Bitcoin is Dead!

Finally, it’s over. For the 449th time, Bitcoin has been pronounced dead. You can forget about it now. If you sold yours last year, well done. If you were a sceptic all along and never owned any, congratulations. You have been proven correct! RIP BTC…

If bear markets in stocks are not depressing enough, crypto winters are a dank, cold graveyard. You don’t want to be there at night, shivering and hearing strange noises. Unless you are me, and have cheerfully been nosing around Bitcoin Obituaries and Bitcoinisdead.org in search of proof of capitulation. Personally, I’ve only experienced one crypto winter to date, that of 2018/19, but it all looks very familiar around here at the moment.

First a disclaimer: I am not a “Bitcoiner”. In fact, I find the majority of Bitcoin cheerleaders mildly annoying at best. I’m not an OG, a cypherpunk, or a crypto bro. I’m a financial planner by trade and an investor learning on the job. I’m interested in markets and money, which involves a fair amount of poking around and peering into the future. I don’t believe Bitcoin is going to fix the world’s problems, but I think it will change some things. And right now, I think it is on sale.

Imagine being an investor and not having even one dollar invested in an asset that looks like this:

Now imagine being a financial journalist tasked with writing about an asset that looks like this:

Source: @cryptohayes

When the Director of Global Macro at Fidelity is posting charts like the first one, it is hard for me not to be quietly bullish. And with the regular dramatic drawdowns illustrated in the second chart, it’s hard for the financial media not to declare Bitcoin dead over and over again.

So should you really care about Bitcoin? Not unless you want to. There are far more important things in the world to devote your energy to. How about if you are an investor, trying to increase the value of your savings in the face of mounting inflation? Well, probably then yes, you should care, at least a little.

Bitcoin not crypto

Crypto is full of get rich quick schemes. Bitcoin, on the other hand, is a don’t get poor slowly scheme. Few understand this. I’ve lost count of the number of people I’ve met who have said something along the lines of “I’m just getting into crypto, but Bitcoin seems a bit expensive already so I bought some (enter name of soon to be dead sh*tcoin).” If we’re keeping things simple, which I generally prefer to do, Bitcoin is digital gold, Ethereum is programmable money, and everything else is a software startup staring into the abyss of its first global recession. It’s not that there aren’t other protocols out there with incredible potential, but only about 1% of them are ever going to survive and thrive, and you have to chuck a lot of darts at the board to pick the right one.

If you want to educate yourself about Bitcoin, then start with the Bitcoin Whitepaper. It’s only 8 pages long, and most of what you need to know is covered in the first 5 pages. Then you need to get your head around the 4 year halving cycle. And for good measure, read up on Metcalfe’s Law on network effects. In short, if we have a fixed supply, and increasing demand, number go up.

Size Matters!

Of course the increasing demand part is not a certainty, and herein lurks the risk. If nobody participates and buys or uses Bitcoin, then it will, of course, be worthless. That’s clearly not the direction it is going at the moment, but that risk is why you don’t go all in. You need to organise your balance sheet so you are never in a position where you have no choice but to sell. That means holding an emergency cash reserve, and keeping your investment size at a level where you can sleep at night. I’ve said it before: allocate according to your level of knowledge. Start small, and increase as your understanding grows. And be ready to adjust if circumstances change.

Four More Years!

The four year cycle is your guidebook and bible to investing in Bitcoin. 2013 and 2017 were bull market years. 2017 featured a (now) obvious blow-off top at $20k, so many of us believed the 2021 bull market would also come with an easily identifiable exit point. Instead it totally tricked us by topping once at $62k, going all the way back to $30k, then pushing back to $69k and looking like it was about to levitate to $100k before crashing right back to $30k again. So timing the market perfectly is extremely tricky, however catching the meat of the big moves is actually relatively straightforward. Remember, the idea is to buy low and sell high.

The 1-2 years after the bull market is the graveyard. All the news is negative. People who lost money in the crash are openly mocked. Even good news is met with a steady grind down in price. The occasional bear market rally leads to heavy selling by traders trying to make something back. This is the accumulation period. You will hate it, but this is when you dollar cost average and don’t pay much attention to where the price is headed.

Then comes the year of the halving. The grind down turns into a grind up. It’s not up only, and sudden drawdowns like March 2020 are entirely possible, but things are looking rosier. This comes in 2024 and you have two years to get ready for it.

2025 is when things get fun. It’s also musical chairs time. You don’t want to sell too early, but you better be quick if the music stops. The best way is to scale out just like you scaled in, selling a little at a time.

Can it really be so simple? Well, why not? This is how Bitcoin was programmed. Of course there are many variables and adoption rate, regulation, and the macro environment will all be important factors. A US spot ETF approval could speed up the exit from the bear market. More big corporates and nation states adding Bitcoin to their balance sheets could also be catalysts. Hey, China might even ban Bitcoin again! When you get into the game theory of the space things get very interesting.

What about Alts?

If you must sh*tcoin, then sh*tcoin responsibly! The time to buy Alts is at the early stages of the next bull run, and you need to buy a broad spread of them as you don’t know which ones will take off. Also, you need to be merciless about selling them when they pump, because when they crash they will crash 80% and then, just when you think the pain is over, they will drop another 50%. Sure, if there’s a particular Layer 1 protocol that you have studied and you’re convinced it’s a winner, feel free to accumulate through the winter, but remember what happened to Luna just recently. Are you really sure you have found the one coin to beat them all?

So do not despair this winter. Wrap up warm, allocate slowly. If we drop to anywhere near the 2017 all time high it’s time to get a little greedy, but never put yourself in a position where you could become a forced seller. And make sure you buy a little extra every time Bloomberg tells you Bitcoin is dead.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Living With the Bear Market

We humans are a complex bunch. I have heard that there are five stages of grief: denial, anger, bargaining, depression and acceptance. With covid, entire countries seem to have gone through their own version of this, which may or may not have included these stages: zero covid, flattening the curve, lockdowns, mass vaccination, and finally living with covid. In the end, it seems, we have to accept and live with whatever pains us.

So are we in a bear market yet? Some would argue not – the S&P 500 is down some 18% from its January peak, and bear markets are defined as falls of 20%. So they are correct, but the NASDAQ has already passed 20%, so it sure does sound a lot like denial, don’t you think? I’m generally an optimist, but I’ve come to appreciate the value of time as I get older, and therefore think we can all save some of this valuable commodity by skipping past anger, bargaining and depression and moving to accept the bear! Grrrr…

Spotted in Marunouchi recently.

