Crypto - Is it too late to invest already? 20240215

As the relentless march continues (BTC crushed through the $50k resistance and closing above it yesterday), those who are not fully allocated to crypto may start having the usual FOMO (fear of missing out). We will look at the issue in a little detail in this email, and ask whether it is still not too late to chase...

Recent ETF trigger may drive price up more

The recent spate of ETF launches did indeed have a meaningful price impact, as we already topped 70,000 BTCs bought by various funds as of 3 days ago:

Chart 1: Net Bitcoin ETF Flows

In fact, the increasing realisation that BTC is the new gold which is not easily stopped at customs check points is probably why the BTC inflows were funded by, amongst others, gold outflows:

Chart 2: ETF Aggregate Flows Since Bitcoin Spot ETFs

The run, however, is not just in BTC, but in the crypto complex at large - if you look at the top 15 coins (+ the 3 top stables), most were rising on the day, 7-day, and 30-day horizons, often at accelerating paces:

Table 1: Current crypto price

So how much is now owned by funds and how much by other entities? here is an estimate which suggests institutionalisation is only beginning, where funds ownership is just a tiny fraction (the green area most likely includes the GBTC trust already):

Figure 1: Bitcoin Mix

Another facet of institutionalisation is how off-ramping is now finally being implemented at a large scale, as Visa the credit card company has also started taking BTC and crediting holder card account - this will finally make spending BTC a reality (not solely an investment vehicle)! More details are in article 2 below.

Is Halving as potent as touted? We think not

Some maximalists keep touting the upcoming Bitcoin halving as a trigger of a next run, but is that indeed the case? Halving describes the protocol phenomenon where after a certain number of blocks, the reward to miners (ie maintainers of the blockchain) is halved, here is a visual representation of the last 3 incidents and the upcoming one as well:

Chart 3: BTC Daily Issuance, supply, and halvings

We believe the halving may have less to do with price rallies than the more important network effect - where more adoption increases the value of the network (of users) and thus the price of the commodity that is the subject matter of the network. In fact, as the number of coins in circulation increases and the halving reduces new supply, the proportional impact of each halving also falls, as shown in the table below - where the last halving over its 4-year period had a 8% impact on supply, but the upcoming halving sometime in mid-April will only have 4% cumulative effect:

Table 2: BTC halving

We reckon that the more important indicator for coming price action to be on how fast the network effect spreads, which is now indeed taking off given wider institutional adoption. Our technical estimates put likely BTC prices in 3 likely levels:

a) almost there already - $60k by March 2024 (mid blue dotted line);

b) in six months' time - $190k in Aug 2024 (top red dotted line); and

c) blue sky (?) next top - $1m sometime in Q3-Q4 2025.

These are shown here:

Chart 4: BTC price log-log chart

So perhaps you have our answer already - It is not too late to jump onboard this up cycle. In fact, just updating our usual Google search chart, you can see that the search frequency of key crypto terms remain well down from the previous two peaks in Jan 18, Apr 21 by >80%:

Chart 5: Google Search

We would argue that another trigger to prompt more people jumping on to crypto might be govt's desperate moves to join the game through their CBDCs (central bank digital currencies) - because only by forcing people to ditch their paper notes can they flush out the money under the mattress. But what this might do instead is people sell the bank notes and buy decentralised, permissionless, and open source private coins instead...

To end, we present an updated 2-year chart of our managed strategy:

Chart 6: Core performance since 2022

=====================Article 1====================

The Globalists Want CBDCs in 2024… What Really Comes Next Will Surprise Them

There’s an excellent chance governments worldwide will soon force their citizens to use central bank digital currencies (CBDCs).

CBDCs enable all sorts of horrible, totalitarian things.

They allow governments to track and control every penny you earn, save, and spend. They are a powerful tool for politicians to confiscate and redistribute wealth as they see fit.

CBDCs will allow central banks to impose deeply negative interest rates, which are just a euphemism for a tax on saving money

Governments could program CBDCs to have an expiration date—like some airline frequent flyer miles—forcing people to spend them, for example, before the end of the month when they’d become worthless.

CBDCs will enable devious social engineering by allowing governments to punish and reward people in ways they previously couldn’t.

...

CBDCs are, without a doubt, an instrument of enslavement. They represent a quantum leap backward in human freedom.

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That’s where Bitcoin comes in.

