jfan

Just curious, where does everyone think BTC will top out this cycle? 1) $150K 2) $200K 3) $250K 4) $300K+ My vote $300K.

@SafetyinNumbers Great podcast! Thank you!

The supply is built into the codebase. To make a change requires the a majority of the nodes to agree to the change. During the blocksize wars, the miners wanted the network to change to increase transactional throughput and misjudged the degree of voting power they had. They assumed that having all the hashing power gave them more influence. However, the node operators and open-source programmers were able to mount a response rejecting their hard fork proposal. As with any voting system, it does require the node operators to be educated well enough to reject such changes. That said, most people (including myself) are not technical, so to some degree we rely on the open source ecosystem to keep the network true to its roots. This is a risk. But as the system grows, it will be harder and harder to achieve any consensus, and hence most proposals will be in deadlock, and the existing codebase will not change.

You are welcome. The root on X, @therationalroot has some really interesting ideas and put together some visualization with historical BTC data. He has some interviews on YouTube that you might enjoy. Caveat: some of the interviewers are a bit nutty

@73 Reds There are a number of models out there that different people have proposed in terms of valuation. Every model has some limitations, but even our traditional finance models have limits (ie DCFs, relative valuations, P/E & P/B ratios etc). In addition to @TwoCitiesCapital's models mentioned, another one that I found useful is on Charles Edward's Medium posts (he runs a digital asset fund) Bitcoin’s Production Cost. An Estimate of Bitcoin’s Production and… | by Charles Edwards | Capriole | Medium Bitcoin Energy-Value Equivalence. The Intrinsic Value of Bitcoin as… | by Charles Edwards | Capriole | Medium More simplistic relative models include % market cap relative to gold, relative to dollar-denominated debt, relative to real estate. Others have analysed the blockchain for ratio signals or wallet distribution/activity to look for over and under-valuation moments. Glassnode is a service you can sign-up and learn/use their data. Greg was quite astute that sometimes it just "feeling" the secular sentiments and behaviour change in the population over time (paraphasing him: digital adoption, level of trust in government, computing power, open-source technologies, etc) @wachtwoord posted a really good document here a while ago. I've attached it below. Even Cathy Wood has some reading material that might shed some light. I don't think it will get you the precise answer you are looking but might be a starting point. Buried within Edwards blog, is a quote from Satoshi about how he thought initially the production costs will drive BTC's value but as this drops, the transaction fees will play a much larger role in the future. This then requires a functioning market that obeys general supply - demand for block space. John Pfeffer - An Institutional Investors Take on Cryptoassets - 2017 Dec.pdf

I was just looking at the miner innovation over time. The current 2024-25 models have up to 860 Th/s with an energy efficiency of 13 J/Th at a $19/Th pricing. If look back to 2018 for example, a miner might have 20.5 TH/s with an energy efficiency of 75 J/Th at prices between $50 - 200/Th. Despite, the total hash rate going up over time, the cost and the energy efficiency to run the network gets lower and better pretty consistently.

Do you have to source for this quote? I was always under the impression that the core business was to have peer-to-peer money that was censorship resistant. There is a nuance to Gresham's law, in that it only applies to the situation where there is a fixed exchange often under governmental decree. In these cases, the bad money replaces the good money in a country as the transactional medium (the good money gets hoarded or sold internationally in exchange for the bad money). There already exists many wrapped BTC tokens on various blockchains entities (WBTC [eth], cbBTC [coinbase], kBTC [kraken]) exchanged at fixed ratios, one could imagine that these formats will potentially take over transaction volumes or at least act as a competitive limit to BTC transactions (base layer and lightning network). Taking this a bit further, if a country wanted to control its out digital fiat token and limit its citizen's from using BTC, they could wrap their token as well. All these self-motivated entities could limit/hinder the future development of a proper market-based mining transaction fee? (just talking out loud - idk) The inventors of BTC may be hoping for an application of Thier's law (reverse of Gresham's) where in the absence of legal tender laws, people will choose good money over bad in a free market system where the rate of inflation is high enough to reduce the real demand for the bad money. Perhaps, it is still technically too challenging for the general public to use to enable wide spread daily adoption.