So what is it like living with a bear? Well, let’s take a look at some of the qualities of this charming beast: Historically bear markets occur every 3-5 years, and on average they last about a year. The S&P 500 typically falls around 33% during bear markets, although a third of these delightful periods have seen drops of over 40%. Bear markets typically end, and bull markets begin, when investor confidence is at a low point. In terms of character, although they may start with a crash, bear markets tend to be a slow grind down, peppered with the odd burst of optimism. Yes, bear market rallies are very much a thing, usually spurred by some piece of good news. However, the rallies are generally short-lived, and then the grind downwards resumes.

As you have probably already guessed, trading the bear is not as easy as you may think. Sure, we would all like to sell the top and then go to the beach, only to return to buy the beginning of the next bull run, but trying to do that can seriously damage your wealth if the market turns around quicker than expected. This is from a post of mine back in 2017:

In the years 1980 to 2015, the S&P 500 experienced an average intra-year decline of 14.2%. However, the market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time. You cannot afford to be sitting on the sidelines while this is happening. In fact, the opportunity cost of doing nothing will cost you far more than any of the corrections, bear markets, and flash crashes:

“From 1996 through 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year. Can you believe it? Your returns would have been cut almost in half just by missing the 10 best trading days in 20 years! It gets worse! If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!” (from Unshakeable: Your Financial Freedom Playbook by Tony Robbins)

So how do you make the most of the slow grind downwards without trying to be too clever and missing out on the best trading days? First of all you need to stay calm. Bear markets are not the time for panic and dumping investments out of hand. If you are taking the time to read this blog you likely have a long term plan and there’s no need to deviate from that. Know your risk profile, stay diversified, and take this as an opportunity to accumulate assets at lower prices. Dollar cost averaging is your friend in the bear market. Rather than trying to catch the absolute bottom, keep investing little by little at regular intervals and build up your holdings at a nice average cost. Buy quality, buy what you believe in – this is not the time for speculation on penny stocks.

As to how this particular bear will play out, my thoughts, for what they are worth, are as follows:

  • The Ukraine situation is obviously a factor in inflation, but the main driver here is the Federal Reserve and other central banks.
  • Stocks in general, and tech stocks in particular, did well in the low interest rate environment during covid – lots of stimulus!
  • Now inflation is 8.3% and the Fed funds rate is 0.75%, and it’s a similar story elsewhere in developed markets ex-Japan.
  • The Fed has to close that gap – they will keep raising rates until they close it / inflation cools down, or until something breaks…
  • Means pain for stocks while this goes on – we could still go lower and there will be a plenty of volatility. I don’t see capitulation yet.
  • I think it will be later in the second half of the year before things start to look better – there are already signs that inflation is cooling off a little. We either get out of this because inflation eases off, allowing the Fed some breathing space, or something breaks and the Fed starts cutting rates again to head off the crisis.

How about crypto?

Crypto bear markets are a rare beast, in that they are programmed into the code of the leading crypto asset and arrive with the regularity of a Japanese train. If you don’t understand the Bitcoin 4 year halving cycle, you will constantly be bombarded with narratives to explain the pain, from the Mt Gox hack to the Quadriga scandal, to the Luna / UST debacle of late, there will always be a narrative to explain something that is actually pre-programmed. 2014 was a bear market, 2018 was a bear market, and so here we are in 2022. As with stocks, in crypto bear markets you accumulate quality. That means Bitcoin and Ethereum. Keep your hands off those alts unless you are really confident in their long term value proposition. Even then, prepare to be burned as the LUNAtics have been this week. Bad things happen to alts in bear markets… Bitcoin is down some 60% from its high so far this time around. Keep in mind that peak to trough 80% is the norm. BTC fell from $20,00 to around $3,000 in 2018. In the 2021 bull market it reached $69,000. If you have the nerve, now is the time to accumulate, and 2025 is the when the next bull market train comes along. Act accordingly and embrace the bear.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

2022 Q1 Roundup

It’s been almost two months since my last post. Apologies for the silence but we have been busy at home with a new baby girl, born in early February! I must say that, despite the massive disruption caused by covid, working mostly at home has been a blessing this last couple of months. Some things really do only happen once or twice in a lifetime and it’s important to be present for them.

So I thought I would do a general roundup on things I have been thinking about during working hours, and how I am investing in this somewhat turbulent environment.

In my 2020 Investment Outlook post in December I wrote about having a view that guides your investment plan, and being prepared to change it if necessary. My focus for the year was on inflation and how Central Bank’s efforts to fight it would affect the investment environment. This, of course, has been somewhat overshadowed by the tragic events unfolding in Ukraine. I have no experience in international conflict, so little of value to add in terms of how things may play out there, but obviously we all hope that peace is restored as soon as possible.

The war has, of course, had a huge impact on the inflation narrative, as anyone who has visited a gas station recently will know. I actually accumulated a satellite holding in energy stocks during 2021 based on 2022 being a year of re-opening / reflation, with business getting back to normal, more travel, and therefore higher consumption of energy. It actually looks like energy prices could have some way to go, but I am out of those positions now and have rotated into tech stocks, which took a pretty good hit this quarter, and Japanese dividend stocks – largely inspired by @CacheThatCheque, who I interviewed in December. (that post is here)

My core holdings are unchanged, as they only require rebalancing once a year.

So what can we expect for the rest of the year? Well, the Federal Reserve went ahead and ended bond purchases on schedule, and then proceeded with a clearly telegraphed rate hike of .25% this month, and the market has reacted surprisingly favourably. It is said that stocks climb a wall or worry, and that’s exactly what they are doing at the moment. With more rate hikes to come I still expect plenty of volatility, but I don’t see any reason for big changes in allocation. Another dip in Q2 and a strong second half of the year is my working hypothesis.

Inflation means sitting in cash is a losing trade. Your spending power is being eroded day by day. And if you hold JPY cash, but are planning on spending the money in the US, for example, you are losing almost 8% per year and taking currency risk. However, investing overseas has been somewhat complicated by exactly that risk, as we have seen a sharp weakening of the yen – the Bank of Japan is by no means ready to taper and just announced they would purchase an unlimited amount of 10 year government bonds at 0.25%. If Japan is your home for the long term, I would estimate the real inflation rate, taking into account recent energy prices, at around 2% per year. This is why I think Japan dividend stocks are interesting as there are plenty of opportunities to earn more than 2% if you are willing to take a little risk. If you don’t have the time to research individual stocks, take a look at something like this Japan high dividend ETF:

As readers know, I also invest in crypto, and things have gotten interesting there again recently. A few weeks ago, Terra founder Do Kwon announced that they would be buying some $10 billion worth of Bitcoin to back their UST stablecoin over the coming weeks. And true to his word, Terra set about buying some $125,000,000 in BTC per day last week. If you are wondering if $125 mill per day is a lot, it is. And if you are wondering how you go about buying this much BTC, the answer is TWAP, or Time-Weighted Average Price strategy.

