Welcome back
More than anything, I don’t want to be the guy who died wondering. I’m long bitcoin (not investment advice), I think fiat currency is a giant fraud, I think the rest of the world is an enormous bubble benefiting very few people. As far as I’m concerned this decade will prove me wrong or prove me right. I’m buying bitcoin, I’m not buying shares in Apple or Raytheon or Bayer and I don’t want Donald’s bonds. Other than that, I’ll spare you any predictions, I’ve put my money where my mouth is and we’ll let the numbers do the talking.
So, roll on the 2020s. Starting them off was the biggest cryptocurrency fund in the world, the Grayscale Investment Trust, which reported this week. Here’s their year in 2019:
| GRAYSCALE | Q1 | Q2 | Q3 | Q4 |
| Bitcoin sales | $42m | $65m | $172m | $193m |
Safe haven
In what may become an increasing trend, bitcoin appeared to respond positively to global political volatility, adding 22% during the height of the Iran conflagration. The chart implies a strong move into bitcoin as tensions heightened and investors moved into ‘risk off’ mode.
I must say, I don’t personally subscribe to this point of view. Bitcoin is still hugely volatile, I can’t think that people are ready to charge into an asset that can lose 30% in a day at the first sign of global instability. A view backed up by the fact that we now have a China trade deal and a deescalation in Iran but the bitcoin price is even higher, at US$8,700. Quite possibly in time bitcoin will be seen as a safe haven but there are other factors that are far more influential on the bitcoin price than geopolitics at this stage.
So, safe haven? No. Asymmetric investment opportunity of a lifetime, I think so.
The monetisation of debt
- Will this policy and printing be reversed this year such that the process the Fed began in 2018 resumes and the balance sheet returns to normal? I suspect it will continue with vigour.
- With markets at all time highs (S&P, Nasdaq, housing), US unemployment at record lows will the Federal Reserve really cut the interest rate in 2020? That is what the market predicts and the President just appointed two new members of the rate setting committee who favour a cut.
Hash rate
The bitcoin hash rate hit a record high in early January. The actual number is irrelevant but this is worth knowing and following if you are interested in the relationship between mining and price:
Mining in a nutshell
- Mining bitcoin involves using a fast computer to solve a mining puzzle
- The computer burns energy. If you are a big miner, it’s a lot of energy
- That’s why so many miners use renewables (it’s cheaper and they do deals to absorb excess renewables often getting the power for near zero cost)
- If you solve the puzzle you can make USD100,000 every 10 minutes (12.5 BTC) but you will spend a lot in electricity doing it
- The more efficient your processors and lower your electricity cost, the more profitable your operation will be.
- With this in mind, the next chart is fascinating. It compares the ratio of bitcoin market capitalisation to the amount of electricity consumed by bitcoin in mining (this can be found here on an excellent site known as the Cambridge Bitcoin Electricity Consumption Index) – the Bitcoin Mining Energy Ratio.
The green zone is a good time to buy and we are in it now. Here’s why:
- The black line is the Ratio of Market Cap BTC/Consumption KWH
- A low number means the price, relative to the electricity used to mine bitcoin is low
- A high ratio means the price relative to electricity costs is high and because of the mining dynamics, miners will go bust and sell coins, meaning the ratio is likely to fall
It sounds too simple to be true but I find it a reasonable analysis because it is grounded in real businesses and hard energy costs. Historically, it has been strongly predictive of good buy signals, less so with sells though.
Fundamentally
Energy and bitcoin are the same thing. You can convert one to the other and back again, that is the whole value proposition. In the end, you can’t fake energy, you can’t print it and you can’t create bitcoin without burning energy. That’s the whole point and it has dawned on almost nobody, but it will.
First futures, then options
The CME launched bitcoin options this week. Interest in the futures market is at all time highs reflecting the strength of institutional involvement and options provide another angle for exposure and hedging.
When futures launched I mentioned that they were only for the very brave, I suggest the same is true of options but the more derivatives we get the more likely we are to see growing liquidity in bitcoin.