Weekend reading: Bitcoin is still bonkers

Yes. I can see Case using a Trezor or Nano Ledger to pay for drinks at the Chatsu in Ninsei of Chiba City.

Crypto shenanigans are one part a grotesque Gibson-esque/PKD nightmare and, for PoW protocols like BTC, another part unmitigated environmental disaster.

When @TI visited this topic in Feb 2021 @Tedious Pseudonym nicely captured the extent of the insanity here:

“Visa will process around 250 _billion_ transactions this year. Bitcoin will handle about 100 _million_. That’s 2,500x less transactions, for 600 times greater energy usage (and more realistically 2,000 or more times, as Visa’s energy includes all sort of non transaction processing uses)”.

I put my cards on the table here: I have a burning hatred of the Libertarian crypto ‘project’, BTC definitely included.

I am with Munger (crypto’s “disgusting and an affront to civilization”) China (banned all crypto mining) and Sci-fi author Charlie Stross (who memorably penned “I want Bitcoin to die in a fire” way back in 2013).

However, trying not to be completely blinded by my prejudices about this topic, and bearing in mind also here Soros’ wise words that a bubble is just name which you give to a price increase that you’re not participating in; is there money still to be made in crypto – whether in BTC, or in one or more of the 10k-20k listed ‘Altcoins’ out there, or in a yet to be invented token?

Maybe. Maybe not.

BTC is non-trivial in absolute terms, but not in the global pool of tradable assets and wealth.

The ‘market cap’ is meaningless, as:
– it has far lower comparative liquidity to public exchange traded large cap shares;
– at least 3.7mn BTC are ‘lost’ due to inaccessible private keys;
– a further 1 mn+ BTC have been nicked in cyber heists and are being tracked over the Blockchain to prevent the culprits cashing out for fiat; and,
– Satoshi’s 750k-1.1 mn strong BTC hoard is unlikely to ever be liquidated.

Put that lot together, and I’d guess (pulling a reasonable sounding number from the air here) that you could mark down the $800 bn headline BTC cap figure to a few hundred bn.

That’s tiny compared to global wealth in the vaguely $400 tn+ range.

So that suggests potentially more room to bubble up bigly in the next hype halving cycle.

But, and here’s the kicker, as I mentioned in recent comments on a different thread; the exponential chart from 2009/10 until now fairly unambiguously shows that the geometric magnitude of each price pop is significantly reducing with each passing wave/cycle.

In the very beginning, ‘prices’ went up literally 10,000s times from fractions (0.1) of a cent to mine (at a difficulty level of 1, with just ~7 mega hashes per second back in 2009) up to thirty odd bucks (the 2011 peak).

But the next trough (2 bucks, also in 2011) to peak (about a grand, at the end of 2013) was only 500x, and the next one after that (2015-17) was just 115x ($170 to $19,500).

By the time that we get to the last wave (2018-21) it’s down to a 23x increase in price from trough to peak ($3k to $68k).

Therefore, it’s a fairly clear pattern of ever smaller rises in % terms.

If we don’t now do over 6x from the $15k bottom in 2022 with this (2024) halving then, in inflation adjusted terms, BTC will be below its last peak.

A peak to peak real terms fall has yet to happen in BTC’s history and, from a purely charting perspective, it would mean that we’d gone from accumulation, markup, distribution, and markdown cycles within a globally rising price trend to such cycles instead occurring within a consolidating price range.

This would be inconsistent with the Stock to Flow model of BTC maximalist ‘Plan B’, which predicts an ambitious $288k price per ‘coin’ target in 2024 and a completely ludicrous (and impossible) $235 bn per BTC in 2045.

However, it would be wholly consistent with the Future Supply Model (“A Non-Divergent, Long-term, Residual Supply-driven Bitcoin Forecast”) of Stephen Perrenod, which sees the BTC price developing broadly as follows:

“Using the best fit parameters, the model converges toward an asymptotic value for market cap of $1.63 trillion (in 2020 dollars) and an asymptotic price of $77,500. However, these values have high uncertainty due to the limited price history and high volatility of Bitcoin”.

Within such ‘steady state’ type models as Future Supply prices can still fluctuate a lot, however (from a couple of time over to several times below equilibrium price).

@Sarah #11: the Guardian article’s incredible. 28! 🙂 Parents have owned (really cared for, as no one owns a cat) two Mollys and a Tom over the decades, and, as you say, 17-20 years seems to be the limit for most cats.