All this twapping appears to have been the catalyst for a rally in BTC to around $47,000, which is close to the year open price. L1 alts have also picked up significantly as a result.

One thing I am watching with interest is the Grayscale Bitcoin Trust (GBTC). The trust, which simply buys and holds BTC with a 2% p.a. custody fee is still trading at almost a 28% discount to the value of the assets it holds. At $30.8 bill in assets under management it is major contender for conversion to an ETF, if it receives approval from the US Securities and Exchange Commission. So GBTC, which can be bought through US brokerage accounts and retirement plans, offers the opportunity to invest in BTC at a 28% discount to current price, with a strong possibility that it will be converted to an ETF, whereby that discount will disappear. If you believe in BTC long term, it actually looks like a better buy than the asset itself. Obviously investing in crypto is high risk, but food for thought…

Best wishes to everyone. I hope you are enjoying the warmer weather and the cherry blossom!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Embracing Volatility – How to Buy Low and Sell High

It was not even a month ago that I wrote a 2022 Investment Outlook predicting there was some volatility coming our way, and following the US Federal Reserve’s commitment to tackle inflation, the markets did not disappoint. The S&P 500 is down some 10% from its peak, the NASDAQ 15%, and Bitcoin, being Bitcoin, dumped over 50% in a matter of weeks. Welcome to 2022!

The last time I heard the term “indiscriminate selling” was March 2020, as stock markets were actually being closed early for falling to their limits for several days running. Risk happened fast as investors dumped everything: stocks, bonds, gold, crypto, you name it. Everything went to cash. There wasn’t a lot of thinking going on, just a mad rush for the exits.

We haven’t reached that level of panic so far this year, but in the US the steady pulse of easy monetary policy is fading, and as I write this the Nikkei 225 index is down over 3% on the day. There is clearly more volatility to come. So how do you invest in this environment? Selling indiscriminately along with the herd is clearly not the smart way.

As usual the strategy needs to be broken down into core and satellite. The core being the 70-80% of your portfolio that is broadly diversified, and satellite being the 20-30% you may have in something a little more sexy.

Core holdings – I have already written about how to buy low and sell high in your core allocation here. In short, you establish a strategic asset allocation that meets your risk profile and then rebalance it once per year. The rebalance in effect sells part of holdings that have gone up in value and reallocates them to the holdings that have gone down. That’s it, no further action required!

Satellite Holdings – Now for the fun part. Satellite holdings are generally invested in assets that add a little more spice to your overall portfolio. They usually have a higher risk / return profile and may change over time depending on market conditions and what is hot. So they could include an allocation to smaller companies, emerging markets, emerging technology, commodities, private equity, and of course crypto. I would note here that for someone who is retired, satellite holdings may actually be lower risk, alternative income-focussed assets, but for today we are talking about the racy stuff!

Higher risk plays tend to exhibit bigger swings, and are therefore more tempting to try and time the entry / exit. So, the first thing you need to do is make an honest assessment of your temperament and ability to manage more risk. I’m no trader and I know it, but I do have the stomach for volatility for part of my portfolio.

Scale in / Scale out: The simplest way to buy something volatile is a little at a time. Dollar cost averaging is probably the most effective way to do this. Buy a little every week, every month, or every quarter until you build your position into the size you want. As you get better at this you will learn to add a little more in months when the asset is cheap, and a little less when it is more expensive. Looking back at the chart above, it’s clear that the panic of March 2020 was a golden opportunity to acquire risk assets, but it takes some guts to be buying when everyone else is selling. That said, buying the asset is generally easier than selling it, and you don’t make money until you sell! Waiting for that perfect top is a recipe for disaster for all but the best market-timers. You need to set yourself a target price, and be prepared to adjust it if conditions change. Once you reach your target, sell half. If you think it might have more to run, don’t get too carried away. Average back out of the asset little by little, the same way you got in. You may end up feeling like you left some money on the table, but that money doesn’t exist if you go over the precipice and tumble down the other side.

If the asset is traded on an open market, learn how to set a stop loss. If it’s trading above your target price and you have already sold half, you can set the stop loss at your target price to make sure you get out if the market takes a turn.

All of this sounds great in practice, but I have personally screwed up trying to time markets more often than I have got it right. This is why position size is important. If you are in something volatile like bitcoin, which frequently dumps 50% just when you think it’s going to the moon, you are going to get it wrong sometimes. You shouldn’t have half your net worth in there! I would also say that you should be invested in assets that, although they may be hot at the moment, you don’t mind holding for the next 10 years. It takes a lot of pressure off if you get stuck in something you understand and believe in during a bear market.

Cutting your losers quickly is good advice, but many people struggle with it as they get attached to the trade and don’t want to lose money. If it’s an asset you believe has great long term prospects, then you can ride out a few bumps in the road, but if the fundamentals change and you realise you were wrong, it’s time to take the hit. Psychologically, people are conditioned to try to be right all the time, but it simply isn’t possible in investing. Accept that you will be wrong sometimes and move on.

Experience is, of course, the best teacher. Keep your positions small enough that you can learn from your mistakes without blowing up your balance sheet. Keep an eye on what smart people are doing, but make your own assessment before entering something risky. One thing you can be sure of: taking a little risk helps you to get to know yourself better!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Diversification the Ray Dalio Way

I recently listened to this excellent podcast with investor Ray Dalio and it once again struck me how, out of all the “investment gurus”, Dalio really preaches simple, actionable investing that us regular people can easily understand and implement.

Dalio has just published a new book, which I haven’t read yet, but contains some eye-opening assessments of the decline of the United States, (30% probability of civil war in the next 10 years) and the rise of China. However, it’s the part covering how to invest in this turbulent environment that really caught my attention. Dalio sees the world economy approaching the end of a major cycle that could have dramatic repercussions for risk assets.