Just glancing at the rate of doubling of transaction volumes on-chain seems to be slowing down (4 years, prior doubling was 3 years, prior doubling was 2 years) and the transaction fees in BTC (excluding the coinbase rewards) has not budged at all (stuck at ~ 10 - 15 BTC). I think this gives some evidence that the transaction fee market isn't necessarily developing in BTC terms as expected. Food for thought. Source: Blockchain.com charts

I've purchased both this one and the one titled winning long-term games. Both are excellent reads that gave me some ah-ha moments. Survival is more important than performance. Play the games that you can survive and not the one's that others were successful in - reproducibility matters. Sub-optimization and redundancy are helpful to survival. This was really useful to think about portfolio construction, long-term investing and dispels some common notions that amateur dabblers like myself held. For example (as it applies to the non-professional) 1) Not being fully invested is not a terrible thing. It gives optionality, allows one to have a clear mind when situational crisis occurs, and achieving a "satisfactory" outcome can still get you to the end-goal without being the best (eg IRR). 2) small position sizes should not be shamed. Lots of unexpected stuff happens both positive and negative. For very long-term holding periods, both are increasing likely over time. 3) Also cutting your flowers should not be shamed. Idiosyncratic things can even happen to really great businesses especially as your time horizon lengthens. The goal is having your portfolio survive for an investment lifetime (50 years), not just 5 - 10 years. This framing also helps with patience. This series of books coupled with ideas from deep survival are super useful (eg survivor mentality).

People's thoughts on this issue of re-hypothecation of BTC and centralization of BTC holdings within 3rd parties reducing the ability to form a functional transaction fee market in the future to secure BTC mining? https://x.com/DU09BTC/status/1850544299500552195

