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Crypto News Updates

Using Hash Rate To Examine Bitcoin Price Dips

The bitcoin mining industry undergoes various capitulations upon the halving of block rewards, affecting bitcoin’s price.

Mimesis Capital: Inside The Event Horizon, Report #17

Why Hash Ribbons Predict Local Bitcoin Bottoms So Accurately

Theory: When the bitcoin price hits a certain level, selling pressure starts to exponentially disappear.

Bitcoin mining is a ruthless industry. Over the long run only the most efficient mining firms will survive.

The tendency for the mining industry to attract large amounts of competition combined with simplicity and beauty of the Bitcoin protocol could give us a method to predict local “price floors” for bitcoin.

Halvings

Blockware Solutions, a bitcoin mining firm, released an in-depth report last year on how halvings directly affect miners and how much sell pressure is removed from the market post-halving.

Take a look at the entire report to get a good idea of how they reached their specific conclusions, but they estimated that USD-denominated forced miner selling would fall 70% after the halving with no change in price.

This was likely a major catalyst for the current bull run.

How Does This Work?

Sell pressure drops due to miner capitulation.

Directly after a halving miner capitulation occurs because the block subsidy is cut in half, but the operating expenses of mining firms do not change.

Revenue being sliced nearly in half, while expenses remain unchanged, is obviously disruptive for any business.

This situation purges the most inefficient miners from the network. As a result, difficulty falls and the most efficient miners actually become more profitable. This free market process removes the miners who are forced to sell the most bitcoin to cover their expenses and rewards the most efficient miners by giving them more bitcoin.

The miner capitulation process occurs until sell pressure has decreased significantly. As price falls, sell pressure exponentially disappears due to the most inefficient (high forced sellers) miners being eliminated from the network.

When Can Miner Capitulation Occur?

The most obvious form of miner capitulation is post-halvings. A 70% reduction in sell pressure, as estimated by Blockware Solutions, clearly had a massive effect on the market price of bitcoin.

However, this inefficient miner purge occurs naturally over time and especially around price drops.

New efficient miners are constantly being brought online (better ASICs, lower electricity rates, fully financed publicly-traded mining firms, etc.). The most inefficient miners get purged when difficulty increases, electricity rates increase or price drops.

Simplified Miner Capitulation Bottom Examples

The first model is assuming peak hash rate and a bitcoin price of $60,000.

Looking at the model, the mining network is divided into five different layers.

The first layer is the most efficient and is roughly 20% of the total network. This likely would consist of publicly-traded firms like $RIOT, $MARA and $HUTMF that have access to unlimited amounts of capital available in public markets and that do not have to sell any bitcoin.

The fifth layer is the most inefficient and is also roughly 20% of the total network. At the current bitcoin price, their operating expenses are roughly 80% of their revenue (mined bitcoin). This means their margins are very sensitive to drops in the price of bitcoin, electricity price increases, rent increases and network difficulty increases.

Now let’s look at the second model. In this model, the price has dropped from $60,000 to $35,000 and the hash rate has also fallen 20%.

The fifth most inefficient layer of the network has now been eliminated. Due to the sudden drop in the bitcoin price, layer five’s operating expenses ($41.4 million) now exceed the amount of bitcoin they can mine ($37.8 million). This causes them to shut down their operations and the remaining layers obtain a larger share of the hashrate.

The interesting idea here is that USD-denominated sell pressure decreased by 40%.

Last, let’s look at the third model. In this model the price has dropped from $60,000 to $20,000 and the hash rate has also fallen 40%.

The fourth and fifth layers of the network have now been eliminated. Due to the sudden drop in the bitcoin price, both layer’s operating expenses now exceed the amount of bitcoin they can mine. This causes them to shutdown their operations and the remaining layers obtain a larger share of the hashrate.

The interesting idea here is that USD denominated sell pressure decreased by 70%.

Hash Ribbons

Hash ribbons are an indicator to help measure miner capitulation.

While the hash ribbon indicator is not perfect, it can illustrate points in bitcoin’s history where selling pressure starts to exponentially disappear.

The indicator releases a buy signal when miner capitulation has ended and price has cooled off. Charles Edwards from Capriole Investments explains hash ribbons in detail.

When sell pressure starts to exponentially disappear due to the dynamics of hash rate falling, we can be more confident bitcoin has bottomed.

Another interesting thing to point out is that the indicator never goes off near tops (2011, 2013, 2017). As the price begins to fall after every local top, hash rate continues to rise. Since hash rate is still rising as the price falls, sell pressure is likely increasing across the network until miner capitulation occurs and signals the bottom during a bear market.

This is how deep bear markets occur. Price gets way overheated for what the network, users and miners can sustainably handle. When price momentum shifts, miners are still being deployed because it is still highly profitable to mine bitcoin. Then you get a period where negative price action scares away new buyers, but more sellers (capitulating miners) still appear due to more miners getting deployed and increasing network difficulty.