Here are some of the key points from the interview:

  • Don’t judge your wealth in nominal terms – i.e. how many dollars or yen you have. Judge it in terms of buying power. The ballooning of central bank debt has pumped up risk assets so people are feeling rich at the moment. However in real terms, inflation is eating away at your wealth.
  • Cash and bonds are a terrible investment in this inflationary environment. Both have negative real returns now, when measured against inflation.
  • Diversification is key. A diversified portfolio of assets should include inflation indexed bonds, stocks, and gold. Take a look at Dalio’s All Weather allocation to understand what a diversified portfolio should look like in an inflationary environment.
  • Don’t try to time the market yourself – that’s an extremely competitive game that even the pros struggle with.
  • Look for balance in your portfolio and make sure that once a year you rebalance back to your original weighting, effectively selling a portion of the assets that went up and investing them into the parts that went down.
  • Dalio is neither a raging bull or bear on Bitcoin and digital assets. He is impressed that Bitcoin has stayed around this long and been adopted so widely, and that means that some of the initial risks of hacking or replacement by a better asset have diminished. However there are risks that money in Bitcoin could flow to something else, and of course regulatory issues as the threat of a better (non-inflationary) currency is a perceived as a risk by governments who have outlawed gold and silver in the past. In all he says an allocation of 1-2% of your total portfolio to Bitcoin is about right.
  • Dalio also makes a great observation on the value of stock indexes, whereby all companies die at some point, but the index is refreshed as the old companies exit and new ones come in, so you don’t have to have your finger on the pulse continually. Simply buy the index and relax.

Just picking up on an important point here: Dalio talks about the negative returns on traditional government bonds, and suggests investing in inflation indexed bonds instead. These are often referred to as TIPS (Treasury Inflation Protected Securities) and seeing as some people may not know what they are here is the Investopedia definition. You are going to struggle to find these in a Japan-based account, but if you have a US account then the TIP ETF is a great way to get exposure. ITPS works for European accounts.

From my experience, I find that people who organise their own investments are often under-diversified. When you boil it down they are largely invested in global / US stock ETFs which all have a high concentration in the same major companies (mostly big tech). In the good times this allocation will perform perfectly well, but there is little protection there when markets take a turn for the worse. So if you are conducting your annual portfolio review as 2022 gets going, it would be a good time to consider if you are really properly diversified.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

2022 Investment Outlook

Wow, year two of the great covid saga is almost over! It may not feel like it, but from an investment perspective, we are coming to the end of one of the easiest years in recent history. How is your portfolio doing? The odds are it’s looking pretty good so far. This has been the kind of market where we all look like pros.

So can we expect more of the same in 2022? You are probably already getting the feeling that it’s not going to be that simple, and that has a lot to do with Mr. Powell, pictured above. There are a lot of tough jobs in this world, but trying to fight inflation during a pandemic, without crashing a stock market that you inflated, certainly has the difficulty level set to Precarious. Volatility is coming back and you better have a plan to deal with it.

Stocks: So how well have stocks actually done? Well if you look at the indices, everything looks fine: The S&P 500 is up some 26% year to date, with the NASDAQ up 17%. Bull market! The picture gets somewhat muddled though when you realise that 45% of the components of the S&P 500 are below their 50 day moving average, and 65% of NASDAQ components are below their 200 day moving average. What does that mean? Well a big chunk of the US stock market is actually in bear market territory. What’s holding up the average is the massive outperformance of big tech: Apple, Alphabet (Google) Amazon, Meta (Facebook), Microsoft, and Netflix literally are the bull market!

All this has happened in an environment nourished by the steady drip of liquidity in the form of zero interest rates and quantitative easing from Jerome Powell’s Federal Reserve.

This from a recent Zerohedge post: “So I submit the notion of a raging bull market is a myth. Indices propelled to constant new highs by still flowing central bank liquidity increasingly held together by a few stocks.”

No wonder things got choppy around the time of the FOMC meeting this week…

Bonds: The problem here is, of course, the emergence of inflation, which the Fed originally tried to write off as “transitory”, but have now decided they need to act on. That means no more drip drip, and interest rates must rise. Inflation is not good news for bonds, as it eats away at the purchasing power of the bond’s future cash flows. Why buy today’s issue when tomorrow’s will come with a higher yield? Bond yields go up = bond prices go down.

Commodities: Assuming inflation is here to stay for a while, what should go up is the price of “stuff”. There’s a reason for that 5% of your portfolio that’s been sitting in gold doing not very much all year. Just be aware that if there’s a panic à la March 2020, everything gets sold off initially, including the shiny metals. Oil is going to continue to be interesting next year if the scourge of Omicron doesn’t crush the reopening trade…

Crypto: It’s been one year since my Bitcoin: It’s About to get Loud post. Yes, I am now patting myself on the back for calling the most obvious bull market of all – the one that comes every four years! Crypto is never easy though, especially for newcomers. We have seen (I think) seven or maybe eight pullbacks of over 30% this year alone. We have been to an all time high of $69k and are now back at $46k with the fear and greed index indicating extreme fear. Meanwhile on Layer 1, Ethereum has outperformed Bitcoin and Avalanche and Solana have done crazy multiples. (ETH up about 420%, AVAX up 3,000%, SOL up 11,000%!) Have we seen the top of the mountain and we are already on the way down the other side, or is there one final push to the summit to come?

Dude, you mentioned having a plan?

A client of mine, who is a former economist once said to me: “Right or wrong, I always saw it as my job to have an opinion.” That comment has stuck with me, as I think it applies to all investors. You can’t always be right, but you should have a view, test it rigorously, and be prepared to change it if you find evidence you are wrong. So for what it’s worth, here’s my view for 2022:

The Fed, and other Central Banks are being forced to deal with inflation, but they have openly admitted that they are equally, if not more concerned, with not crashing the stock market. The words “rock” and “hard place” spring immediately to mind. So they taper now and plan to stop bond purchases by March. The market does not like this and corrects strongly, which basically means that those big tech stocks sell off dramatically. Then, central banks have to backtrack and slow or end the taper, and maybe rethink those rate hikes planned for later in the year. When the drip is turned back on, the market bounces back.

You get the idea.

How you plan for this depends on your investing style:

If you have a diversified asset allocation and your plan is to do nothing at all and ride it out, maybe continue dollar cost averaging every month: Congratulations! You are dismissed from class and free to go and play!