@Marco #12: there really aren’t any genuine, unique and meaningful innovations in BTC or Blockchain. Almost definitionally centralised applications and platforms under single control will be cheaper, faster and more reliable than some network of dispersed and independent operators who have to reach consensus before an operation can take place over the network.

BTC is a trade not an investment. Same for the other cryptos.

It’s not comparable to putting money into gold for jewellery, into art or into watches. They all have long established aesthetic value. A BTC address or transaction ledger entry has no such appeal.

Without economic cash flows like shares, bonds and real estate it can never have fundamental (intrinsic) value. It’s just a speculative, unproductive, extrinsically valued ‘thing’ (or perhaps a ‘nothing’).

Of course, trades in nonsense can be profitable and, paradoxically, can still make sense. As Soros also reputably said, “when I see a bubble forming, I rush in with both hands”.

Maybe BTC hits $100k or even conceivably $200k this year.

But it’s not going to go up 100x like it did in 2010, when there were only 2.6 mn mined BTC, & the price started at 0.3 cents on the 1st exchange (Bitcoinmarket.com, established 17 Mar 2010, not Mount Gox, which only started in July that year) and ended the year at 30 cents (on Mt Gox); having at one stage crashed in days from 17 cents to 1 cent.

For BTC to do 100x this year, with over 19 mn mined ‘coins’ now, would require it to go from $40k to $4 mn per BTC; and that’s just impossible, even if (hypothetically speaking) the allegations being made about whales, algos and Tether being used to try to manipulate the price were to be found to be true.

There are plenty of other mad (and not so mad) things out there to trade. Take a look at the price of Uranium Yellow Cake, for example, up from $24 per lb in 2020 to $86 at the end of last year.

If you prudently limit exposure to 0.5%-1% of assets, then a 2.5-5x pop in the BTC price to $100k-200k isn’t going to change your life or your portfolio. Staking more wealth than that would be reckless, IMO. So why bother at all?

For reference, the big price action was at the start of BTC’s first decade 2010-20, but most especially in 2010, 2011 and 2013.

Anyone entering into trading / speculation on BTC now have very likely missed the boat. Here are the 1st decade returns and drawdowns:

Year/Return/Drawdown
2010/9,900%/-94%
2011/1,473%/-94%
2012/186%/-85%
2013/5,507%/-83%
2014/-58%/-71%
2015/35%/-78%
2016/125%/-30%
2017/1,331%/-40%
2018/-73%/-73%
2019/95%/-43%
2020/301%/-61%

All excellent points @Indyinv 3.0.

The operating leverage potential upside gain of listed miners (Marathon, RIOT, Argo etc), exchanges (COIN) and funds (KR1) probably compensates for some degree of idiosyncratic company risk.

Personally (collective investment vehicles structured as shares aside) I avoid/dislike investing in individual stocks because of the returns skew – i.e. most individual shares underperform the market portfolio and a shockingly large minority fail to generate returns exceeding their cost of capital and/or the returns in Treasury Bills (per Bessembinder et al).

But with crypto, if one were to speculate sensibly, then one would want to keep the bankroll at risk quite small (to try to minimise loss regret), and also to sin a little with market timing in order to try and put money in, if at all possible, during the latter part of the markdown phase of the episodic drawdowns (i.e. not now).

A small bankroll at risk favours trying to maximise leverage via exposure by proxy to the tokens using miners or funds.

Otherwise, if the outturn is positive, then the gain % to the overall portfolio will be too small to bother with at a realistic gain multiple (i.e. 5x a 0.5% allocation is still pretty negible).

Whilst I hate crypto, both as an idea in principle, and as an ecosystem of deceit in practice (look no further than SBF in 2022 or at Mt Gox in the beginning); at the end of the day, I want to make some money, and every lawful investment and/or (as here) trade/speculation with some non negible potential for positive expected value deserves a fair & impartial evaluation.

I also hate tobacco and oil companies, but they’re both somewhere in there in my All World trackers’ holdings (I do try though to compensate a bit by not having a car).

But there is probably more company specific risk in crypto than for most other sectors.

For example, when I looked at Argo Blockchain in the last but one crypto winter (2018/19), it looked a fantastic opportunity, albeit unproven.

Then, in the next boom phase, along came Boatman Capital (Aug 2021) with a report alleging that the then new Texas mining site was overvalued 100 fold, and raising many questions.

Boatman could have been barking up the wrong tree and talking nonsense, but it was enough to put me off.