Is Bitcoin the Antidote to CBDCs?

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CBDCs are going to introduce and familiarize people with using digital currencies. Then, it’s only a matter of time before they discover Bitcoin.

CBDCs and Bitcoin share some characteristics. For example, they are both digital and facilitate fast payments from a mobile phone. But that is where the similarities end.

The reality is that CBDCs and Bitcoin are entirely different in the most fundamental ways.

You need the government’s permission and blessing to use a CBDC. With Bitcoin, nobody can be prevented from using it.

Governments can (and will) create as many CBDC currency units as they want. Bitcoin is totally resistance to debasement. There can never be more than 21 million BTC.

CBDCs are centralized. Bitcoin is decentralized

...

In short, CBDCs are a pathetic attempt to compete with Bitcoin. They are a desperate, last-ditch effort to keep the fiat currency scam going—a Hail Mary.

CBDCs make an inferior form of money even worse, but at the same time, they are an excellent Trojan Horse for Bitcoin.

...

That’s how, contrary to conventional wisdom, CBDCs could be an enormous catalyst for Bitcoin adoption.

Historically, Bitcoin’s biggest moves to the upside happen very quickly… and the next big move could happen imminently.

...

=====================Article 2====================

Visa enables crypto withdrawals on debit cards in 145 countries

MetaMask users can now sell crypto directly to a Visa card, which eliminates the need to use centralized exchanges.

Global payment giant Visa is doubling down on cryptocurrency adoption by enabling another method to exchange crypto to fiat currencies without using a centralized exchange.

Visa has partnered with the Web3 infrastructure provider Transak to introduce cryptocurrency withdrawals and payments through the Visa Direct solution, the firms announced on Jan. 30.

The new integration allows users to withdraw cryptocurrencies like Bitcoin directly from a wallet like MetaMask to a Visa debit card. Available immediately, the integration enables one to exchange crypto to fiat and pay at 130 million merchant locations where Visa is accepted.

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The partnership allows users from 145 countries to directly convert at least 40 cryptocurrencies to fiat without relying on centralized exchanges. Some of the supported countries include jurisdictions like Cyprus, Malta, Singapore, Turkey, Portugal and the United Arab Emirates, according to Transak's global coverage page.

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One of the world’s largest companies in the payments industry, Visa has been actively exploring the use cases of cryptocurrency in recent years. In 2020, Visa made a major move into crypto, by partnering with the blockchain firm Circle to support the USDC stablecoin on certain Visa cards. In September 2023, Visa rolled out support for USDC payments settled on the Solana blockchain as it continued to expand the support of the stablecoin.

How to better forecast Bitcoin prices? 20220909

Ever since bitcoin became a phenomenon way back in 2017 (some may even argue before then), there have been attempts to forecast its price trajectory into the future. The most common way of course was to use linear projection. But there are many other approaches that may get better results, and through our close and long standing analysis and investing in the asset, we provide here a very brief exposition of how price projections can be done for this, and perhaps all fast growing crypto assets.

 

There are logs, and then there are logs

Most excel wizards would be familiar with a handy feature to turn linear charting to logarithmic scale, which may provide much closer fit and easier for interpreting of trends. This is indeed how we started back in 2017 as well, and even now to many, the simple relationship still somewhat holds, despite some large deviations, especially at the early and late ends of the price spectrum:

Chart 1: BTC price trend on linear log scale - not a bad fit

However, as we found out ourselves over time, that simple tool became increasingly frustrating when the price of bitcoin began moderating from a linear fashion, this deviation became increasingly obvious after the 2018 bear correction.

We as a result, resorted to higher order polynomial log fitting to put the relationship back on a sound footing, starting with 3rd order polynomial log correlation. As one can see from the 2010-1 blue shaded areas in Chart 1, the gap was very large, but on 3rd order polynomial fitting, much reduced (see same shade in Chart 2). Further, the 2015-6 shaded area in Chart 1, although quite close to the actual price progression, was actually far from what a decaying trend should be, as seen in the distance between price and the 3rd order polynomial approach below:

Chart 2: BTC price trend on 3rd order polynomial log fitting – somewhat improved correlation

What is more, the average distance overtime between the trend line and actual price is now better at 69% compared to 168% using the linear approach. A pat on the back!