https://www.ft.com/content/894aba60-de05-46b7-a8a8-9fd405c16889 Hermes vs Kering

Outcast Beta Blog + Ergodicity, and their implication to portfolio construction The conventional wisdom among value investors is that: 1) invest with a mindset of holding a company's stock for 5 - 10 years, 2) concentrate on your best ideas where you have an edge/circle of competence/unique contrarian insight that is highly probable that you are right, 3) buy below intrinsic value (especially if market implied expectations are particularly extreme) and sell above it. The problem with this conventional wisdom, is that I feel it is incomplete and potentially dangerous to the goal of building wealth especially for the everyday retail investor. This is because it does not take into account the repeatability of a particular strategy in the long-term, nor the fact that long-term, really means one's life expectancy (not the planned holding period of a stock), for a specific individual. Buffett concentrating his portfolio in Coke was a big winner. Other value investors concentrating in Sears was a big loser. Miller riding Amazon was a big winner. Other value investors shorting Tesla was a big loser. Why did it work from some and blow-up others? After reading Outcast Beta's blog and learning about the concept of ergodicity, it gave me a bit of insight on how to think about this a bit more deeply as it pertains to myself as I learn how to construct a portfolio. The first lesson I learned is that survival is more important than performance, and the only way to survive is to have a strategy that I can live with and reproduce in a consistent manner. This strategy will depend on the game that I choose to play, which in turn depends on my own skillset, knowledge base, and temperament (or in the case of professional investors, their clients). This coupled with one's own personal time frame (ie months - years - decades), will govern the interplay between the number of stocks and the degree of leverage (% of stocks in a portfolio of stocks & cash equivalents). The second lesson I learned is that greater the deviance of portfolio from a well diversified index, the wider the distribution of outcomes I will be exposed to in terms of geometric returns, total wealth accumulated, and probability of losing as compared to a benchmark index. The most practical way to minimize this deviance is from diversification. Where I was surprised, was the degree of diversification necessary especially as one's time frame lengthens. In fact, over a 40+ year investing time frame, a randomly-selected portfolio could require > 25 - 100+ stocks to reduce this drag. Interestingly, but not surprising, is that selecting stocks > 20th percentile in market size, cheap, profitable stocks, and having a lower % of stocks in the portfolio reduces the degree of diversification necessary to reduce the variance drag in a less than perfectly diversified portfolio compared to the benchmark. Although not precise, inspecting the graphs in Outcast's blog, it seems that selecting stocks > 50th percentile in mkt cap will reduce the # of stocks by 50%, and selecting cheap, or profitable, or stocks > 20th percentile market cap will reduce the # of stocks by 30%. Starting with the assumption of a 100% stock portfolio, it would seem that ~ 120 - 150 stocks get you close to a well-diversified portfolio. By using the above selection criteria (ie big, cheap, profitable), I would be looking at ~ 18 - 22 stock positions over a 40+ year investing life-time, which is remarkably close to Buffett's punch card rule of thumb for the buy & hold investor. It may also be consistent with Munger's 3 stock portfolio with ~ 5 year holding periods over a ~ 40 year investing life (ie 24 stock positions over a lifetime). In either case, a significant factor contributing to Buffett and Munger's success, is creating ergodicity. This can be done both in measurable and philosophical ways (qualitative). It can be, as shown in Outcast's blog, through diversification in the number and styles of stocks. But diversification can also be done through time, such as a buying a full position of 1 in 20 punch card positions every 2 years when you can find them at a decent price or alternatively accumulating small amounts of your evolving list of 20+ favored businesses over time. Core to this, is avoid the potential of zeros or extremely negative outcomes in a manner than does not cause permanent irreversible damage to your overall portfolio (taking into account future certain cash flows from other sources such as employment). Furthermore, reducing the % of your portfolio that is comprised of VC-like bets, as you age and get closer to the fixed income stage of life also helps, because recovery from future certain employment cash flows is much less likely to rescue you and your portfolio. The other way to create ergodicity is act like a true long-term owner by thinking like one or actually have significant influence in the business. As an outside passive minority shareholder, we have neither the influence or clout to vote away poor board decisions, we can only ride along with management's decisions and choose to accept them at their word or not. Buffett and Munger can take equity positions and by the nature of their reputation, have significant sway in management. Along the theme of ergodicity, is playing games that we can reproduce and games where there are many winners. Copying Buffett and Munger in this regard, doesn't work. So as an OPMI, it behooves us to have a higher level of diversification (# of & through time) than these investing giants. As it comes to "stock-picking", it is more valuable to think about this endeavor more similar to searching and owning a participation in a collection of durable assets/businesses with a historical track record of surviving many different harsh economic realities (quality businesses). As Cliff Asness wrote recently in his paper "The Less-Efficient Market Hypothesis", the markets have become less efficient (so finding opportunities for the skilled investor) has become easier but sticking with what is right is getting much harder (longer to time for the market to realize this value). This got me thinking that being highly concentrated in a small cap value in a foreign market for example, will require significant patience and will very likely cause a long-term drag on your portfolio. It will also require you to ensure that the underlying business is of high quality (highly profitable with a long re-investment runway) and/or management is actively working at returning capital to shareholders. These positions may need to be smaller so that you and your stakeholders don't run out of patience waiting for the re-valuation event. I'll end of this post with some examples of how I would apply the above: 1) Costco/Hermes - punch-card high quality at a stretched valuation - accumulate slowly over time (time diversification for a better price) 2) Fairfax India - owns some highly durable assets in a vehicle that is not particular shareholder friendly at a very cheap price that will have a long-reinvestment runway - own in quantities directly proportional to your degree of patience 3) Stellantis - not a 100-year business that a monkey can run (although founded in 1899), available at a cheap price that is actively returning capital to shareholders hoping for an inflection point of a successful EV transition - own in quantities that won't permanently damage your portfolio if it fails and reduce your time frame of holding on it (not a buy-hold candidate) 4) Fairfax Financial - punch-card quality if the culture stays the same over time available at a very reasonable valuation - having a > 5-10% position is very rational with a 10+ year time frame (large, cheap, profitable)