If you are not one of these people then please take note – staying sane is actually an option here. However, if you insist on trying to trade this, it is probably past time to start getting a little more defensive and raise some cash to deploy when things get rough. I would, however, be tempted to entertain the possibility that Omicron is also a little roller coaster like by nature, and the initial whoosh into the sky will return to earth equally quickly. This could precede the discovery in late Q1 that inflation actually was somewhat transitory, and caused mainly by supply chain disruption, and therefore the need to deal with it falls away. So be cautious, but it’s perhaps not time to lock yourself in the bunker.

Is the crypto bull market over? Crypto is more correlated to stocks than many crypto people like to think, so if anything is going to slay the bull it could be a dramatic stock market correction. That said, the level of adoption, or network effect, has increased significantly this year, and includes a good deal of institutional money. If your plan, like mine, was to sell the cycle top at $100k+ and then buy back in the bear market, it may be time for re-evaluation. I’m slowly becoming more open to the idea that the four year cycle could be smoothing out and, despite frequent mini crashes, we may not see a 2017 style blow off top followed by a grinding two year bear market. Don’t hold me to that, but a simple way to play it is to have a cold storage allocation that you hold longer term, and a tradable allocation that you look to sell at Extreme Greed and buy back at Extreme Fear, rinse and repeat.

However things play out, it is unlikely to be smooth sailing. So I wish you a peaceful holiday season. Here’s hoping Japan does a better job of holding off Omicron than my home country is doing so far…

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

There Goes The Metaverse!

The above tweet comes from a remarkable thread by a market veteran who is trying to get his head around what happened in financial markets in the month of October 2021. Amid fears of inflation and a flurry of tech earnings reports, Tesla stock went off to the races, whilst Mark Zuckerberg renamed Facebook and launched his foray into the metaverse. Meanwhile in crypto, meme-based dog coins were off the leash and a virtual world currency suddenly woke up and went parabolic. All while the VIX, the US stock market’s “fear index” languished by the pool sipping cocktails.

It’s enough to make anybody’s head spin, but it’s particularly confusing for serious traders and investors who dare to try and apply fundamental research to markets gone wild. In another fascinating thread, Zhu Su of Three Arrows Capital attempts to explain why traditional Discounted Cash Flow valuation method no longer applies in a market driven by network effects.

It always amazes me how many Tesla haters are out there, continually predicting the company’s downfall, whilst missing out on the asymmetric returns it provides. Some masochists even short the stock, enduring months and years of pain in the hope of the big payoff. The same thing happens with crypto. These people will forgo incredible returns so they can one day turn around and say “I told you so” when the asset comes crashing back to earth.

Don’t get me wrong. There is nothing misguided in buying good quality companies when they are on sale and holding them for the long term. This strategy has made Warren Buffet a fortune, but he is very, very good at it and has massive capital to invest when he identifies his target.

Sorry to drop yet another thread on you, but this one from Raoul Pal also caught my eye over the weekend. His take is that the market is now being driven by millennial investors, who have not been blessed by the benign conditions their parents came of age in, and are throwing caution to the wind because it’s the only way they are ever going to make it. They are not interested in diversification and modern portfolio theory as they know they will never be able to retire with a sensible investment strategy. The only way they are going to get rich is if they concentrate their bets in trades with the biggest possible payoff. They are going all in on meme stocks, crypto, NFTs, and soon the metaverse, and, to their parent’s disbelief, they might just make it!

Now this is a financial planning blog, or at least it started off as one. I’m not going to tell you to sell off your diversified portfolio and your blue chip dividend stocks and bet it all on electric cars and dog coins, but it’s hard to deny that a shift is in progress and we won’t be able to navigate it with old thinking. Yes, you need to have an emergency cash reserve and an appropriate amount of insurance. You need to have a pension or long term savings vehicle that averages into stocks in the early years and then diversifies over time as the numbers grow bigger. Yes, you need a core investment portfolio of cash, bonds, equities, property, commodities and alternatives that is rebalanced annually. And yes, you need to keep some powder dry for when it all comes crashing down, because it will do that once in a while. But it would be a mistake to ignore the Exponential Age that is upon us, even if you have no intention of ever setting foot (metaphorically) in a virtual world.

I have talked about core / satellite investing previously and I believe it still applies. It’s just that the satellite part of the allocation suddenly got very interesting. Here are some things you might want to read up on:

The Metaverse – first coined in Neal Stephenson’s novel “Snow Crash”, and confirmed last week as the big thing on Mr. Zuckerberg’s mind, the metaverse will be more than just a virtual reality space where people interact via dorky avatars. As they develop, virtual worlds will intersect work, socialising, gaming, entertainment, commerce, and all manner of human interaction. You can already own land in the Metaverse and set up shop there. These virtual worlds are likely to be split between those run by big corporations, such as Meta (Facebook), and decentralised versions run democratically as a community. For a glimpse at where we are heading, take a look at Decentraland.

The currency of the metaverse is going to be crypto and participation will happen through social tokens and NFTs. It’s no coincidence that Decentraland’s Mana token went vertical right after the Facebook announcement. Sh*t just got meta!

Want to show off your wealth in the metaverse? NFTs are how you flex. Read this post (and every other post) by Arthur Hayes for more on that. Also check out this next-level NFT art gallery.

Metcalfe’s Law, or what is a network effect and why should I care? Wikipedia does a pretty good job of explaining how the value of a network is proportional to the square of the number of connected users of the system. This no longer only applies to telecom or computer systems. The internet is a network, social media is a network. Visa and Matercard are networks and so are Bitcoin and Ethereum. If the user base grows, the value increases. You don’t have to like it, but good luck shorting it!

So this is all great, but what do you do with it? Well, unless you are planning on betting the ranch on the metaverse, you play it as a satellite holding. If you prefer hiking outdoors to virtual worlds I’m with you, but you don’t have to ignore what is going on. Crypto and social tokens are the obvious entry point, as is owning stock in the corporate metaverse companies. If you want to be more involved then other places you can start are: The Sandbox Game, Cryptovoxels, and Wilder World.

There will be many more investment opportunities if you keep your eye on the space. Maybe mad October isn’t the beginning of the end, but just an extension of the new normal. The metaverse is coming – be there or be square!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Crypto Curious? You Should Be!

Wow what a week it has been in crypto! In case you weren’t paying attention, the guy whose company bought $1.5 billion in Bitcoin just a couple of months ago sent a flurry of tweets and crashed the market by 40%. Yes, Mr. Musk is not the the most popular person in cryptoland right now, and Tesla shareholders are probably not very impressed either. For people who just got into crypto this year, as the bull market picked up steam, it’s literally been a crash course in risk.