Since bitcoin is the best monetary good ever created and we are watching the world begin to monetize it, it’s likely a fantastic idea to stack more sats when it begins to get exponentially more scarce, as indicated by hash ribbon bottoms. This is about to occur again for the twelfth time in history.

TLDR: Use hash ribbons to time bitcoin buys when price has dropped and sell pressure is likely exponentially dropping too.

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Why Bitcoin Eats Altcoins For Lunch

Other cryptocurrencies have no chance at all in competing with the monstrously large Bitcoin network.

Mimesis Capital: Inside The Event Horizon, Report #16

Bitcoin Versus Ethereum And Other Alts

It’s been “alt season” for the past couple months. Bitcoin has remained situated around $50,000 while Dogecoin, Shiba Inu and Ethereum are soaring.

While short-sighted gamblers like to make bets on the next big dog meme coin, it’s important to review the basics of why bitcoin has accrued value and compare bitcoin to other tokens.

Bitcoin is the best monetary good.

Why? It has specific credible properties: scarce, durable, portable, transactable and so on.

From these properties, we can derive two unique characteristics:

  1. No counterparty risk
  2. No dilution risk

These two characteristics can only be maintained by having the ability to hold your own private keys and run your own full node.

No other coin or token can even compete with bitcoin on these properties and characteristics.

Therefore, no other coin or token can compete with bitcoin as being the best monetary good.

Like the invention of the number zero, “Bitcoin is a path-dependent, one-time invention; its critical breakthrough is the discovery of absolute scarcity — a monetary property never before (and never again) achievable by mankind.” — Robert Breedlove, “The Number Zero and Bitcoin”

The point of money is being able to send wealth through time and space. Bitcoin’s unique properties enable it to do that better than any other good. Since money is a winner-take-all, network effect–driven good, individuals game theoretically converge on bitcoin as a Schelling point due to its specific properties and characteristics.

“Each digital value network carries a network effect, the strength of which can be approximated by the $ value of each. (Shown here as size of circle, with accurate scale.) 

With your hard-earned money at stake, pick which circle others will value most.” — @croesus

Why Do Ethereum And Other Alts Have Value?

First, ETH is a token.

Before its launch, 71% of ETH was premined. Some of this ETH was given to developers, but it was mostly distributed to ICO investors.

ETH clearly has not and cannot compete with bitcoin on being a monetary good as its monetary policy has and never will be credibly perfect like bitcoin.

Instead ETH is “pitched” as a promise to be useful in a variety of different applications. Since ETH is a token and not equity in a corporation, the community attempts to create both supply and demand narratives to incentivize speculators to buy and hold the token.

The ETH community must continue to come up with unique narratives that rationalize a reason for holding ETH. It must continue changing if it wants to bring in new buyers.

Some of these include demand use cases like issuing ERC-20 tokens, DeFi, NFTs and DAOs.

Other narratives are supply driven, like “Ultra-Sound Money,” where the community has recently started to argue that ETH supply could potentially decrease over time.

The unethical part of this is some people pitch ETH as “ultra-sound” money, something that is supposedly “better” than bitcoin.

This idea of ETH being “ultra-sound” money is scammy and misleading.

In fact, ETH is actually copying the monetary policy of an ERC-20 token built on ETH, $BOMB. This token has a monetary policy that dictates that supply will forever decline.

The market cap of $BOMB is $3 million. If ETH successfully copies $BOMB and becomes worth just as much, it will trade at $0.02 per ETH, a rather large drawdown from $4,000.

Of course, since this token has a constantly decreasing supply, it should confirm that supply itself (or “ultra-sound” money) does not make a token a good monetary good.

Unlike bitcoin, whose value accrued as a game theory Schelling point from the organically decentralized, credibly fixed nature of its monetary properties, ETH’s value is derived from promises and speculation.

ETH must continue changing and promising more applications and usefulness otherwise why hold the token? The hope is simply that it becomes more scarce and more in demand, forever. Like most startups and bubbles, it’s not the underlying fundamentals that give the asset value, it’s the hope and/or speculation of what it could become.

Like stated above, ETH is a token. It’s useful if you want to use the Ethereum blockchain. It’s not money.

The ETH token is like a Chuck E. Cheese token to use the Ethereum blockchain.

ETH’s best-case scenario: There are sustainable, long-term, useful applications on the Ethereum blockchain that are not able to be built on Bitcoin or Bitcoin second layers, don’t require perfect censorship resistance or decentralization (average person can’t run an Ethereum node), and wouldn’t just be more efficient as a product or service offered by a corporation.

Potential use cases:

  • Buy an NFT or buy a Fortnite skin (corporation)?
  • Trade on DeFi exchange or trade on Binance or Coinbase (corporation)?
  • Get a DeFi loan or get a loan from Unchained Capital, BlockFi or HodlHodl (corporation)?
  • Casino, gambling or speculation (e.g., Dogecoin, ETH, and all other alts)?