 

The story does not end here – as progressive price cycles set in – one can now count four cycle peaks and 4 cycle troughs from 2010 to date – the ability of the 3rd order polynomial approach to curve fit disappears. By adding orders of degree to the trend equation, we may play catch up, but that really is too mechanical and ultimately unwieldy, even though the degree of fit did improve (variance reading improved from 69% to 62%), here is 5^th order fitting:

Chart 3: BTC price trend on 5rd order polynomial log fitting – better fit still!

The advantage of another degree of freedom to capture turning points is illustrated above by the blue shaded area, where the trend now captures the 2022 downturn which was not identified by the 3^rd order trend in Chart 2.

Stock to flow model also has issues

Another approach that is well known out there is called the ‘stock-to-flow’ model where the value of bitcoin in circulation over the supply thereof over any set period is used as the basis of curve fitting to its traded price, as shown here:

Chart 4: Stock-to-Flow modelSource: https://buybitcoinworldwide.com/stats/stock-to-flow/

The validity or otherwise of this approach is not of interest to our discussion here, but there have certainly been very large deviations from actual traded price, as is obvious from the chart above, and often such deviations are sudden and unrelated to market conditions, driven by the halving phenomenon built into bitcoin’s protocol.

As a result of this, we decided to pursue other avenues to better model the price of bitcoin.

Commodity or currency, it is a monetary phenomenon

As all traders / investors might have had a hunch on how crypto price actions increasingly correlate with the wider capital markets, they may also begin to expect overall monetary conditions would have an increasing impact on price action of cryptos, especially now this asset class is valued in the trillions instead of mere billion or million dollars a few years ago.

In other words, we should increasingly factor in availability of money as an input variable for any projections of bitcoin prices. The other key variables we deem important in this calculation include also:
a) the number of non-zero balance bitcoin addresses, this acts as a proxy for the level of adoption in the population at large, and would be useful in modelling the network effect of rising usage of the asset;

b) number of BTC in issue, which obviously is increasing, but at a ever diminishing rate. In a sense, this metric is a bit like the money supply element of fiat currencies, where more supply debases the value and resulting in higher prices.

As an overall comparison, we put the three factors on the same scale so as to visualise the comparative impact they may have had on the price of Bitcoin in the recent past:

Chart 5: BTC price in the context of demand (# of addresses), supply (# of BTC in issue), and fuel (Global M3)

Obviously, some factors will have stronger influence over Bitcoin price at different phases of the asset’s history, eg the number of addresses featured heavily in the 2010-2 period when the growth was highest, while in the longer run, it may well be money supply which will dictate future price changes, when for example the user and supply growth both taper off.

 

In compiling the monetary facet of the input variables, we picked only the top 5 economies as proxy, but obviously more countries might produce better results. We will for now stay at the more manageable level this stage in our adventure. Here is the composition of the top 5 countries by M3:

Chart 6: top 5 countries by M3 (U$bn)

Perhaps surprisingly for most, China now has a bigger M3 value than the USA, and by quite a large margin, followed predictably by the EU and Japan. UK and India (not included) are much smaller by some distance, as shown in the chart above. Together, the top 5 M3 economies account for 55% of global GDP – may be at some stage we would bump that figure to 67% to increase the accuracy?

The new Grand Unified Theory of BTC?

With the above foundations, we are now ready to put all the pieces together – with a regression model curve fitting, we have come up with a new trend line for BTC prices, as shown here:

Chart 7: BTC price as predicted by our improved factor inputs

But sadly the variances of trend compared to actual prices were still some way off, until we increased the weighting of the M3 element (after all, money printing drives all fiat devaluation no?), to finally reach the more satisfying outcome shown here:

Chart 8: BTC price as predicted by our “grand unified theory” model

So now we have reduced the variance measured from the first version’s 66% to now 55% – still large by traditional asset standards – but we have some further refinement ideas already, and if we make enough progress, will share in a separate missive…

The advantages of the new methodology are multiple: a) it is not purely statistically driven; b) the model inputs are relevant and quantifiable; c) input variables allow for significantly more real world twists and turns in the fitted line which the statistical method is incapable of producing. Perhaps at some stage, this new grand unified theory will be useful as an input in our investment models…

We are definitely not finished in this quest for perfect modelling of Bitcoin prices, and there is a lot more work to be done, we leave you with a mystery chart that seems to do away with the problem of decaying exponential growth:

Chart 9: another elegant way to present linear BTC price trend