Despite this I have spent my free hours this week labouring over this post, the reason being that over the last 12 months or so I have come to the following conclusion:

If you are serious about building wealth and pursuing financial freedom, and you have not done so already, you need to educate yourself on cryptocurrency.

Notice that I’m not advising you to go out and buy XYZ coin today. I’m saying you need to study, understand the shift that is going on in this space, and act accordingly. Otherwise you could miss out on a world of opportunity.

So what do you need to get your head around? Here are a few things:

Adoption

A couple of surveys in the US have just published some interesting results. The first is Gemini’s State of Crypto 2021 report. (you can read a good summary of the report by Zerohedge here.) Then NYDIG carried out a similar survey, reported in Newsweek here. The Gemini survey of US based individual investors shows that 14% of Americans already own crypto. More interesting is that 63% of respondents are “crypto-curious”. This group are interested in learning more about crypto, with 13% considering adding crypto to their portfolios in the next year.

NYDIG estimate that some 46 million Americans own Bitcoin, and they found that many of these people would be happy to store their Bitcoin with their bank if the option was available. (see here) Banks are seeing the outflows to crypto exchanges like Coinbase and are waking up to the opportunity to offer Bitcoin and other crypto directly to customers.

We are also seeing rapid adoption in the developing world, particularly in countries like Venezuela where the economy has been poorly managed, resulting in a severely devalued local currency.

Institutional Adoption

The 2017 bull market was peppered with whispers that “the institutions are coming”. Well in 2021 they are slowly arriving. There are currently 8 filings for a Bitcoin ETF sitting with the SEC in the US, and it looks like it is only a matter of time before the first one is approved. (Canada already approved a BTC ETF) In the meantime, Grayscale’s cryptocurrency-based trusts are nearing $50 billion in assets under management!

Morgan Stanley are launching access to three funds which enable ownership of Bitcoin for their wealthiest clients. Goldman Sachs are preparing to offer clients access to digital assets from this quarter. Insurance companies are starting to invest. Hedge funds and wealthy family offices are involved. Guggenhiem Partners, who manage over $230 billion in assets, have a sizeable position in the Grayscale Bitcoin Trust, as do Ark Funds.

A growing number of publicly traded companies are now allocating part of their cash reserves to Bitcoin, and yes, at least at time of writing, Tesla is still one of them.

Inflation fears

Bitcoin is seriously starting to rival gold as the ultimate hedge against inflation. And following over a decade of money printing and quantitive easing in response to the 2008 Global Financial Crisis, and yet more stimulus to combat the economic damage wreaked by Covid-19, inflation fears have been wobbling markets in the last few weeks. With its hard-coded fixed supply, 4 yearly halving events and digital immutability, Bitcoin is programmed to be deflationary. You simply can’t print more Bitcoin, even if you wanted to.

This is why the likes of Michael Saylor at MicroStrategy are investing part of their company treasury in BTC. Bitcoin is now viewed, by some at least, as a superior store of value, an alternative to the “melting ice cube” that is Fiat currency

DeFi

The word “disruptive” gets thrown around a lot these days as technology challenges the old “traditional” way of doing things. Some may say this is just a natural progression of things, but it perhaps doesn’t feel that way if it is your business that is in the process of being disrupted! DeFi, or Decentralised Finance is threatening to disrupt TradFi, or Traditional Finance. DeFi is one of those terms that can quickly turn off people who only have a passing interest in crypto – it all sounds too complicated. To keep it simple, DeFi is removing the middleman from financial transactions, with the middleman generally being a bank or brokerage.

Here’s a good definition from Investopedia: DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.

The potential for DeFi is clearly huge, and it is in the very early stages. Expect plenty of volatility as TradFi is not going to give up easily! It is also going to be tricky to regulate as there is no central body with its HQ in a particular jurisdiction, where it can be bound by that country’s specific rules.

NFTs

Non Fungible Tokens suddenly hit the news this year when a digital collage by the artist Beeple sold for a whopping $69 million! NBA Top Shots offer the chance to own digital highlight plays, with some listed as high as $250,000. A lot of assets are accused of being in a bubble these days but this one is hard to deny. After all, if you want to look at the Beeple collage, it’s right there online to view for free and you can download a JPEG onto your computer. However, don’t write NFTs off so easily. Ownership of something digitally certified as unique can be applied to art, fashion, collectables, licenses and certifications, tickets for entertainment and more. The potential for use in gaming and virtual worlds is huge too.

Ethereum

You may have noticed a dramatic increase in price of the number two cryptocurrency, ETH recently. ETH is programmable money and much of the above DeFi and NFT ecosystems are built on its protocol. ETH is not without competition, but it has first mover advantage in the smart contracts space. There is even talk of the ETH market cap surpassing (flipping) Bitcoin over time.

Cycles and how to invest

What I wish I had better understood during the 2017 bull market in crypto, and the subsequent bear market, is that it wasn’t the first time around the track. In fact, it happened in 2013. And now here we are in the 2021 bull market. Do you see a pattern here? The Bitcoin four yearly halvings generate a clear four year cycle. And as long as BTC leads the market, this cycle applies to other coins as well. The two graphs below compare the current bull market to those of 2013 and 2017.

Source: @raoulgmi
Source: @raoulgmi

I recommend reading this excellent post on the Bitcoin four year cycle. Understanding this is crucial to formulating an investment strategy for the years to come. Despite the current correction, we are now well and truly in Phase 1- the bull market! That’s why Bitcoin is in the news and every Elon Musk tweet moves the market. The Bitcoin bull market does not go straight up, there are usually a number of pullbacks, corrections and mini crashes. Bitcoin being in the news can be both positive and negative: It’s boiling the oceans, China is banning it, India too! Believe it or not, this is the fun part!

If you didn’t accumulate Bitcoin and/or other crypto in the last couple of years, then that’s a shame, but guess what? The next phase is the bear market. During this chilly crypto winter, BTC generally declines around 80% and Altcoins possibly more – and then comes your next chance to accumulate. If there is one thing I would like you to take away from this post it is this: If you learn about crypto in the months to come you are still early. I don’t think that dollar cost averaging and buying on dips (like the one now) this year is a bad idea, but be very careful with your sizing. It is not the time for FOMO (Fear Of Missing Out) and betting the ranch. A little skin in the game will give you motivation to study, but you need to think longer term. Step up the dollar cost averaging during phase 2,3 and 4 and 2025 is your target year for enjoying the good times!