The ONLY major use case for a blockchain is money (bitcoin). For money, you need censorship resistance and decentralization in order to have the best credible monetary properties.

With that said, even if some of these use cases do play out, it doesn’t mean the token (ETH) would accrue value.

When Chuck E. Cheese launched in 1977, you should have bought equity in the business, not their tokens.

ETH And Alts Are Riding Bitcoin’s Monetization

All alts are riding the success of bitcoin. On top of bitcoin’s monetization process, unprecedented monetary and fiscal policy leads to a breakdown in the pricing mechanism of “free” financial markets.

Traditional finance doesn’t understand bitcoin, and they bring their idea of diversification to the world of monetary goods (not a good idea). In addition, retail speculators are shortsighted and constantly looking for the next big thing (SPACs, GME, Dogecoin, ETH, Tron, etc.) to get rich quickly. They fall for unit bias and chase price.

At the end of the day, alts fall to the greater fool theory. Can I sell my token to someone else at a higher price?

The best monetary good (bitcoin) becomes money, and the rest are nothing more than gambling in a casino. Dogecoin (nothing more than a joke/meme) closing in on Ethereum as the number three coin should help shed more light on that.

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Why Does Bitcoin’s Price Make Random, Sudden Downward Moves?

The bitcoin market’s volatility is a well-cited aspect by naysayers—but what causes it?

Mimesis Capital: Inside The Event Horizon, Report #15

Why Does Bitcoin’s Price Make Random, Sudden Downward Moves?

A common knock on bitcoin is that it is “too volatile.”

There is no denying that bitcoin is a volatile asset. Its price action supports this conclusion on nearly all time frames (including minute, hour, daily, and yearly).

However, volatility isn’t necessarily a bad thing. In fact, volatility creates opportunity.

Over long time horizons (4+ years), bitcoin’s volatility has been mainly to the upside. Using this longer time horizon helps to eliminate the noise and focus on the signal.

Volatility and return can be assessed using something called the Sharpe ratio, which measures risk-adjusted return. The Sharpe ratio is the result of dividing the asset’s return by its risk/volatility over a 4-year HODL period.

Bitcoin’s Sharpe ratio has been higher than that of every other asset class throughout its entire existence. This is one of Wall Street’s favorite financial metrics, and it screams, “Buy bitcoin,” as it shows that the return of holding bitcoin has more than compensated holders for its historical level of downside volatility.

Large, Quick Downward Moves

Why does bitcoin have such large, sudden downward price moves? What is causing these massive corrections in such short times?

April 18th, 2021
February 22nd, 2021
March 12th, 2020

Unlike equities (stocks), which tend to be traded aggressively on earnings days (days when companies’ performance and future guidance fundamentally change), bitcoin tends to be traded aggressively on seemingly random days.

This strange phenomenon tends to confuse traditional commentators and journalists as they struggle to find any news piece that could have affected the price so drastically.

Eventually, someone finds some possible explanation, and it immediately gets circulated as a result of confirmation bias.

Examples:

  • “Bitcoin fell 10% because of the Biden tax hikes”
  • “Bitcoin fell 10% because of a (false) exchange inflow of 10,000 BTC”
  • “Bitcoin fell 10% because Yellen is pushing for an 80% capital gains tax on crypto” (fake news)

Although a small number of individuals may be placing buy or sell orders based on one-off news stories, they likely aren’t the sole driver of the sudden bitcoin price crashes that we regularly see.

In reality, many people retweeting and spreading the news that bitcoin’s price crashed because of X are simply being “Fooled by Randomness.”

Leverage Liquidations

Although X may be one of many catalysts, the large downward moves are often driven by excessive leverage in the system.

This may confuse some people because by definition, for every buyer of a futures or perpetual swap contract, there must be a seller. However, the prices of those contracts change based on the market’s balance between longs and shorts.

For example, a funding rate is charged that helps exchanges to keep the perpetual swap price in line with the spot price. If the general market sentiment leans long, then the funding rate likely results in longs paying shorts every 8 hours. This is why bitcoin futures contracts trade in contango during a bull market.

Parker Lews from Unchained Capital explains leverage liquidations well by stating that “Bitcoin eliminates imbalance.”

If there are too many leveraged longs on bitcoin without simultaneous buying pressure in the spot market, the current price may temporarily be unsustainable.

As @WClementeIII explained, an overleveraged market is similar to a Jenga tower built on a fragile base. If the funding rates and the futures contango are extremely high without significant buying pressure in the spot market, the Jenga tower only needs a slight push before it comes crashing down.

These leverage liquidations result in an ugly negative feedback loop:

  1. Price falls.
  2. Highly leveraged longs get liquidated (forced sellers).
  3. Price falls further.
  4. Less-leveraged longs get liquidated (more forced sellers).
  5. Traders see falling prices and jump on the trend.
  6. Price falls.
  7. Repeat until the fragility of systemic leverage is eliminated.

