Editor's Note: This article comes fromBlockchain Camp (ID: blockchain_camp)Editor's Note: This article comes from
Blockchain Camp (ID: blockchain_camp)
Blockchain-based cryptocurrencies have been around for over a decade since the release of Bitcoin in early 2009.
Although the asset class has grown significantly, the magnitudes are still relatively small and volatile, so whether to insert a small amount of Bitcoin or other cryptocurrencies in a portfolio allocation can be a contentious and confusing decision.
Perhaps this article will somehow help some investors decide. Online Bitcoin analysis can be polarizing, either written by bullish enthusiasts or dismissed as a worthless Ponzi scheme. As a generalist investor with a value bias and a global macro focus, I try to analyze the gap by sharing my view on Bitcoin which is currently bullish.
Although I've been aware of Bitcoin as a speculative small asset since around 2011, and recognized someone mining Bitcoin on his computer if possible (ASICs are now required due to competition), early In November 2017 when I wrote the first article, the price was between 6500-8000 US dollars. During a week or two of writing and editing, the price jumps up considerably. At the time my conclusion was neutral to bearish and I didn't buy anything.
Now, people have a more optimistic attitude towards Bitcoin. Bitcoin and other major cryptocurrencies are very expensive compared to current estimated usage. Investors should proceed with caution.
— Lyn Alden, November 2017
Bitcoin briefly spiked to $20,000 in the month or so after the original article was published, only to drop below $3,500 a year later, before bouncing back into a larger trading range with little or no lasting returns .
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Since my original article nearly two and a half years ago, Bitcoin has underperformed the S&P 500, gold, U.S. Treasuries, and various other asset classes, especially on a volatility-adjusted basis:
Investing in Bitcoin: Bearish Performance
I update the article from time to time to update the data and keep it current with changes in the industry.
In early 2020, I refocused on Bitcoin and became bullish. I recommended it to a colleague of mine at Advanced Research Services on April 12th and bought some bitcoins for myself on April 20th. Prices around this time around $6,900. Since April, Bitcoin’s rapid rise above $9,000 represents a return of more than 30%, but its price is extremely volatile, so these gains may or may not be long-lasting:
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My base case is that Bitcoin does really well over the next two years, which is what we'll see. I like to have it as a small part of a diversified portfolio without worrying about regular adjustments, and use the money I'm willing to invest.
As someone with a mixed engineering and finance background, Bitcoin's design theory has always interested me, but it wasn't until early 2020 that I could devote enough interest to build a constructive case for its price action over the next few years . As a new asset class, Bitcoin has taken some time to establish a price history and gain an understanding of the cycles it goes through, and a wealth of valuable research has been published over the years to synthesize the data.
So, I'm neither one to buy Bitcoin at any price nor one to dump it outright. As an investor in many asset classes, these are the three main reasons why I went from being uninterested in Bitcoin to bullish earlier this year, and remain so today.
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Scarcity + Network Effect
Bitcoin is an open-source peer-to-peer software currency system invented by an anonymous person or Satoshi Nakamoto Group to store and transfer value.
It is decentralized, with no single authority controlling it, instead using blockchain-based cryptography (computed by multiple parties on the network) to verify transactions and maintain agreement. The protocol awards incentives to computers whose ability to validate transactions in the form of newly "mined" coins and/or transaction fees. In other words, for validating and securing the blockchain, you earn some tokens.
Bitcoin's protocol limits it to a total of 21 million coins, which makes it scarce, so it has the potential to give it value if there is demand. No central authority can unilaterally change that limit. Satoshi Nakamoto himself is currently unable to add more tokens to the Bitcoin protocol. These tokens are divisible into 100 million units, like fractions of an ounce of gold.
For context, these "tokens" are not "stored" on any device. Bitcoin is a distributed public ledger, and owners of bitcoins can access and transfer their bitcoins from one digital address to another as long as they have their own private key to unlock their encrypted address. The owner stores the private key on the device, even on paper or engraved on metal.
In effect, the private key can be stored as a seed phrase, which can be remembered and recreated later. You could literally commit your seed phrase to memory, destroy every device that ever held the private key, cross international borders with nothing from yourself, and then later that week use the remembered seed phrase to recreate the access bits currency capabilities.
