The Psychology and "Magic" of Bitcoin

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To investors,

Bitcoin continued to increase in USD value over the weekend and eventually eclipsed the $10,000 threshold for the third time in the asset’s history. The first time was in 2017 when the digital currency went from $10,000 to an all-time high of ~ $20,000 in just 18 days. The second time was in the middle of 2019 when Bitcoin was on a meteoric rise from approximately $3,500 to almost $14,000 in a matter of weeks. 

Although this is the third time Bitcoin has crossed $10,000, it feels much different than the prior two times. Each of the past events were during hyperbolic growth in the asset price. The $10,000 milestone was merely a blip on the radar as the digital currency shot higher. That isn’t what is happening this time. Bitcoin has been trading between $7,000 and $9,000 for the last few months. It has slowly been grinding up higher and higher. There isn’t a parabolic growth trajectory this time. It feels much more sustainable. It feels more natural. And it leads me to believe that $10,000 will end up meaning a lot more this time, than it has in the past. 

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Regardless of the sustainability of Bitcoin’s appreciation, there is something psychologically magical about the five figure number. It is a nice round number. It adds another zero to the price. There is a sense of excitement that comes with $10,000 Bitcoin. Quite literally, people are willing to spend $10,000 to purchase a single Bitcoin. That would have been nearly impossible to fathom eleven years ago when Bitcoin was released to the world.

But $10,000 is still 50% lower than the all-time high price in USD terms. So should people really be excited about crossing over $10,000 again? While some may disagree, I think it is an important milestone. It is also not the only data point that paints a positive picture. We are heading into the 2020 mining reward halving, which will create a shock to the incoming monetary supply. People will likely be bullish going into that event at the end of April or beginning of May. The Bitcoin price is likely to rise as we get closer. 

Don’t be fooled though. Bitcoin is an overly simple concept — there is an artificially fixed supply to the asset and as long as demand continues to increase, then the price of one Bitcoin will have to continue to rise. This will remain true as long as supply and demand economics remains valid. 

The simple thesis requires an individual to accept two core assumptions. The first is that Bitcoin’s code will continue to execute as designed. There will be no 51% attacks that are successful. There will be no downtime on the network. There will be 1,800 Bitcoin created and dispersed to miners every 24 hour period until the upcoming halving. The post-halving mining reward will drop to 900 Bitcoin per day. Each of these falls under the “supply side assumptions” in the Bitcoin bull case.

The “demand side assumption” is that demand will continue to increase. There are two key components to this assumption — one is quantitative and one is qualitative. The quantitative assumption is that as more people learn about Bitcoin, there will be some percentage of those people that will opt-in to owning Bitcoin. This leads to a measurable increase in Bitcoin demand. There are plenty of people who have beat this horse dead, so I won’t waste time on the mathematical models today. The qualitative argument is around the continued chaos, political instability, and economic uncertainty in various geographies around the world. Whether it is countries like Venezuela, Iran, North Korea, and Argentina, or it is in the United States, China, Russia, and India, there is enough issues surfacing to suggest that the trend won’t reverse any time soon. 

So if the supply side assumption (Bitcoin continues to work) and the demand side assumption (demand will increase) are accurate, the US dollar price will rise over time. Each of us should be hoping for that price increase to happen slowly and steadily. If we have the parabolic price increases, they are unlikely to be sustainable. The deep 80%+ drawdowns in price usually follow the rapid increases. Even though the price grinding up is more healthy, I don’t think it is going to play out that way. Markets are too irrational. Humans ultimately make up these markets and humans are incredibly irrational, emotional, bias, and greedy.

As Bitcoin has crossed $10,000, many people are reporting on Twitter and in private conversations that friends and family are starting to reach out about Bitcoin again. They are asking how it works. How they can purchase some. Inquiring whether the recipient of the question thinks now is a good time to get exposure to the digital currency. All early signs that we are heading into another bull market. A market that will probably look and feel similar to past bull markets for Bitcoin.

This time the numbers will be bigger. The volatility will feel greater. But it won’t be much different on a percentage basis. The upside is asymmetric. As price starts to rapidly increase, more people will become interested. They will start to buy Bitcoin. The price will accelerate even more. Which will lead to more people buying the asset. Rinse. Repeat. 

During the height of the 2017 bull market, Coinbase was seeing 100,000+ people sign up every day. It wouldn’t shock me if this number ends up being 1,000,000 people per day in the height of the 2021 bull market. Notice that I said 2021 and not 2020. That is because the actual top of the parabolic rise in price will be approximately 18 months after the halving in my opinion. It won’t be immediately after. It won’t be 3 years later. The 2021 calendar year will bring the big fireworks. 