This imbalance, driven by excessive leverage, results in volatility. This volatility results in coins getting transferred from weak hands to strong hands that understand bitcoin. After weak hands sell, the price must adjust to the new equilibrium.

A new base of strong holders is then built at a more sustainable price level, and then bitcoin’s parabolic bull run continues, as it has for more than a decade. This is all due to individuals game theoretically converging on Bitcoin as a Schelling point because of its superior monetary properties.

Contango? Hyperbitcoinization?

Some may ask, if excess leverage is a key reason why these sudden downward price moves occur, how can the futures curve contango be good for Bitcoin, especially if the curve is driven by the demand to place leveraged long bitcoin purchases?

First, the contango basis trade still exists, and it is profitable for a low-risk USD-denominated trader to buy spot, sell futures, and capture the spread. With that said, if the curve gets too high without enough capital coming in to execute the basis trade or buy spot, the contango/funding rate could get unsustainably high.

If the funding rate or contango curve gets too high without significant buying pressure in the spot market driving up the price, then the price could be driven up on a fragile base of leveraged longs paying high funding rates. If so, it could potentially crash violently.

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Bitcoin Versus Bonds: Asymmetric Assets

The asymmetric upside of bitcoin is tangential to bonds’ asymmetric downside as traditional treasury assets collapse.

This article is a republishing of “Mimesis Capital: Inside The Event Horizon, Report #14”

Bitcoin Versus Bonds: Asymmetric Assets

Jack Bogle, the founder of Vanguard, popularized the idea of a “60-40 portfolio.” The 60-40 portfolio is the basic idea that passive investors looking to efficiently transfer wealth through time should diversify their assets into 60% stocks and 40% bonds.

If bitcoin’s performance over the last decade tells you anything, it should scream that the 60-40 portfolio is dead.

Yale’s endowment fund is a prime example of forward-thinking asset allocation. As of 2020, the endowment held only 6% of their portfolio in bonds, and they also began stacking bitcoin.

What is the catalyst for this shift by “smart” money?

Why Shift Out Of Bonds Into Bitcoin?

First, bitcoin is the world’s hardest monetary good. It is the only asset with no counterparty risk and no dilution risk and is therefore “the world’s safest asset.”

These two unique characteristics will eventually enable Bitcoin to store a near-infinite amount of wealth. This means that the upside of allocating capital (savings) into bitcoin is orders of magnitude higher than its current market price.

Additionally, the maximum potential downside of using Bitcoin is -100%, meaning that it is only possible to lose what you put in.

Asymmetry

These unequal potential outcomes create a unique dynamic called asymmetry.

The potential asymmetric return of Bitcoin becomes even more interesting because it is nearly inevitable in the long run, and total loss is nearly impossible.

In contrast, traditional fiat-denominated debt held by investors as bonds and bank deposits has a similar asymmetric return, but to the downside.

Unlike the case with bitcoin, the potential return of a 10-year US Treasury Note is only 1.63% annually. If you hold the 10-year note to maturity (a total of 10 years), you cannot earn more than that predetermined return (denominated in USD). At best, this would somewhat “retain” your purchasing power more than holding cash under your mattress.

Nominally, the potential downside of storing wealth in bonds isn’t that bad (depending on to whom you lent the money). In real terms, holding bonds could be catastrophic: ou could be risking 100% of your real capital for a measly maximum 1.63% nominal return.

Bitcoin Is Antifragile And Bonds Are Fragile

Nassm Taleb popularized the idea that the opposite of fragile is not robust, but antifragile. Fragile systems break under stress, robust systems tend to remain fortified under stress, and antifragile systems become stronger under stress.

Bitcoin can be viewed as the most antifragile asset in the modern financial system, whereas bonds may be viewed as the most fragile asset in the financial system.

A fantastic example of this dichotomy is asset performance post-COVID. The global pandemic was a massive shock to the world that unleashed massive volatility, disrupted cash flows, and business insolvency.

In the short term, in March 2020, Bitcoin appeared to be fragile, and Treasury bonds appeared to be antifragile. However, massive unprecedented economic shifts took time to play out once all rational economic actors responded. The pandemic and financial shock were inevitably met by massive amounts of fiscal spending and quantitative easing by governments and central banks worldwide.

Since before COVID began, long-term treasury bonds (TLTs) are down by 1%, whereas Bitcoin is up by more than 677%.

Although TLTs have dropped by 1% nominally, the situation is much worse in real terms. For example, TLTs are down by 85% denominated in Bitcoin.

>$100-Trillion Global Bond Market

As of August 2020, the total size of the global bond market was approximately $128.3 trillion, which is more than 100✕ the size of Bitcoin at $1.1 trillion.

