September update

The regulation of Bitcoin

This month was another case study for the history books. In fact, this entire year feels like we are making history in slow motion. Because it followed so closely with last month‘s letter it’s worth reflecting on:

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Both of these events occurred: We pushed 180b and established a psychological floor just above 100b – I’ve marked these in purple below:

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The top and bottom of the market for August

On Sept 2nd the market was flying like never before, running from 150 to 180b driven by a jet stream of new projects along with positive television segments from financial press (a pattern that will continue to reenforce itself). Japan begins exchange regulation; traders from traditional finance begin bragging about how rich they got off Ethereum; a whole new genre of stories were being told…

During these runs I’ve noticed the population of investors who are still on the sidelines (or have cash ready to invest) throw down in fear of missing out. Meanwhile early investors set their sights on 250b the next logical place to go (where, in my opinion, the walls of this [short term] bubble start to thin.

Right before Bitcoin broke $5,000, while the champagne was still on ice, we had the news cycle that only a bear could dream up. The water cooler gossip was China (the hub of cryptocurrency speculation) was “shutting down” Bitcoin…

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This news was doubled up by a second wave of negative press due to the strange comments of Jamie Dimon. The most interesting aspect of his comments was how he spoke down about his daughter’s success investing in Bitcoin and called it “a fraud”. I took it as an example of a man who needs to listen to his Daughter’s generation. Nevertheless, the China fears alone caused the Bitcoin price to fall ~2000 USD in a flash (almost 40%) – the drop below $4,000 was mostly technical as margin traders were stopped out and liquidated.

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This event dragged on market (pulling it down 44% peak to peak) and proved that the entire sector is correlated to Bitcoin sentiment – if Bitcoin falls, we all fall down. Below is the market excluding Bitcoin which experienced a 50% drop on Sept 18th.

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Of course the real news was that China is going through a process of regulation, which begins with a slash and burn of the existing exchanges (which are making a fortune). To me this was a great learning opportunity for those who still need to be convinced that Bitcoin is a “global network”. That is, no government or single entity can stop Bitcoin because it’s (a) global, and (b) peer-to-peer. Like shutting down online piracy, it’s a game of whack-a-mole. Tell someone they can’t buy from person X and they will simply turn to person Y. We need only look at the chart of local Bitcoin trading volume to see what happens next. People start trading directly:

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The purple line is the moment this most recent shutdown began. Like the previous shutdown scare, this will increase the baseline trading happening on the streets. I’ll be interested to watch how this volume is sustained over the next months.

At the end of this drama we have a market which is about to press 150b, with a 100b floor in the rear view mirror.

Looking ahead

This month I learned that my previous estimate for a market drawdown was slightly optimistic at 35%, as I wrote in August:

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My thoughts from August’s letter.

This last panic resulted in a 44% swing, so the minor league volatility is still with us. Instead I’ll use 40% as a rough guide for the next downturn limits. I also see 100b as a floor we may test again.

The peak is clearly ahead of us. I do believe a price bubble is forming, that is, the existing rate of gains can’t be sustained across the next 2-3 years. The birth of a market is an exciting, yet messy process – and bubbles are a necessary part of it.

However, I don’t believe we are in the final leg of the bubble when all hell breaks loose, that is everyone jumps in, not just the ~0.1% of us who are currently exposed. Keep in mind that it is estimated that there are only ~300,000 people globally with at least $5,000 in a Bitcoin wallet. I think it’s safe to say at most 1 million people on earth are exposed to cryptocurrencies. There is no doubt in my mind that this will reach 10 million soon (due to the wave of funds that are currently launching).

In terms of where the market can go next, I believe that 250b is a meaningful target simply because (as I’ve mentioned before) Bitcoin alone can justify that valuation when it steals another 2 points from net gold holdings. The next big catalyst for Bitcoin price will be the coming availability of a Bitcoin ETF (I believe this is when the news cycle will be “will Bitcoin reach $10,000?”) – before this happens I can’t (yet) imagine a reason for this market to break 200 billion.

Current allocation

From a fundamental perspective things remain unchanged. Now that a more mainstream market is starting to emerge I’m leaning more closely towards an index weighting with a few exceptions. I also hold no USDT at the moment. When this market pushes 250 billion I plan to move at least 25% to USDT. I hold both Bitcoin and Bitcoin cash and will hold firmly through any future fork.

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High level allocation

If you are interested in a more detailed breakdown of my holdings (including smaller holdings) please reach out directly – I’ve been enjoying conversations with readers of this blog. I’ve gotten to know retail crypto investors, crypto fund managers and VC’s alike.

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