I note that there is talk in some circles of a super-cycle. That is no 80% decline this time and the bull market continues. It sounds wonderful and there would be no complaints from me if it happened, but I am not convinced and am basing my planning on the 4 year cycle. What I could see perhaps happening is ETH and perhaps some of the DeFi coins decoupling from the Bitcoin cycle and going their own way. Only time will tell on that too.

Crypto and Japan

In 2017 Japan appeared to be positioning itself as a global leader in crypto regulation, and there was even one ICO issued by a regulated exchange in Japan. (Quoine, now known as Liquid’s Qash token) However, very little of note has happened since then. Hacks at Coincheck and Zaif probably didn’t help. Only a handful of crypto assets are available on Japan exchanges and there are no stablecoins on offer. If you are looking to invest in Altcoins or DeFi coins you will need an account overseas to do so. (FTX, Kraken etc.)

Moreover, the tax treatment of crypto gains in Japan is less than friendly. Gains should be reported as miscellaneous income and are taxed at your highest marginal rate, with the maximum of 55% often mentioned in reports. I would note here that your marginal rate depends on how much you earned in the previous year and, depending on your income you may pay significantly less than 55%. Here is a useful summary of the Japan tax treatment.

You should also note that there is no offset on losses as there is with stocks. This makes me think that the best strategy in Japan is to accumulate over time and hold for the longer term. (noting that crypto moves fast and long term could mean 3-5 years) Trading aggressively doesn’t really seem worth it, although some may disagree. I would be careful of this one major pitfall: making big gains in one coin, selling and creating a taxable event, and then moving them to another coin to try to make more money but actually making a big loss. You will still be liable for the gains from that first trade, even if you don’t actually have any of the money you made left…

One way around the tax issue is using funds, and ETFs when they are finally available. Grayscale’s trusts are taxed as stock, (so 20% on gains) and I imagine ETFs will be too. (you will need a US Brokerage account though)

So be careful on tax. That said, we are talking about an investment space with massive growth potential. If you accumulate during the bear market and sell during the bull cycle and actually bank the money you probably won’t be too unhappy about paying some tax.

So what should I do again?

Educate yourself. People will tell you to only invest in what you know, but if you aren’t expanding your range of knowledge you will be stuck with a rather narrow range of investments, and you could miss out on great opportunities. Yes, you should buy some and get a little skin in the game. It will encourage you to take notice of what is going on, but take it slowly. You may feel late to crypto, but we are still at the stage where one person’s tweets can move the market by 40%. It’s still early and there is plenty of opportunity. People often ask what percentage of their assets they should have in crypto, but I think you should size your positions according to your level of knowledge and conviction.

The other big part of crypto is learning to take responsibility. Don’t invest half of your life savings because of something you saw on Twitter. (or read on a blog!) Don’t leave your coins sitting on an exchange that could be hacked – learn how to self-custody and use cold storage. People have perhaps gotten too used to handing their money over to a third party and letting them look after it for them. Connect with people who know more than you do and learn from them, but make sure to go down the rabbit hole yourself. And if after that you are not convinced then that’s fine. It’s better to make an informed decision not to get involved than to just assume something is meaningless and miss the opportunity.

Below is a list of resources to get started. I may add to these from time to time.

That’s all I have for now. Best of luck and be curious!

Resources

Podcasts: What Bitcoin Did / The Pomp Podcast

Books: The Bitcoin Standard / The Internet of Money

People to follow: @100trillionusd / @woonomic @PrestonPysh / @raoulGMI / @CryptoHayes / @RussellOkung / @glassnode / @CaitlinLong_ / @zhusu

Detailed Overview of DeFi

NFTs and Their Use Cases

Article On Bitcoin Energy Consumption

Video Interview on Virtual Worlds- Earning Money in the Metaverse

The Crypto Fear and Greed Index – I have found this to be a much better indicator than price. Buy at extreme fear, and sell, or at least be cautious, when it’s at extreme greed!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Bitcoin: It’s About to Get Loud

Well it’s official, three years after the last one, Bitcoin has set an all time high and broken through the massive $20,000 resistance point . As I write now, it’s actually trading at around $21,500. However, somehow it feels different this time around. Something is missing. It’s very, very quiet… Nobody outside the world of finance or crypto itself seems to be paying much attention.

I remember the previous all time high very clearly. Late 2017, having risen from under $1,000 earlier in the year, Bitcoin surged past $10k and just kept on marching. New highs were marked every week. Here in Japan there were crypto exchange ads on TV constantly. (remember Tetsuro Degawa and the ill-fated Coincheck?) Mr. and Mrs. Watanabe were buying feverishly as the FOMO (Fear Of Missing Out) took hold. I remember watching a news report about Kabukicho hostesses trading crypto on their smartphones. The 2017 bull run was driven by individual investors caught up in a get-rich-quick buying frenzy. And when the bubble burst they all got burned…

Fast forward three years and the landscape looks quite different. Since the halving in May 2020, Bitcoin has gradually fought its way through heavy resistance at $10k, $12k, $13k, $14k and now $20k. Mainstream news, dominated by Covid-19, economic stimulus and a soaring stock market, makes little mention of it.

Meanwhile, big things are happening: You can now buy crypto through Paypal. MicroStrategy, a business intelligence software company, has invested $475 million of its cash reserve in Bitcoin and is in the process of issuing $650 million in convertible notes, the proceeds of which will be used to buy more BTC. Square, the payments company run by Twitter’s Jack Dorsey has invested $50 million in Bitcoin. One River Asset Management, a hedge fund specialising in volatility bets, has just emerged as another huge investor in Bitcoin, with some $600 million already allocated. And also this week, MassMutual has become the first insurance company to invest in Bitcoin, dipping its toe in with a $100 million investment.

Are you feeling bullish yet?

Guggenhiem Partners, who manage over $230 billion in assets, started investing in Bitcoin when it was around $10,000. Their CIO, Scott Minerd, just shocked Bloomberg TV hosts by telling them that his firm’s analysis shows it should be worth $400,000. (Video here – tellingly Bloomberg delayed coverage of a Federal Reserve press conference to get this comment!)

Following the massive success of Grayscale Investments, Bitwise have just launched the Bitwise 10 Crypto Index Fund, which invests in the 10 biggest cryptocurrencies. The fund is available to purchase the same way you would purchase a stock or an ETF on US brokerages, and is already seeing huge demand. (not to mention a dizzying jump in price)

What is interesting here is that the reason for this underlying demand from companies and financial institutions is due largely to a change in the perception of Bitcoin, from payment system to store of value.