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Digital Currency Commodities
According to Satoshi Nakamoto, Bitcoin is basically a rare commodity with unique properties.
As a thought experiment, imagine a metal that is as rare as gold but has the following properties: is gray in color, is not a good conductor of electricity, is not particularly strong, but is also not malleable or easily malleable, would be tolerant to any metal Neither are used for practical or decorative purposes.
There is also a special magical property: it can be transported through communication channels.
— Satoshi Nakamoto, August 2010
Therefore, Bitcoin can be viewed as a rare digital commodity with unique properties. Although it has no industrial use, it is scarce, durable, portable, divisible, verifiable, storable, fungible, salable, and recognizable across borders, thus possessing monetary properties. However, like all "potential" currencies, it requires constant demand in order to have value.
At the time of writing, Bitcoin has a market capitalization of around $170 billion, roughly the value of a large company. The total market capitalization of the entire cryptocurrency asset class is about $270 billion, with Bitcoin as the main share.
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Bitcoin market capitalization chart
Back in 2017, one of my concerns with bitcoin was that even if we recognized that these digital commodity properties were useful, and that units of any cryptocurrency were scarce by design, anyone could now create an entirely new cryptocurrency . Since Satoshi solved the hard problems associated with figuring out the mathematics and software responsible for digital scarcity (based in part on the previous work of others) and made that knowledge public, any programmer and marketing team can now assemble a new cryptocurrency.
Now, the floodgates of knowledge have been opened, and there are thousands of them. Some are optimized for speed, some for efficiency, some for programmatic contracts, etc.
So not only is there one scarce "good" with a unique property capable of being transmitted across the network, there are thousands of similar goods with this new property. This risks the scarcity of the commodity, and therefore its value, by diluting the commodity and dividing the community into multiple protocols. Each cryptocurrency is scarce, but the number of cryptocurrencies that can exist is not scarce.
This differs from gold and silver, for example. There are only a handful of elemental precious metals, each of which is rare in metals (e.g., an estimated 2 million tons of mined gold), and is also rare as to how many elemental precious metals exist, and they are all unique (silver, gold, platinum, Palladium, rhodium, some other rare and valuable elements... that's it, naturally no more added).
There is a ratio called "Bitcoin Dominance" that measures Bitcoin's percentage of the total cryptocurrency market capitalization. When Bitcoin was created, it was the only cryptocurrency and thus had a 100% market share. With the rise of Bitcoin, there are now thousands of different cryptocurrencies. First a trickle, then a flood.
By the end of 2017, at the height of cryptocurrency enthusiasm, while Bitcoin remained the largest independent protocol, its market share briefly dipped below 40%. Since then, it's back to above 60% market share. Among thousands of cryptocurrencies, bitcoin accounts for nearly two-thirds of all cryptocurrencies market share.
So what makes individual cryptocurrencies potentially valuable is their network effects, which in Bitcoin's case primarily comes from their first-mover advantage, which brings security advantages.
Likewise, since Satoshi Nakamoto solved the hard problem of digital scarcity and released his method for the world to see, it is easy to create a new cryptocurrency. The almost impossible part is making a product that is trustworthy, secure, and in constant demand, all characteristics that Bitcoin has.
When I was analyzing cryptocurrencies in 2017, I was worried about the diminishing market share of cryptocurrencies. Bitcoin's market share is near lows and still falling. What if thousands of cryptocurrencies were created and used, so none of them alone hold much value? Each is scarce, but the sum of all of them is potentially infinite. Even starting with just ten protocols can pose valuation issues. If the total cryptocurrency market cap grows to $1 trillion, but splits evenly among the top 10 protocols, for example, then each protocol has a market cap of only $100 billion.
Additionally, there were a number of notable Bitcoin forks at the time, with Bitcoin Cash and later Bitcoin Satoshi Vision being forked protocols of Bitcoin, which could theoretically split the community and market share. Ultimately, they haven't caught on since then for a variety of reasons, including their weaker level of security relative to Bitcoin.