KR1 I think is more interesting as a speculative proposition in that they eschewed mining for PoW tokens and instead have successfully unwritten the launch of many new Altcoins by third parties, perhaps most notably backing the issue of TIA tokens (native digital token of the Celestia network); for which KR1 received 7.5 mn TIA for just $75k overall, and which traded at one stage for $12.50 apiece (NB: KR1 are locked into their TIA holdings until 2026, and it makes up ~40% of their NAV).

I think both Wexboy and @Finumus have, or have had, some holdings in KR1.

What puts me off bunging say 0.25%-0.5% of the portfolio into KR1 right now is the general level of bullishness around crypto as we go into the halving.

I’d be much less apprehensive about speculating in KR1 after, say, BTC pops post halving and/or post the ETF decision, perhaps peaking at $50k-$150k and then falling 70%-80% to the $15k-$30k range, taking smaller Altcoins down 80%-95% with it, rather than going into KR1 now.

Even if crypto has no future (and I do hope that it doesn’t) that in itself is rather unlikely IMO to prevent further cycles of boom/crash/boom.

If something happened once before, then it can happen again. If it happened two or more times before, then it probably will happen again.

@Naeclue (#38): The useful in context (approximation) answer for present and all practical purposes is that history rhymes, even if it doesn’t repeat (at least over the timescales which we observe).

The literally corrected answer though is that Poincaré recurrence occurs within a finite entropy system, of which our visible universe is one (the entropic limit being the area of the horizon size in Plank length units squared). Here’s how Physics Stack explains it:

“our Universe is approaching the empty de Sitter space – we are already pretty close to it, actually, because the cosmological constant dominates the vacuum energy (68% of it). It has a cosmic horizon (the boundary behind which we can’t see) and the degrees of freedom are formally living on that surface. Via the holographic principle (in a somewhat less tested context), one may claim that this means that de Sitter space has a finite entropy so a finite-dimensional Hilbert space is enough to describe everything that happens in it (including the matter in not-yet-empty mostly de Sitter space, like the present Universe). If that’s so, the Universe we inhabit behaves much like any system with finitely many degrees of freedom, and it has Poincaré recurrences. The Poincaré recurrence time is extremely long, something like exp(10^120) billion years [the unit (seconds, or years) isn’t important] ..because the entropy of the de Sitter horizon is 10^120 Boltzmann’s constant (the cosmological constant is 10^−120 in Planck units or so). After this super long time, approximately, events start to repeat themselves. At least in some sense, it is fair to say that the time is literally periodic”.

@Naeclue: Never say never again 😉 I’d like the ludicrous scheme, and monstrous illusion, that is crypto to just fade away, and for the damage wrought by it to be limited to the treasurer and reputations squandered so far.

Sadly, I fear that the time when it finally disappears for good will be beyond the foreseeable future. BTC alone has been declared dead several hundreds of times already. In the meantime, there’s unfortunately plenty of chances for it to bubble up again. Human stupidity seems to know no limits, or – in any event – is at least highly elastic.

I really feel that the authorities in each jurisdiction should have done their job to protect consumers by banning it at the outset in 2010-11, when there was a chance to limit the harm.

I’ve decided not to post further on Monevator after this current posting.

I never intended to denigrate or disparage anybody, but I had thought that it was permitted to ‘play the ball rather than the man’. I accept that, to an extent, it is now verging on a mainstream viewpoint to see cryptographic tokens as an asset class. But I don’t think that it is a minority position, less still an extreme one, that they are, in actuality, no such thing.

Taking as one example the approach of Bogleheads (‘BH’) here.

BH promotes the Lars’ (and obviously John C (Jack) Bogle’s) one total stock market and one local government bond market passive fund approach.

However, they also permit discussion of (and have a great many topic threads about) subjects which are incompatible with (if not outright antithetical to) Jack Bogle’s own investment philosophy, including (for examples) the use of ‘factor’ investing, leverage, quantitative market timing models, and actively managed funds.

Even so, under their ‘Unacceptable Topics’ they’ve chosen to draw a line to exclude discussion of crypto tokens, and they set out their policy choice on that as follows (to quote verbatim):

“Greater Fool Investing Strategies

Eventually, one runs out of greater fools. – Burton Malkiel

Discussions of investment strategies based on securities or physical assets that have no underlying value or negative expected long term returns are prohibited.

Examples include: cryptocurrencies; lottery tickets; tulip bulbs; Ponzi, pyramid, and multi-level marketing schemes; affinity frauds; and market manipulation schemes”

Whilst it is of course up to any website to decide for itself what it individually chooses to allow comment wise, I would respectfully suggest that skepticism (even quite trenchant skepticism) towards crypto tokens remains very much within the mainstream of opinion, at least for the time being.