I will check this one out. I've been listen to Driving with Dunne podcast which had a number of good discussions on EVs, China, Batteries and Software Defined vehicles. He had John Wall, SVP and Head of engineering at QNX, discuss his views on autonomous driving. His opinion only but his thoughts are that the liability issue of autonomous vehicles is very much in the air and full driver acceptance may be a ways off. His prediction in 2014 was maybe 2035, but he thinks this is likely still too aggressive (in 2024). His thoughts are that Level 1 --> 5 progress will be incremental with OEMs specifically focused on safety features and a gradual consumer adoption over time.

https://x.com/TaylorOgan/status/1833455617798750255 This is a video from Huawei's ADS.

@nwoodman @TwoCitiesCapital @rkbabang @SharperDingaan Tagging a few people that might be interested in this video/podcast A few key points: 1) passive indexing creates inelastic markets especially in well-follow large caps 2) passive indexing creates a situation where it becomes increasingly difficult for active managers to outperform 3) as % of market is invested in passive (70-80% threshold), exponential outcomes can occur 4) BTC is not the solution because it doesn't have a profit incentive because supply is fixed and ultimately the largest player will dominate BTC holdings

Thanks @nwoodman for the summary. This got me thinking about the whole paradox of skill and the distillation of the best of the best investors surviving in this globalized hypercompetitive market with all this fee compression from passive fund flows. The questions in my mind are: 1) with more skillful active investors out there, will it require fewer and fewer % of active mangers needed for long-term value discovery? 2) with democratization of investing, social media, will this counterbalance/offset the challenge of creating alpha? 3) will reversions to intrinsic value be faster for large cap/well followed companies and slower for those underfollowed (small cap)? If Mauboussian is right about luck playing a more contributory role in investing outcomes, how do investors maximize this? - being a generalist (cross-industry model thinking) - willingness to tolerate larger cash balances - ability to wait longer without pressures to investing from LPs - creating a lucky network (see attached link) (5 Ways to Create Luck in Investing and Life - Safal Niveshak)

As people have pointed out mathematically and examples from reality regarding difficulties with capex decisions and their respective execution, I am not sure that this simplification regarding capital lite good and capital heavy bad dichotomy is necessarily accurate. I think it depends on the type of product and the level of competition. If competition is absent or minimal (eg railway monopoly or oligopoly), a significant amount of capital invested in real tangible assets that are difficult to replace, all but guarantees a certainty in future cash flows with a very long tail could be quite desirable. Conversely, in many software businesses where it is asset light, but the product is a commodity or the competition is fierce, coupled with the fact that human capital is potentially very expensive, the cash flows may be more elusive than one thinks and the growth runway is shorter than it seems at first glance.

STLA

Rolex revenues (USD) 10 billion swiss francs = $11.25 billion USD I think the same was said about the luxury watch marker when the quartz watch came out. Business breakdowns had a nice podcast on the history of Rolex. Can you own both? I think you can. Will you use them differently? Probably. Will you pass on your Apple watch to your heirs? Low probability. Just speculating, perhaps, the luxury watch brands, will become even more coveted because they are becoming more scarce and Apple has paradoxically increased their brand value by taking over the middle-tier markets.

It seems to me that the persistence of some of these luxury brands is their ability to say NO to their very wealthy customers who are not accustomed to being denied anything they want in life. It is less about the actual product but the mindshare/relationship between the heritage of the brand with customer themselves. All these products (bags, watches, collector cars) are essentially commodities, and will have competing products that deliver more utility at a lower cost, but the truly successful brands are selling the ability to belong to an exclusive club more than they are selling these items. It seems that companies that rely on their brand, are especially maniacal about maintaining this relationship. Costco's membership, as @gfp, pointed out is similar. Their promise to deliver high-quality low cost products that we use daily is carefully nurtured and cutting out that membership would be inconceivable in our household (and I suspect many other households). Perhaps the acid test is the number of people that would utter the statement (as my wife does often), "I love Costco". I'm no brand/marketing expert, but after studying a few of these brand-dependent businesses, it seems the successful ones understand their relationship and take certain elements to the extreme and maintain that over time. They then calibrate their funnel to find the next generation of customers at the same time optimizing their most avid supporters (ie super-fans) life-time customer value (ie minimize retention costs, increase share-of-wallet, reduce churn). It is very interesting that many of these luxury brands have existed decades owned by families or non-profit foundations. I think it requires the caretakers of these brands to be particularly long-term focused and have significant abilities to defer gratification to ensure brand mindshare and survival.