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Gold vs Bitcoin
This reliance on network effects is not unique to Bitcoin or other cryptocurrencies. Gold is also very reliant on network effects and the perception of it as a store of value, while industrial metals such as copper have very little, as they are used almost exclusively for utilitarian purposes, so basically keep the lights on.
Unlike Bitcoin, gold does have non-monetary industrial uses, but only about 10% of demand is industrial. The remaining 90% is based on demand for gold, silver and jewelry, buyers see gold as a store of wealth or a display of beauty and wealth, because from the point of view of it looking good, gold happens to have great properties, life Rust is very rare, it has great value in a small space, it can be divided, it can be permanent, etc. If gold's demand for jewelry, coinage, and bullion is substantially reduced and structurally reduced, leaving its actual industrial use as its primary demand, then the existing balance of supply and demand will be knocked out, which could result in significantly lower prices.
So the argument that Bitcoin is not like gold because it can't be used for anything other than money doesn't really hold water. Or more precisely, about 10% of real value, referring to 10% of industrial demand for gold. 90% of the demand for gold comes from the use of jewelry and bullion based on perception, emotion and fashion (all for good reason, based on gold's unique properties), if gold's widespread losses , gold will have similar problems to Bitcoin. The interest in it is a store of value and a display of wealth.
The advantage of gold, of course, is that, in addition to having properties that make it suitable for money, it has thousands of years of history as an international currency, so its risk of losing that perception is also low, making it historically extremely reliable A store of value has less upside and less downside risk, but is not that different in nature.
The difference is mainly that Bitcoin is newer, has a smaller market cap, and has more upside and downside potential. As explained in the next section, unlike precious metals, the security of cryptocurrencies is tied to their network effects.
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Cryptocurrency Security Adopted
The security of a cryptocurrency has to do with its network effects, and specifically with the market capitalization a cryptocurrency has. If the network is weak, a group with enough computing power could potentially overwhelm all other participants on the network and take control of the blockchain ledger. Cryptocurrencies with smaller market caps have lower hash rates, which means they have small amounts of computing power that are constantly running to verify transactions and support the ledger.
Bitcoin, on the other hand, has so many devices validating the network that they collectively consume more electricity each year than smaller countries like Greece or Switzerland. The cost and computing power of trying to attack the Bitcoin network is enormous, and even if a nation-state or other large entity were to attempt an attack on this scale, safeguards exist.
You never hear any news reports about Bitcoin being hacked or stolen, nothing to do with Bitcoin's protocol itself, which has never been hacked. Instead, instances of Bitcoin hacking and theft have involved perpetrators breaking into systems to steal the private keys held within them, which often lack security. If a hacker obtains someone's private key, they can gain access to that person's Bitcoin holdings. This risk can be avoided by using sound security practices such as keeping private keys in cold storage.
The rise of quantum computers could eventually pose a real security threat to Bitcoin's encryption, where the private key can be determined from the public key, but it is already necessary for the Bitcoin protocol to employ known methods that make it more robust Quantum resilient, as the blockchain can be updated when there is broad consensus among participants.
The difficulty set by Bitcoin for validating transactions is automatically updated every two weeks in search of optimal profitability and security. In other words, the difficulty of adding puzzles to the blockchain can be automatically adjusted up or down based on how efficiently miners as a whole solve those puzzles.
If Bitcoin becomes too unprofitable (meaning the price drops below the cost of hardware and electricity to verify transactions and mine it), then fewer companies will mine, and as computing power gradually increases, new blocks are created The speed of will be behind the expected speed. Being disconnected from the network automatically makes difficulty adjustments, which reduces security by reducing the computing power required to verify transactions and mine new coins, but it must be ensured that miners are not incurring costs for maintaining the network.
The latter happens quite often, so Bitcoin's difficulty increases exponentially over time, making its network increasingly secure.
Even with the emergence of a cryptocurrency that is clearly superior to Bitcoin (some users believe that some existing protocols are already superior in many ways based on speed, efficiency or additional features), this superior cryptocurrency still has little chance to catch up Bitcoin's security lead in terms of hash rate. Because of weaker security due to weaker network effects, they have an inherent disadvantage over Bitcoin on that particular metric, which is the most important metric for a store of value. The fact that Bitcoin is number one cannot be replicated unless the community around it somehow fails badly and allows other cryptocurrencies to catch up. However, the gap is huge.
