin on the exchanges. If you hold your Bitcoin on an exchange, you do not own it; but rather, are an unsecured creditor to a leveraged business. That’s not secure and also causes you to miss out on a crucial benefit of Bitcoin ownership; having assets outside the primary financial system. Owning one of the ETFs is also an option, but again, you do not have control over those assets and they only trade during market hours leaving you with a potential liquidity problem if there’s overnight or weekend news. There are better options. Let’s list a few:

DKI self-custody options here. It doesn’t need to be complicated.

DKI Takeaway: We’ll list three better options for self-custody of Bitcoin. First a hardware wallet or cold storage is a much safer option than leaving your coins on an exchange. You’ll have to invest an hour or two in reading and research, but that investment is worthwhile to understand the system and secure your assets. Personally, I like using a Ledger device. I’ve posted detailed easy-to-follow instructions on how to move Bitcoin from Coinbase to Ledger on X and if you want to go that route, just click: https://x.com/Gary_Brode/status/1594880697033973761 . Finally, for those of you who want institutional quality multi-signature storage without having to keep and maintain a device yourself, please feel free to reach out to the team at OnrampBitcoin. They have a high-quality solution that will make it easier for your heirs to access your Bitcoin should something happen to you. Whatever path you choose, please remember the mantra, “not your keys, not your coins”.

 

Video version is here: https://www.youtube.com/watch?v=4Zab2A7THnw

 

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