This massive size difference comes at the end of a 40-year bull market in bonds, meaning that rates have hit all-time lows and have nowhere to go except remain at extremely low levels, or slowly creep upward.

Image Source

For deeper insights on global debt cycles, I recommend “How The Economic Machine Works” by Ray Dalio and “The Conclusion of the Long-Term Debt Cycle and the Rise of Bitcoin” by Dylan Leclair.

Bitcoin And Macro Backdrop

In a world of extremely low bond yields and massive inflation driven by government and central bank fiscal and monetary policy, there is only one asset worth holding in size: bitcoin

Bitcoin’s relative lack of adoption combined with its perfectly increasing scarcity made it the best-performing asset of the last decade, and it will likely be the best-performing asset of the next decade as well.

Image Source

TLDR: Drop everything and stack bitcoin, and if you don’t do that, at least drop bonds for it.

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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A Deep Dive Into Bitcoin’s Contango

The fact that bitcoin is trading in contango presents a remarkable investment opportunity and suggests hyperbitcoinization. But what is it?

Bitcoin is trading in contango. But what does this mean?

Now, what’s a futures contract?

Currently, the spot price (market price for bitcoin on exchanges) trades lower than futures prices. The spread for the June futures contract is more than 25 percent annualized on most major exchanges.

This means that anyone can buy bitcoin and use that bitcoin as collateral to sell the June futures contract. This trade locks in a risk-free 6 percent USD-denominated return (more than 25 percent annualized) no matter where the price of bitcoin goes over the following months.

The only risk is exchange custody (losing coins due to poor management or hacks).

Why Does This “Free” Money Exist?

The contango exists due to how profitable it is to leverage long bitcoin (and the amount of capital willing to go leverage long versus leverage short).

Almost everyone goes leverage long on bitcoin in two ways:

  1. Long perpetual swaps
  2. Long forward futures contracts

Currently, there is $22 billion in open interest on perpetual swaps and futures], so there is a significant amount of capital and liquidity.

If you go long on the perpetual swap, you are charged a funding rate every eight hours. This funding rate is set by the market to ensure the perpetual futures price stays near the index spot price. In a way, it is basically a futures contract that is only eight hours in duration and it always rolls over.

Over the last month, the perpetual swap has been averaging around 0.03 percent every eight hours, or 0.09 percent daily or 32.9 percent annually. This funding rate is the longs paying the shorts (because more capital is naturally going to be long bitcoin, especially when the price is going up).

So, if you want to go leverage long for an extended amount of time, and the perpetual swap funding rate is high, then you’re much better off going leverage long on a futures contract that may only be trading at a 23 percent annualized premium.

But again, just like the swap market, not many investors want to leverage short-forward futures contracts. A large portion of the capital that is short bitcoin is likely doing the basis arbitrage trade.

What Are The Implications?

It’s possible that bitcoin’s contango has created a super massive black hole.

The Ever-Growing Bitcoin Black Hole:

  1. Bitcoin is the world’s best monetary good designed to go up forever
  2. Market participants buy and the price goes up
  3. Price going up attracts more buyers (with leverage)
  4. Leverage buyers drive up the contango spread
  5. USD arbitrageurs attempt to capture the risk-free return
  6. To capture the spread, they buy bitcoin and sell futures
  7. Buying bitcoin causes the price to go up further
  8. Price going up increases the contango spread, attracting more arbitrageurs
  9. Investor recognize this feedback loop exists and just buy bitcoin to HODL
  10. Repeat for all market participants until hyperbitcoinization?

Why Has This Not Been Arbitraged Out?

The bitcoin contango basis trade is adding gas to the fire. As more and more capital begins to recognize this opportunity, the price of bitcoin will continue to increase.

There are a few possible explanations for why this spread hasn’t been arbitraged out. Since a truly “efficient” market would likely eat up any “risk free” 20 percent yield opportunities.

One possibility is that the only people in the bitcoin industry who have both a good understanding and the capital to move markets recognize that in order for the spread to be potentially closed, there must be billions of dollars’ worth of bitcoin purchased. If there’s an incentive to purchase billions of dollars’ of bitcoin and you know bitcoin is the world’s hardest monetary good, you likely aren’t going to accept the “risk-free” more than 20 percent because you know bitcoin will outperform that over the long run.

The second possibility is simply that the $100 trillion-plus of excess capital invested in bonds, stocks and real estate is held by investors who don’t know that the futures arbitrage trade exists, or they don’t feel comfortable deploying capital in the space yet.

The last possibility is that the risk-free spread could represent a truly market-based, “risk-free” rate of return. Since bond yields have been manipulated lower and lower over the previous decades, this more than 20 percent could be the market’s way of saying it expects stocks, real estate and other assets to perform in line with this, plus a small risk premium. This high expected nominal return could be possible due to the endless fiscal spending by governments financed by the dovish monetary policies of central banks.