An investment in, or speculation in, a cryptocurrency, especially bitcoin, is an investment in, or speculation in, the network effects of that cryptocurrency. Its network effect is its ability to retain and grow its user base and increase its market capitalization, and by extension its ability to protect transactions from potential attacks.
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Bitcoin strengthens market share and security
I was a little worried about losing market share when I was doing my analysis in 2017, but Bitcoin has stabilized and strengthened its market share.
Bitcoin has by far the best security and leading adoption of any cryptocurrency, cementing its role as the digital gold of the cryptocurrency market.
Compared to 2017 lows of less than 40% cryptocurrency market share, Bitcoin has returned to over 60% market share.
An entire ecosystem has been built around Bitcoin, including specialized banks that specialize in lending and lending to it. Many platforms allow users to trade or speculate in multiple cryptocurrencies, such as Coinbase and Kraken, but a growing number of platforms, such as Cash App and Swan Bitcoin, enable users to buy Bitcoin but not other cryptocurrencies.
Currencies tend to have winners in the majority. They live and die by their needs and network effects, especially when it comes to international recognition. Cryptocurrencies seem to be the same so far, with a few big winners taking most of the market share and holding most of the security, especially Bitcoin, while most of the other 5,000+ don't matter. Of course, some of this may lie outside of useful applications, primarily as a store of value, but as a store of value in the cryptocurrency space, it's hard to beat Bitcoin.
These other cryptocurrencies may have been subject to speculative bidding during strong Bitcoin bull markets, briefly pushing down Bitcoin’s market share, but Bitcoin has now shown considerable resilience over multiple cycles.
By combining first-mover advantage and smart design, Bitcoin's effectiveness in terms of network security and user adoption is very, very difficult for other cryptocurrencies to match. Still, monitoring and analysis has to be done from time to time to see if the health of the Bitcoin network effect is intact or if it is deteriorating for some reason.
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Halving cycle
Since its inception in January 2009, approximately 50 new bitcoins have been generated every 10 minutes from "miners" to verify new transactions on the network. However, the protocol is programmed so that after a certain number of blocks are added to the blockchain, the number of new coins per block decreases over time.
The number of new tokens will asymptotically approach 21 million. Every four years or so, the rate at which new tokens are created is halved, and by the early 2030s, more than 99% of all tokens will be created. Of the 21 million that will eventually exist, more than 18.4 million have been mined so far.
Historically, Bitcoin has performed very well 12-18 months after launch and after the first two halvings. In the face of continued or growing demand for a coin, it is not surprising that a decrease in new supply or flow of coins tends to push prices higher.
Here’s a historical Bitcoin price chart in logarithmic form, with four red dots representing the earliest price points to come, and three halvings representing the start of the four Bitcoin market cycles so far:
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Here we see a very strong pattern. During the 12-24 months after launch and subsequent halvings, funds flow into reduced token flow due to supply constraints and price increases. Then, after a big price rally, momentum speculators get involved, and others catch up to it, leading to a mania that eventually flares up and crashes. After Bitcoin entered a bear market for a while, it eventually stabilized around a balanced trading range until the next halving cycle cut the new supply in half again. At that point, if there is still legitimate demand from current and new users, the price could see another bull run as incoming money from new buyers flows into a small amount of new tokens.
For more information, Preston Pysh, co-founder of the Investor Podcast Network, put together charts and narratives to describe his take on the halving cycle from a miner’s perspective.
Based on recent hash rate data, it appears that the mining market may have passed the halving capitulation period (from May to July) and now looks quite healthy. Bitcoin’s difficulty adjustment hit new highs this week for the first time since the March sell-off.
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stock-to-flow model
Money goods have a high stock-to-flow ratio, which is the ratio of the quantity of goods in storage (aka "inventory") to the quantity of new goods produced each year (aka "flow"). ").
Monetary commodities such as silver and gold have high stock-to-circulation ratios. Silver has a ratio of over 20 or 30 and gold has a ratio of over 50 or 60. In particular, the World Gold Council estimates that 200,000 tons of gold exists above ground, with an annual new supply of about 3,000 tons, making the stock-to-flow ratio count as an envelope sometime in the mid-60s. In other words, the gold currently stored in vaults and elsewhere around the world is more than 60 years old.