The original Bitcoin white paper talked of a peer to peer electronic cash system: i.e. a means of exchange, something you would use to buy your coffee, but with no intermediary / bank in the middle of the process. While Bitcoin is certainly capable of such transactions it is still somewhat clunky and there are other cashless payment methods, and even other cryptocurrency solutions, that can get the job done more efficiently.

What the likes of Michael Saylor at MicroStrategy see, is that Bitcoin acts far better as a store of value, an alternative to the “melting ice cube” that is Fiat currency. This is the role that has typically been played by gold for generations. The unprecedented expansion of Central Bank balance sheets, pumped ever higher by Covid-19 stimulus, has institutions eyeing an asset which, despite being easy to transport and store, cannot be manipulated to increase supply. You can’t just print endless Bitcoin. Understanding this shift in reasoning is essential for individual investors wondering why they should care about digital assets. (Saylor has been the guest on a number of podcasts where he talks at length about his reasoning on Bitcoin – here’s one if you are interested in listening)

Institutions and Bitcoin “whales” are certainly trading the BTC price action to some degree, but their main goal is accumulation. And compared to individual investors they have the capacity to accumulate in bulk. When dips in price scare off smaller investors and day traders, these big guys are hoovering up supply and locking it away for the long term. This level of demand combined with Bitcoin’s built in scarcity could lead to some serious price moves in the next 12 months.

So how should regular investors be adjusting to this new dynamic? If you don’t own any crypto but think you should, how do you get involved without getting burned? What follows is my two cents, for what it’s worth, in a market that changes fast. Please note that I am not a trader and do not use leverage. The purpose here is to share my thoughts on how to accumulate BTC. All the usual disclaimers apply: I don’t know your financial situation or risk profile, this is not investment advice, don’t invest money you can’t afford to lose etc etc:

  • Breaking $20k is a big deal. We could be off to the races, but new resistance levels will form and volatility is the norm in crypto.
  • Expect retraces down into the 17,000s and below, and be ready to buy these dips. It’s going to take courage as every financial news site will be screaming about the “crash” in the Bitcoin price.
  • Any kind of major macro shock, eg. a severe stock market correction, will send BTC tumbling down with it. This will be even scarier as the panic will lead investors to sell every asset they have to raise cash, as they did in March this year. Mainstream news will now be proclaiming a full-blown financial crisis. Bitcoin will be pronounced dead for failing to act as a hedge against other assets. Hold onto your hat and buy as much as you can.
  • Hold, hold, hold.
  • Assuming however, there is no such macro shock. Things are about to get interesting. Just as big dips are possible, so are big moves up.
  • Accumulation is best done little by little over time, and the same goes for selling a rising asset. If the trend is up, don’t fight it. Sell a little at a time unless you are already looking at life-changing values. (when kabukicho hostesses start trading again and Degawa pops up, it’s probably time to think about getting out!)
  • I’m not going to guess how high it’s going to go. If you are looking for price models, charts and research here are some people worth following: @100trillionusd / @woonomic / @PrestonPysh / @raoulGMI
  • When BTC takes off, altcoins generally follow. Personally I would stick to the top 10 in the Bitwise fund. I have no idea where Dogecoin will land in all this!

By the time you read this, prices could already have changed significantly. This is a fast-moving space. Whatever happens, I don’t think it will stay this quiet for much longer. Things are about to get loud!

With that I’ll sign off. Wishing you a safe and enjoyable holiday season and an exciting 2021!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Why is Bitcoin Valuable?

BTC Scarcity

I’m writing this today with Bitcoin having once more passed the $10,000 mark. It’s quite remarkable to think that a digital asset that didn’t even exist until 2009 can be valued at such a level. Is it pure speculation? Or is there something particular about BTC that makes it valuable?

One person who has an answer for that question is known as PlanB, an anonymous Dutch institutional investor who created the Bitcoin Stock to Flow (S2F) model. According to his website, the name PlanB refers to “an alternative plan to quantitative easing (printing money by central banks), negative interest rates, and currency debasement in general.” His online handle, @100trillionusd, “is a reference to the Zimbabwe 100 trillion dollar note during the 2008 hyperinflation.”

If you really want to understand what the S2F model is, you should go straight to the following two articles from March 2019 and April 2020 respectively:

Modeling Bitcoin Value with Scarcity

Bitcoin Stock-to-flow Cross Asset Model

If this is a bit too much heavy reading I will attempt to summarise briefly:

The bottom line here is scarcity, Bitcoin is scarce in the same way that silver and gold are scarce, but it can be transmitted over the internet. The S2F model aims to put a value on this scarcity.

Stock refers to the existing stockpile or reserves of something. Flow is the annual production. Gold has a high Stock to Flow ratio – it would take 62 years of gold production to get the current gold stock. Around the year 2022 Bitcoin’s stock to flow ratio will overtake that of gold.

It is high stock to flow that makes something monetary goods. Low stock to flow goods can easily be over-produced, thereby crashing the price.

Supply of Bitcoin is fixed. As new Bitcoins are mined, the miner that found the block is rewarded. Over time those rewards are cut in half at regular intervals, know as halvings. The halvings and the fixed supply are the reason that Bitcoin’s stock to flow increases over time.

Working on the hypothesis that scarcity (SF) drives value, PlanB created a statistical model. What he found is that there is a statistically significant relationship between stock-to-flow and value. (the price of Bitcoin) Interestingly he also found that gold and silver are in line with the Bitcoin model values for SF. Of course other factors also affect price, but he found scarcity to be the dominant driving factor.

So what could it mean for the future price of Bitcoin? The initial modeling predicted a $1trillion valuation sometime after the May 2020 halving. This would mean a price of $55,000 per Bitcoin in the next year or two.

“People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.” (Modeling Bitcoin Value With Scarcity)

The Bitcoin stock-to-flow cross asset model in the second article then revised this to a market value of $5.5trillion in 2020 – 2024. Which translates as $288,000 per Bitcoin. Yes, that’s the kind of number that can get your attention! Whether it turns out to be accurate or not will be something that’s very interesting to watch over the next few years. (particularly if you have some skin in the game)

Clearly my explanation above has been highly simplified. If you find this interesting and / or need a lot more persuading, please do read the two articles posted above and follow PlanB for more: @100trillionUSD

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

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