What Could Break The Contango?

Bitcoin only going up sounds great on paper, but what could eliminate the futures contango?

Since the futures contango is driven by more money wanting to leverage long than leverage short, this dynamic would need to flip, meaning more capital would need to be going leverage short than leverage long for bitcoin to switch from contango to backwardation.

With the macro money printing backdrop, finite bitcoin supply and a growing number of bitcoin yield and lending products, there is little reason to expect this to occur, at least anytime soon.

With that said, there are a few potential scenarios where bitcoin’s contango breaks and turns into backwardation.

One, old HODLers could start selling in size. This may not happen due to a growing number of financial products that make it easy to use bitcoin without selling it.

Two, people could read too deeply into @100Trillion’s S2F and S2FX models. If bitcoin’s price overshoots the models, some may consider selling in order to buy back lower. While this would be very risky, especially in the current macro environment, if enough market participants do it, it could become self fulfilling.

Last, a drastic change in monetary/fiscal policy could temporarily break the contango. For example, during the March 2020 crash, when the money printer wasn’t going brrr fast enough, bitcoin went into backwardation.

Is This Hyperbitcoinization?

We are not sure. Would we feel comfortable selling a significant amount of bitcoin at any price?

Absolutely not.

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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What Percentage Of Wealth Stored In Stocks Will Move Into Bitcoin?

As bitcoin eats into capital held in other stores of value, how much wealth will eventually transfer to BTC from equities?

If you’ve been following potential bitcoin price targets, you know that many analysts expect bitcoin to completely consume or eat into portions of gold, money supply (M2), global fiat-denominated debt, stocks (equities) and real estate.

Once you’ve grasped the implications of bitcoin having no counterparty risk and no dilution risk, you should recognize that bitcoin will fully inhale all wealth stored in gold, M2 and global debt, but what portion of the wealth stored in equities (stocks) will be reallocated into bitcoin?

It’s a very complicated idea to ponder.

Two weeks ago, we published our thoughts on how the valuation of a fictional company, Wyoming Red Ribeyes, would change post-hyperbitcoinization. Now, we’re going to dive in a bit further and run a scenario analysis that shows how much the valuation of a typical S&P 500 company would change based on two relatively unknown predictor variables:

  1. The BTC inflation rate: How do we expect a relative CPI index (price of goods) to trend over time?
  2. The BTC equity risk premium: What expected percentage return (BTC denominated) will motivate investors to invest their BTC into publicly-traded equities?

BTC Inflation Rate

It is realistic to expect the average BTC consumer price index (CPI) inflation to fall somewhere between 0 percent and negative 10 percent. The current system attempts to produce roughly 2 percent CPI inflation annually. Since the Bitcoin monetary standard operates under a fixed supply, bitcoin savers will be rewarded with all future productivity enhancements through lower and lower prices.

Generally, it is reasonable to expect a CPI of roughly negative 5 percent, which indicates that economic growth under a Bitcoin standard will be faster and more sustainable.

BTC Equity Risk Premium

An equity risk premium is the excess return that investing in stocks is expected to provide over a risk-free real return of simply HODLing bitcoin (or potentially earning yield on Lightning Network lease channels).

This is difficult to predict as it will ultimately come down to the bitcoin HODLers. They will be the ones to determine the equity risk premiums they are willing to accept for their bitcoin.

Based on current bitcoin-denominated lending rates (6 percent at BlockFi), we would likely expect the equity risk premium to be above this, since this is the rate for fairly safe debt, hence “equity risk premium.” It may be realistic for an S&P 500 company to have an equity risk premium between 0 percent and 30 percent.

While this depends on how the market weighs specific business risks, generally it is reasonable to expect around 10 percent, which indicates that investors won’t be willing to part ways with HODLed BTC unless they expect a 10 percent return to accompany the risk of investing in a publicly-traded equity.

What Store Of Value (SoV) Percentage Is In Equities?

Below is a data table that displays what percentage of wealth stored in publicly-traded equity valuations is simply looking for a generic SoV (i.e., bitcoin). Note that this data table is using the discounted cash flow (DCF) models of Wyoming Red Ribeyes as a typical fictional S&P 500 company.

The two predictor variables, BTC inflation and BTC equity risk premium, are the only two variables changing in the DCF models.

Looking at our estimations of negative 5 percent BTC CPI inflation and 10 percent BTC equity risk premium, the estimated SoV percentage currently stored in public S&P 500 equities is 77 percent. This indicates that 77 percent of the real wealth stored in the S&P 500 could re-allocate to bitcoin.

This estimation varies depending on the two predictor variables. For example, on the low end (0 percent equity risk premium and 0 percent inflation), bitcoin will only capture 46 percent of the wealth stored in publicly-traded equities. However, on the high end (30 percent equity risk premium and negative 10 percent inflation), bitcoin will capture 90 percent of the real wealth stored in the S&P 500.