The existing stock of Bitcoin increases over time, and its stock-to-circulation ratio continues to improve as the rate of new coin creation declines after each half-cycle halving. In the current halving cycle, about 330,000 new tokens are created every year, and there are 18.4 million existing tokens, which means that its current inventory ratio is in the top 50, which is close to that of gold. In 2024, after the fourth halving, Bitcoin's equity ratio will exceed 100.
In 2019, Dutch institutional investor PlanB published a popular Bitcoin price model based on its stock-to-float. It comes in several versions and has multiple visualizations, this is one of the representations:
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Chart source: PlanB, @100trillionUSD
The white line in the chart above represents the price pattern over time, where the notable vertical movement was the three halvings that occurred. The colored dots are the actual price of Bitcoin during that time period, and the color will change compared to the number of months leading up to the next month's halving. Every year since its inception, the actual price of Bitcoin has been above or below the white price model line.
As you can see, the above pattern emerges. In the year or two following the halving, the price tends to be bullish, sharply out of the model, then drops below the model, then bounces back and finds an equilibrium close to the model until the next halving.
Here's his breakdown of each halving cycle (including the launch cycle), which makes it even more clear:
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Chart source: PlanB, @100trillionUSD
Each halving cycle is less explosive than the previous one, as the size of protocols grows with market capitalization and asset class maturity, but each cycle still rises sharply.
PlanB's model extrapolations are very bullish, suggesting that prices will reach six figures in the next 18 months of this fourth cycle, and possibly even higher in the fifth cycle. A six-figure price tag is more than ten times higher than the current $9,000-plus price range. Will that happen? I have no idea. Bullish compared to my base case, it's still a useful model to look at what has happened in the past.
If Bitcoin hits six-figure price levels, with a total of 19 million coins, that would bring its market capitalization closer to $2 trillion or more, surpassing the largest large-cap companies in the world today. However, it's still only a fraction of 1% of global net assets, and about a fifth of gold's estimated market capitalization (roughly $10 trillion, backside), so if there's enough sustained demand, that's where Bitcoin ends up going Not incredible. During the cryptocurrency mania of late 2017, the total market capitalization of the cryptocurrency space exceeded $800 billion, although as mentioned earlier, Bitcoin’s share of it briefly fell below 40% of the asset class, reaching a little over $300 billion Peak.
While the PlanB model is accurate for Bitcoin's price relative to its historical stock/flow ratio, the extent to which it will continue to follow the model is an open question. During Bitcoin’s first decade of existence, it went from a microcap asset with little demand to a relatively large asset with a lot of niche demand, including some institutional investors. On a percentage growth basis, demand growth, already incredibly fast, is slowing.
When something works, a whole host of laws come into play. It takes a lot of money to invest a small amount of money, and it takes a lot of money to invest a lot of money. In other words, it's easier for a network to grow from $20 million to $200 million (requiring thousands of enthusiasts) than it is to grow from $200 billion to $2 trillion (requiring mass retail adoption and/or broad institutional support).
If demand growth on a percentage basis is slower than in the past, prices could be lower than PlanB's historical model forecasts for years to come, even if it follows the same general shape. That would be the base case: Rise from current levels to new all-time highs in two years, but not necessarily a 10x increase in two years. On the other hand, we cannot rule out a bullish case if demand surges and/or some global macro monetary event adds another catalyst.
game theory
All of this is just a model. I have a high degree of belief that the overall shape of price action will play out historically again in the fourth cycle, but the size of that cycle is an open guess.
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game theory
Let's keep the real numbers for a second and do a simple thought experiment, with imaginary numbers for clarity.
In this example, the starting state is 100 bitcoin holders, 1000 tokens exist between them (average 10 tokens each), and the current price is $100 per token, so the total market cap is 100,000 Dollar.