So $10,000 Bitcoin price is an important thing to pay attention to. This is exactly what you would expect to happen going into the halving. We have about 22 months to watch if the rest of the bull market / parabolic growth cycle plays out. The big thing is that people need to be patient. They need to have a low time preference. Put together a financial plan. How are you going to buy Bitcoin (daily? Weekly? Monthly? Quarterly? One time only?)? What is your plan to sell and go back to fiat currency? Do you plan to ever sell? Will it be all at once or will you dollar cost average in and dollar cost average out? 

Your plan doesn’t need to be perfect. And your plan can change in the future. Just don’t go into a potential parabolic growth period with zero idea of how you are going to manage your wealth. There are a lot of people who got burned in 2017’s bull market. Even though the asset went up ~ 20x in a single year, many people still lost money. Be responsible. Be prepared. And make sure you know what you are buying and why you are buying it. 

This weekend was exciting, but it will pale in comparison to the emotion and frothiness of the future bull market if Bitcoin’s promise is realized. Thankfully, there is more education available for people today. There is better infrastructure in place. But as we all know, Bitcoin is an animal unlike anything the finance world has ever seen before. When it is ready to move, it can melt people’s faces off. 

22 months is a short period of time, but it can also feel like an eternity. Frankly, I am just glad that we are all on this journey together. 

-Pomp


This installment of Off The Chain is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 40,000 other investors today.


THE RUNDOWN:

CFTC Asked to Provide Opinion in SEC Case Against Telegram ICO: A U.S. judge has asked lawyers from the Commodity Futures Trading Commission (CFTC) to provide an opinion in the case brought by the Securities and Exchange Commission (SEC) against Telegram's $1.7 billion token sale. On Thursday, Judge Kevin P. Castel of the Southern District of New York issued an order inviting the CFTC's office of the general counsel "to express its views on the issues presently before the Court." The opinion can be submitted in writing, the judge said. Read more.

Fearing ‘Currency Struggle,’ Japanese Politicians Want G-7 Response to China’s Digital Yuan: Japan should prepare to issue digital currencies and propose bringing up the topic at this year’s G7 meetings to counter China’s move toward issuing a digital yuan, a group of ruling party lawmakers said on Friday. The group will present the proposal to the government next week, its leader Akira Amari, a Liberal Democratic Party (LDP) heavyweight and former economy minister, told reporters. Read more.

Now More Than Ever, SEC Is Scrutinizing Unregistered Token Offerings: News about initial coin offerings is back with a vengeance. Only this time, it's not about how much money there is to be raised, but how much money there is to be paid back. In January, two new ICOs completed in 2018 were charged by the U.S. Securities and Exchange Commission with fraudulent sales of unregistered digital asset securities. Read more.

Paystand Raises $20M to Be Blockchain-Based ‘Venmo’ for Commercial Payments: Paystand, a platform using blockchain technology to automate commercial payments, has raised $20 million in Series B funding. Backing the round are a number of VC firms including DNX Ventures, Battery Ventures, Epic Ventures, Commerce Ventures and Wildcat Ventures. Existing investors Leap Global Partners and BlueRun Ventures also took part. Paystand aims to makes complex commercial transactions and payments "as easy and fast for enterprises as Venmo has done for basic consumer-to-consumer transactions.” Read more.

Chinese Insurance Firms Use Blockchain to Process Coronavirus Claims: Insurance firms in China use blockchain to manage coronavirus-related claims amid the outbreak. English-language local news outlet South China Morning Post reported on Feb. 9 that this month Chinese online mutual aid platform Xiang Hu Bao added the coronavirus to the illnesses eligible for the maximum one-time payout of around $14,300 (100,000 yuan). Read more.


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LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


Meltem Demirors is the Chief Strategy Officer at CoinShares, a digital asset management firm that provides professional-grade tools and services for investors. She consistently has some of the most interesting perspectives across the crypto industry, while also having significant experience applying her theories and ideas in the real world through building one of the leading asset management firms. This conversation was lengthy and touched on a multitude of topics. Highly, highly recommend this one!

In this conversation, Meltem and I discuss:

  • CoinShares

  • Tesla

  • Central bank digital currencies

  • Barstool Sports

  • The shitcoin waterfall

  • Politics

  • The average age of regulators

  • Pensions and retirement funds

  • Venture/macro markets & how crypto may connect them

  • What the wealthy elite do to control the government

I really enjoyed this conversation with Meltem. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


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