Updated Price Targets

Starting with the baseline assumption that Bitcoin eats the wealth stored in gold, M2 and global debt, we begin at $17.1 million per BTC.

If we use our analysis to determine that bitcoin will intake 77 percent of global equities, that pushes the total BTC market cap to $427.9 trillion, indicating a price of $20.4 million per BTC. From there, we can conservatively add in that bitcoin will take the SoV out of real estate (50 percent of total real estate), which pushes us to a total BTC market cap of $568.4 trillion, indicating a price of $27 million per BTC.

Compared to our previous price target incorporating both stocks (50 percent) and real estate (50 percent), it only increased by $1 million (from $26 million to $27 million). However, $1 million BTC sounds pretty great right now.

Future Research

We want to also dive into real estate valuations, since we simply used a baseline of 50 percent to determine the wealth stored in real estate that will be absorbed by bitcoin. This could be higher or lower. In addition, we could further attempt to price in the future the productivity gains that bitcoin will bring, as well as the high propensity to hold a counterparty-risk-free and dilution-risk-free asset.

The global wealth numbers originated from Visual Capitalist and the ”Mimesis Bitcoin Investment Research Report.”

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Valuing Companies Post-Hyperbitcoinization

How will companies be valued once bitcoin is universally used as a unit of account and measuring stick of worth?

Bitcoin will fundamentally change the way that investors value companies.

Upgrading monetary technologies is a radical paradigm shift that will leave many financial “experts” confused. Our current monetary system, the U.S. dollar, is based entirely on an ever-growing mountain of debt. In contrast, the Bitcoin monetary system is equity-based, with no counterparty risk and no dilution risk.

Once the world has completely embraced bitcoin as the superior monetary good, we will be living in a post-hyperbitcoinization world. Let’s experiment and see how a company will be valued using bitcoin as our unit of account or measuring stick of value.

Wyoming Red Ribeyes

The fictional company we will use for this example is Wyoming Red Ribeyes. It is a small cap, consumer staples, wholesale beef supplier that raises cattle and then sells premium beef to grocery stores in the U.S.

We will analyze this company with a discounted cash flow (DCF) analysis. Put simply, we attempt to predict the future cash flows the business will generate, and discount those cash flows to today’s value.

Two DCF models are created. One model is analyzing the company in a world where prices are driven by USD-denominated investors (today), and the other model is analyzing the company in a world where prices are driven by BTC-denominated investors (post-hyperbitcoinization).

USD-Denominated Model (Pre-Hyperbitcoinization)

Before we create the full model, we need to lay out our assumptions.

First, let’s assume the current variable cost per ribeye produced is $5, and the price that Wyoming Red Ribeyes sell it for is $10. Based on previous years’ sales, we expect 10 million ribeyes to be sold this year. Other expenses, including selling, general and administrative expenses, historically equal about 25 percent of annual revenue.

Additionally, we expect its unit costs to rise 2 percent per year (consumer price index inflation), and it will pass that on to its customers by raising our prices 2 percent per year. It also expects to increase the number of ribeyes sold by 2 percent per year, as U.S. beef consumption is steadily growing.

Last, Wyoming Red Ribeyes expects to sell the business in 10 years at a price-to-earnings (P/E) ratio multiple of 25 (the S&P 500 Consumer Staples average), and it will discount its projected future cash flows back to today’s value using the company’s weighted average cost of capital (WACC) as its discount rate. This company is financed with 50 percent debt and 50 percent equity, with a cost of debt equaling 100 basis points (bps) above the risk-free rate (based on a 10-year treasury note) and an equity risk premium of 5 percent.

Above is the USD DCF model (hiding years four to nine for display purposes). Three things are very notable: One, we can see that revenue starts at $100 million and continues to grow over time. Two, earnings start at $25 million and also continue to grow over time. And three, the implied market cap is just below $1 billion.

BTC-Denominated Model (Post-Hyperbitcoinization)

Before we create the full model, we need to lay out our updated assumptions since all prices will now be denominated in bitcoin.

First, we updated the unit cost to be 50 sats and the price at which Wyoming Red Ribeyes sells a unit to be 100 sats. This corresponds to roughly $5 and $10, respectively, at $10 million per BTC. Based on previous years’ sales, Wyoming Red Ribeyes still expects 10 million ribeyes to be sold this year. Other expenses, including selling, general and administrative expenses, historically equal about 25 percent of annual revenue. It is possible that this percentage would be decreasing over time, but for simplicity, we’ve kept it stagnant.

Unlike in our USD-denominated analysis, Wyoming Red Ribeyes can anticipate both its costs and its prices to decline by 5 percent annually. This is due to bitcoin’s natural deflationary nature allocating productivity gains to bitcoin savers. These productivity gains could be from an infinite amount of sources, including: automated energy production; self-driving delivery trucks; automated packaging and distribution; automated feeding, breeding and slaughter processes; or new software driving other unforeseen enhancements.