However, the supply of new coins each year is decreasing (no one is selling existing coins except the miners who produce the coins). In the first year, 100 new tokens are available for resale. In the second year, only 90 new tokens will be available. In the third year, only 80 new tokens will be available, and so on. This is the reduction in new supply we assume for this thought experiment:
During the first year, the price did not change; ten new buyers (with a total capital of $10,000) could easily buy 100 new tokens (10 tokens each), while the price of each coin remained at $100.
In the second year, only 90 new tokens and $10,000 of new capital want to enter, each buyer can only get 9 tokens, and the effective price point is $111.11 per token.
In the third year, with only 80 new tokens and still $10,000 in new capital, each buyer can only get 8 tokens, an effective price point of $125 per token.
By the fourth year, there were 70 new tokens at $142.86 per coin. Issue 60 new tokens by the fifth year, or $166.67 per token. During this five-year period, the number of tokens increased by 40%, and therefore the market capitalization also increased significantly (over 130%), as both the number of tokens and the price per token increased.
Some of these premises are, of course, unrealistic, and serve only to illustrate what happens when the user base grows and new buyers keep low-key resistance to the dwindling flow of new tokens.
In fact, higher prices tend to generate more demand, and vice versa. When investors see a bull market for Bitcoin, demand increases dramatically, and when investors see a bear market for Bitcoin, demand decreases. In addition, not all existing Bitcoin stocks are held permanently, there are a lot of transactions and sales.
However, Glassnode has a lot of research and data on how long people hold Bitcoin.
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For example, they published a graph in the past few weeks showing that over 60% of the Bitcoin supply has not changed addresses in the past 60+ years, and over 40% have not changed addresses in the past two years or more. %:
Chart source: Glassnode
Renowned gold bull and Bitcoin bear Peter Schiff recently conducted a poll of his followers with a large sample size of over 28,000 and found that approximately 85% buy and hold Bitcoin and answered His poll (we have to grant: biased sample, though I'm not sure which) would be willing to keep it for 3 years or more, even if that price stayed below $10,000 the entire time.
I'm not criticizing or praising Peter Schiff here, just highlighting recent data.
The simple thought experiment above only captures the mathematical premise behind the stock-flow parameter. As long as the user base of holders grows moderately, and there is some level of new demand in the face of reduced new supply, the reduction in new supply will naturally lead to an increase in price. Otherwise, new or existing demand falls.
The fact that the new bitcoin supply is cut in half roughly every four years, rather than by a fixed amount every year like in the simplified model, represents a very clever game theory inherent in bitcoin's design. In my opinion, this approach offers the protocol the best possible chance of successfully growing market capitalization and user adoption, and it has been a huge success so far.
Basically, Bitcoin has a built-in 4-year bull/bear market cycle, not too different from the stock market cycle. And those four years give investors plenty of time to experience the mania and despair associated with this cycle, which is hard to replicate in a 1 year cycle because all of this happens so quickly
Bitcoin tends to have these occasional multi-year bear markets in the second half of each cycle, which defuses the speculative bubble and allows Bitcoin shorts to pile up, pointing out that the asset hasn't made new highs in years, and then the reduction in new supply sets the stage for the next bull run Base. After that, new users are attracted every cycle.
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For additional visuals from Glassnode, here's their recent graph that compares Bitcoin's price (gray line) to the percentage of Bitcoin supply (orange line) that hasn't changed addresses in at least a year. I added green dots to indicate halving:
Chart source: Glassnode
Here we see a consistent trend. During the Bitcoin price spikes associated with each cycle, people trade frequently, so the percentage of long-term holders decreases. During the Bitcoin merger leading up to the halving, the percentage of inactive Bitcoin supply begins to grow. If new demand comes in, it has to compete for a fraction of the tokens available, facing a new short supply, bullish on the next cycle's supply and demand basis.
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Bitcoin priced in gold
We can remove the dollar and various models from the price equation and just look at Bitcoin priced in another rare asset: the gram of gold.
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Chart source: Charles Vollum, PricedinGold.com
My analysis begins by noting the relative height and timing of the mid-2011, late-2013 and late-2017 highs. The second peak is about 48 times higher than the first peak, and the third peak is about 17 times higher than the second peak. Therefore, the growth rate at the peak appears to be slowing down.
