Trillion dollar knowledge gap
I always say to others that this is “the great information trade of all time” not because the information is secret but because people can’t interpret/understand it easily yet – and it’s not their fault. All of us were born into a world with various forms of money we never witnessed the initial creation of. So it’s very difficult to imagine how new money can be made out of thin air.
To those of us who have filled this gap (understanding of Bitcoin) it can be a difficult yet hopeful process to watch people very gradually digest an idea and explain it to each other in an unbiased way. Right now it’s obvious there isn’t widespread (unbiased) understanding of Bitcoin or the technology behind it….so we have two groups:
- (small) People who understand money OR technology deeply enough to go through an independent realization about Bitcoin before it was a reality. I love this clip of Milton Friedman from 1999, 10 years before Bitcoin he understood it as an inevitability:
- (huge) People who never had a chance to understand it. Just a few weeks ago Jim Cramer was predicting that after the Bitcoin futures launch the “shorts will pummel this thing into the ground” – he was part of a large group of people who didn’t think it was possible for this magic internet money and magic government money to hold hands. They thought that ‘smart money’ would crush belief in this worthless coin…that didn’t happen.
I love the following clip from a few days after the launch because it shows Jim Cramer grappling with the fact that the price never crashed to zero as he had hoped – instead he gives up on that and throws out the obligatory “could be a million” price target.
This kind of clip feels like it’s going to be a historical artifact of the a phase in history when “the world discovered the price of Bitcoin by understanding it”, I think it’s probably a 2 year process we are somewhere in the middle of…
I’ll begin with my thinking from the last letter (Dec 1st), at the time the market was worth 333b and about to make a move into ‘mainstream’ via the upcoming BTC futures launch…I drew/wrote:
And here is what has happened (on 3 month chart for context)
At first the futures market was betting on higher bitcoin prices (pricing Bitcoin around 18k for Jan) along with a price run on the spot market to 20k. A few days later the futures market flipped to a short bias, resulting in a sell off from 20k which bounced off 12k.
Of course the media interpreted this volatility (due to price finding) as the “bubble popping”
It was in fact a very successful launch. A launch like this requires the market to have a chance to ‘punch up and down’ in order to find a middle ground (15k as of now). It was amazing to see the amount of price support in both spot and futures markets at around 12k. The price didn’t go anywhere near $10,000 in either market, for a few seconds it hit 10800’s on Bitmex (existing crypto futures market). Here is the CME futures price since launch:
Bitcoin price in perspective
Right now Bitcoin is in its “store of value” run (using it as gold), which is much much more aggressive than any “medium of exchange run” (using it for daily payments). I believe Bitcoin’s “store of value” potential needs to be measured by the market, but that requires a global understanding of it. It’s easier to see Bitcoin price on a log normal chart which converts exponential curves to straight lines.
Note the underlying linear trend which acts as a price floor (It’s the baseline based on people who don’t sell in a price panic). Interesting to notice that the wild movements seem to only happen on the upside of the underlying linear price trend. The downside movements are almost nonexistent on the above chart.
What will happen if Bitcoin “works” is this underlying line will continue to rise and eventually level out (logarithmically) when the market (and the global understanding, access and trust of it) is saturated, as it is with gold. From this perspective Bitcoin made sense at 10k by end of 2017, and will soon be justified at 25k. (~500b market cap for Bitcoin)
Bubbly birth of an asset class
An important signal last month was the sudden surge in baseline trade volume:
This surge has been sustained and is even increasing…
On Dec 20th we hit 59 billion daily volume which is equivalent to 79% NASDAQ volume. I like to flip the “bubble” argument and instead look at this market as a rising tide that’s at a full boil – constantly bubbling. That is because this market is still being “discovered” so it’s full of excitement (and unknowns) which requires volatility during price discovery. All the leading alt coins have been through multiple “bubbles” which only help to pull up on the Bitcoin tides over time.
Because we are entering a world where “Bitcoin is normal” (tradable on all public markets and accessible through all consumer trading platforms) people are naturally looking to get in on the ‘next thing’ which is driving altcoin valuations. Notice in the above chart that 2016 & 2017 were years with only 2-3 altcoins with any real value, while 2018 is shaping up for a flood of high valuation coins (multi % of market).
While it’s clear this should push down on Bitcoin dominance (currently at ~35%) it doesn’t make sense to me below 33% for the long term since Bitcoin is the physical and physiological basis for this whole sector. Bitcoin will always have the most trust as a store of value since it’s had a 10 year head start, and with any form of money in existence, trust is everything.
It just doesn’t make sense to value Bitcoin as a tiny slice of the crypto market right now. This is why I’m overweight Bitcoin as of now and plan to continue to increase allocation as market runs.
So while the market is beyond my rational point from last month (450-500b) it can only make sense to me at 1 trillion if bitcoin is at least half of the market (if not 60%). As only Bitcoin can justify this much new money. If Bitcoin is at 25k and takes 50% of the market we are at a 1 trillion market overall.
I also need to factor in the hype associated with the growing institutional acceptance & understanding of Bitcoin which is racing ahead with 2018 ETF listings. This could easily push the market to break 1 trillion.
I imagine others would love to sell off before 1 trillion is hit (this is the 10 year fund thesis and I imagine many others have used it as a high water mark), which means we’ll start turning downwards somewhere around 870b for another consolidation into BTC. I still believe today that if we enter a period of fear and consolidation, the market makes sense around 400b (+/- 100b).
Now is also a good time to remember that this is a decade long story, and while we might be in a ‘short term bubble’ (i.e.the market is running up to show what’s possible in the future) the long term trend can still justify 10x growth when this sector enters a more established phase in 8 years from now. Maybe this is a 3-5 trillion dollar market, in 2032…it’s yet to be discovered.
John Pfeffer’s recent letter lays out the long term case case for Bitcoin from an institutional investor’s perspective, notably:
This could very easily turn into a stampede for the entrance and value could very credibly gap up to at least the low-end private-sector target of USD 1.5 trillion in a matter of months, with subsequent growth to the high-end private-sector target of USD 4.7 trillion happening more slowly over the course of two or three years.
He also explains that this offers an extremely rare risk/return opportunity for investors.
This is inline with a powerful narrative emerging in the past few months (amplified by the Peter Thiels of the world), it’s not worth not risking some money on Bitcoin. That’s how important the opportunity is.
Planning to increase Bitcoin allocation (from 39% towards 50%) ahead of what will be a profit taking from fresh altcoin money soon. Some notable moves:
I’ve recently reduced my LTC, XRP positions to capture profits from recent run.
- still overweight LTC (holding 4.5% against market which holds 1.8%)
- now underweight XRP (holding 7% against market which holds 16.9%
I’m underweight XRP because I think the price momentum (at this level) makes little sense nor will it survive the next altcoin sell off. Also, due to the altcoin run some of the early bets have grown into large holdings in the fund. Such as:
- BAT (2.75% against the market 0.08%)
- SNT (2% against the market 0.27%)
- DGD (1.5% against the market 0.04%)
- MKR (1.5% against the market 0.1%)
- GNT (1.5% against the market 0.1%)
- EDG (1.1% against the market 0.02%)
I will be watching these closely with the goal of gradually moving them towards market allocation as the market gets greedy (this will also help increase Bitcoin allocation towards 50%).
We look ahead with the following high level allocation at the time of this letter:
2017 was an unbelievable year, looking towards 2018 with a healthy mix of wonder, fear and excitement. For this reason ~30% of the fund has been taken to fiat to secure gains and this will continue if the market approaches 1 trillion (using short hedging).