Last, Wyoming Red Ribeyes expects to sell the business in 10 years at a P/E multiple of seven, and we will discount our projected future cash flows back to today’s value using the expected equity risk premium under a Bitcoin standard, 10 percent. The P/E ratio is expected to be around seven and the discount rate is expected to be around 10 percent in order to better compensate the risk that the investor is taking relative to the new opportunity cost of simply HODLing bitcoin. The discount rate could possibly be higher and the P/E could possibly be lower.

Above is the BTC DCF model (hiding years four to nine for display purposes). Four things are very notable: One, we can see that revenue starts at 10 BTC and continues to decline over time. Two, earnings start at 2.5 BTC and also continue to decline over time. Three, the implied market cap is just above 20 BTC. And four, and most notably, the real USD equivalent market cap is less than one-fourth the valuation in the USD-denominated world.

Bitcoin Swallows “Store Of Value”

As you might have expected, this massive drawdown in (real) valuation is simply taking the “store of value” aspect out of the equities, since that value will be stored entirely in bitcoin. However, it may be better to think that equities won’t fall in (real) value, but instead the amount of actual savings in the economy must increase by multiple orders of magnitude. I.e., the value per bitcoin must go very high.

Ultimately, bitcoin HODLers will be the ones who price equities in a bitcoin world, and they will be the ones who determine at what equity risk premiums they are willing to part ways with their bitcoin. The types of companies and projects that get funded in a bitcoin world will be high value, low time preference endeavours, as that will be the only way to obtain positive free cash flow.

The high equity risk premium doesn’t necessarily mean that fewer projects will be funded. It is likely that the value of bitcoin will rise so high that large HODLers will have so much wealth to fund all sorts of interesting ventures, while still retaining a significant amount of their BTC as savings.

Bitcoin will usher in a new era of price discovery for markets by eliminating government and central bank intervention, obliterating the idea of debt and allocating all risk free “store of value” wealth to bitcoin. It is likely that the amount of wealth humans will be willing to store in a risk free “store of value” asset with no counterparty risk and no dilution risk is incomprehensible.

This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

Categories
Crypto News Updates

2021 Bitcoin Investment Research Report

Bitcoin, the decentralized digital currency, was established on January 3, 2009 by Satoshi Nakamoto, the pseudonymous developer(s) who pieced together its original source code. Satoshi mined the very first Bitcoin block and received 50 BTC for the work. After that, the decentralized cryptocurrency network was born, and it would begin to grow and spread throughout the world like a virus.

Bitcoin’s price has surmounted a wall of worry since this 2009 origin. It went from few people thinking it has value, to millions of people around the world buying and saving bitcoin, including some of the world’s top investors like Bill Miller, Paul Tudor Jones, Stanley Druckenmiller and Larry Fink. And one of the more fascinating things behind the rise of bitcoin is its organic nature. Bitcoin has no CEO, no centralized organization and no marketing department, yet it has still become a multi-hundred-billion-dollar asset. The objective of Mimesis Capital’s “2021 Bitcoin Investment Research Report” is to dive into why bitcoin was the best performing asset of the last decade, and provide an outlook for 2021.

In the Mimesis Capital bitcoin investment research report for 2021, we cover bitcoin’s repeated parabolic price history, why bitcoin has value, three key exponential network effects, the stock-to-flow scarcity pricing model, its potential long-term opportunity, our outlook for 2021, the idea of “escape velocity” and more. It aims to be the ultimate modern guide on bitcoin, designed to provide unique, data-driven insights that support the inevitable adoption of bitcoin as the world’s greatest form of money. Our research is specifically written for family offices, institutional investors and corporations looking to adopt bitcoin as their treasury reserve asset, but we are publicly publishing this research for all individuals.

Who are we? Mimesis Capital is a family office that focuses on wealth preservation through bitcoin, equity investment and investment-grade art.

As a firm, we believe that bitcoin has ignited a generational wealth transfer. Bitcoin is a system capable of storing monetized energy without dilution. It is a revolutionary discovery of a new digital good that has the unique properties of being scrace, durable, divisible, transactable, portable and fungible, all in a decentralized manner. We believe that Mimesis Capital has recognized the implications of the discovery of bitcoin before the world at large, and we are capitalizing on this pivotal transition.

Based on our research and unique perspective, we believe that bitcoin is the pristine primary treasury reserve asset. In addition, we think bitcoin can serve as our investment benchmark and unit of account. The rest of the world is trying to accumulate more dollars, while we are trying to accumulate more bitcoin. Dive into our publicly-available “2021 Bitcoin Investment Research Report” to understand our thought process, peer into how we came to the conclusion that bitcoin is the world’s best monetary good and access data-driven insights that support our analysis.

Access the full “Bitcoin Investment Research Report for 2021.”

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Source: Bitcoin magazine