—Charles Wollum
If the next gold peak in bitcoin is 5x higher than the previous peak, for a random example of a continuing decreasing pattern, assuming gold holds its value for the next few trades, that's pretty good in terms of USD May turn into six digits. After a manic period using the model, it may temporarily dip into the five-figure price range until the next cycle. All of this is speculative, but worth noting for anyone who notices a pattern.
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Reduce volatility over time
Charles Vollum also notes that Bitcoin's presence, its volatility has dropped, is again priced in gold (but roughly applies to USD as well):
Next, note the distance between the red and green lines for any given date. In 2011, the upper limit was about 84 times the lower limit. A year later, the ratio was 47 times. In 2015, this figure was 22 times, and by the beginning of 2020, it had dropped to 12 times. This is a good thing, and it shows that the overall peak-to-trough volatility has decreased. If this pattern continues, the ratio will be around 9x by mid-2024 and 6.5x by the end of the decade. Still high by FX and bond standards, but less than 10% of 2011 volatility!
—Charles Wollum
If over the next 5+ years, Bitcoin's market cap becomes larger and more in control, its apparent volatility will decrease, much like a small growth company develops into a large blue chip company.
At the same time, Bitcoin volatility can be managed by using appropriate position sizing relative to an investor's level of knowledge and belief about the asset, as well as their personal financial situation and specific investment goals.
Bitcoin's volatility is not meant to be fake but then again a 2% portfolio position in something even if it halved is rarely worth losing sleep but if it goes up say 3 can still provide meaningful s return. -5x or more.
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intentional design
Whether it ultimately succeeds or fails, Bitcoin is a beautifully structured protocol. The design of Genius will be obvious to most people who delve into Genius in a way that it incorporates mathematics, computer science, cybersecurity, monetary economics, and game theory.
It's not just a fixed token he released to the public, a permanently fixed new supply, or any other possible permutation that Satoshi could devise, but the specific method he chose to initiate, which is now perpetual. Nobody even knows who Satoshi Nakamoto really is, or if he's still alive; he's like Tyler Durden walking in a fight club in the shadows outside, watching the building he built in a very become self-sufficient in a broad community that is now collectively responsible for its success or failure.
Regular halving events continue to reduce the flow of new coins, meaning that even with annual new interest in Bitcoin from new buyers remaining constant, as long as there is a durable user base that prefers to hold a lot of existing coins, rather than rise), the price of Bitcoin may appreciate during the halving cycle. This in turn draws more attention and attracts new buyers in the cycle.
The ideas that went into its architecture may have played a major role in why Bitcoin has achieved relatively widespread adoption and achieved a twelve-figure market cap, rather than being a novelty that some cypherpunk programmers are obsessed with. For Bitcoin to fail, Bitcoin's user base needs to stagnate, step aside, and ultimately persist for a while. 11 years after its existence, it has struggled and is still growing, possibly due in part to the halving cycle brought on by its first-mover advantage, helping it build maximum computational security.
There is debate about how to change it, such as rival protocols using Proof-of-Stake instead of Proof-of-Work to verify transactions, or adopting cryptographic improvements to make them more resilient, but ultimately with network effects and price action, which will determine which A cryptocurrency wins. That's Bitcoin so far. It is not the fastest cryptocurrency, nor the most energy-efficient, nor the most feature-heavy, but the safest and most trusted cryptocurrency with the broadest network effects and first-mover advantages.
Bitcoin’s performance over the next two years is a considerable test of its third halving and fourth overall cycle, compared to its previous post-halving performance. We'll see if it stalls here, breaks down compared to historical patterns, or keeps pushing up and expanding like the previous three cycles.
I don't have an answer, but my base case is bullish, with several factors working in its favor. And as to why this cycle should differ from previous cycles in general direction and shape, there's really no firm catalyst to speculate on, even if I don't want to.
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ideal macro background
In the Bitcoin genesis block where Satoshi Nakamoto launched the blockchain, he published the headlines of the week:
The Times 03 January 2009 Second bailout for banks coming to chancellor
—Bitcoin Genesis Block
The crisis took years to resolve. The U.S. deficit grew for more than five years, quantitative easing did not end until late 2014, and Europe experienced a delayed sovereign debt crisis in 2012. The entire financial crisis is a process, not an event.
More than a decade later, we face an even bigger crisis, bigger bailouts, bigger quantitative easing, and direct cash assistance to companies and consumers that pays central banks and monetizes central bank deficits.
For example, the broad money supply in the United States has increased substantially. Here's the year-over-year rate of change:
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Chart source: St. Louis Fed
Depending on the size of the next fiscal injection, the US federal government will run a fiscal deficit of 20% of GDP this year, the largest deficit since World War II. The Fed monetized much of the deficit by creating funds to buy Treasuries from primary dealers and elsewhere in the secondary market, ensuring that the explosive supply of Treasuries did not overwhelm real demand.
The dichotomy between the quantitative easing that central banks around the world are doing and the quantitative tightening that Bitcoin has just experienced in its third halving has given a good sense of the difference between scarcity and lack. The dollar, euro, yen, and other fiat currencies are diverse and rapidly growing in supply, while the likes of gold, silver, and bitcoin are inherently scarce.
This is an era of near zero interest rates, and in some cases even negative nominal interest rates, and massive money printing. Key interest rates and sovereign bond yields across the developed world are below their central banks' inflation targets. The rapid creation of money has proven to feed into asset prices. Over the past 25 years, stock prices, bond prices, gold prices and real estate prices have all been pushed higher.
If tens of trillions worth of zero-coupon bonds and cash assets happened, even a 1% premium flowing into Bitcoin would far exceed the current total market value of Bitcoin.
I have several articles describing the money printing and currency debasement likely to occur throughout the 2020 decade:
The slight risk of treasury bonds
"Solving" Debt Problems
Quantitative Easing, MMT, and Inflation/Deflation: A Primer
Why This Is Different From the Great Depression
In early May 2020, Paul Tudor Jones became openly bullish and long Bitcoin, calling it a hedge against money printing and inflation. He compared Bitcoin in the 2020s to gold in the early 1970s:
Aside from businesses of cryptocurrency origin like Coinbase, there are already some major businesses involved. For example, Square's (SQ) Cash App can buy Bitcoin. Robinhood, which has seen an influx of millions of new users this year, has a built-in cryptocurrency trading feature, making it easy for Robinhood users to transition if they happen to shift the bullish trend from stocks to cryptocurrencies. Paypal/Venmo (PYPL) may also launch someday.
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So if Bitcoin's halving cycle or fiscal/monetary policy backdrop leads to a Bitcoin bull run in the next few years, there are plenty of access points for retail and institutional investors to catch the momentum and potentially lead to the same explosive The result of the previous three halving cycles of the price. Again, I don't mean to say certainty, because it depends on how much demand there is in the end, but I certainly think it's a strong possibility.
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Currently, I view Bitcoin as an asymmetric bet in a small portion of a diversified portfolio based on: a) Bitcoin’s proven network effects and security; b) we are in the halving cycle Bitcoin is programmed for ; c) The macro backdrop anomalies support Bitcoin as a potential hedge.
If you allocate a few percent of your portfolio to it, the risk of loss is limited. If the price of Bitcoin halved or somehow completely lost its value in the next two years, and this fourth cycle failed to start and completely collapsed and completely diverged from the previous three issuance/halving cycles, then this period The bet will always be a blank promise; on the other hand, if Bitcoin is as far ahead as it has been in the previous three issuance/halving cycles, then Bitcoin will triple, quadruple, or rise from current levels during this time It's not out of the question to start with potential price volatility.
What happens during this cycle? I have no idea. But as I've studied how the protocol works and watched the ecosystem around it over the years, I'm taking it more and more now that it's a planned two-year venture that's probably going to take a while so far. longer time.
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Additional Notes: Ways to Buy Bitcoins
I've been asked what I think are the best places to buy bitcoins, which I'll add in the last section.
Many people have strong feelings about where to buy or which companies to do business with; in the end, it depends on your country of residence, how much you want to buy, how you want to experience it, and whether you want to accumulate or trade it. Convenience, security, and options come with trade-offs.
Exchanges like Kraken, Binance, and Coinbase are popular entry points for people to buy some bitcoin, especially if they want to trade it. Do your homework and find ones that meet the standards in your jurisdiction.