thanks...that means a lot of sense. I've been looking at some luxury companies out there, and it seems that for those with secondary re-sell markets (or at least a demand for such) have a significant 2-4x consumer surplus that is left uncaptured. Certainly, this might suggest that their financials are under-earning to a degree with the caveat that full capture of this surplus would be long-term detrimental to its brand value over time (ie the barrier to a purchase commitment is raised if the expensive Birkin, Patek-Phillipe, Chanel, Ferrari item can't hold "value" into the future). With the valuation of these luxury companies routinely trading at lofty numbers, is it just the fact that the market recognizes this untapped pricing optionality or is it massively over-estimating the growth potential/re-investment runway for these companies (ie ubiquity being the enemy of luxury, # of HNWI out there and the growth of their net worth, barriers to exit for failing legacy brands, and fickleness of end customers)? I guess these particular companies and their securities should be viewed as alternatives to inflation-protected long-term treasuries coupled with the share scarcity in the float as part Rembrandt if the brand can survive multi-decades into the future.

I appreciate that untapped pricing power could be used strategically as a means of delivering more value to customers than its costs in order to maintain customer loyalty. As an outside passive minority shareholder, would you pay a premium for this untapped pricing power and if so, how much? (in light that you won't have control on the pricing itself) Would this be different if you could acquire the entire company and influence pricing?

I think there is potentially a lot of validity to this statement. It really depends on who is in the receiving end of these BTC payouts. Only the fervent retail HODLer or long crypto expert investor who is going to hold on this. If the majority of these claims are held by asset managers that have promised their LPs a massive gain on payout, their LPs will expect return of capital, which means liquidation of BTC in the spot market. PS @ValueArb quite enjoyed your post on China's history!

Joe, BTC

Re-listening to my audio book again. Kahneman separates decision making errors into bias (systematic deviations) and system noise. System noise from level noise (differences between people) and pattern noise (variation within people). Pattern noise from stable pattern noise (internal variance that result from an individual's past experiences and personality and their interactions with specific situations) and occasion noise (random events that affect decisions). Interestingly, in DK's studies, he found that system noise is a larger component of decision error than bias; pattern noise accounts (50-80% of system noise) for more than level noise; and finally stable pattern noise (4x larger in a study of model judges) is often greater than level noise which is greater than occasion noise. Level noise can be addressed with eg guidelines, rules. But stable pattern noise is much more challenging to address because it is due to people's uniqueness in judgment abilities. This got me thinking about the overall effectiveness of the market price aggregation mechanism over the long-term especially in the light of indexing, gamification of investing, in effect lowering the barrier to entry of non-expert investors and deluge of information. I can see how the search bubble and algorithmic feeding of information based on past searches, can super-charge the homogeneity of thinking and in turn bias the market participants. But what about noise, especially stable pattern noise, since it makes up so much of the error in decisions. With fewer and fewer people doing primary work (eg indexing), and more and more retail non-experts participating (more level noise, more pattern noise, momentum buying, short-term trading), it seems that the implication is that the quality of judgment has reduced. What are the implications here? I would think that there should be more volatility (more violent up and downs, coupled with longer than average over and under-valuation of markets than history). This coupled with Gigerenzer's concept of wicked environments, and Max Bennett's (A brief history of intelligence) discussion of how humans learn (neocortex's ability to simulate their own & other minds, and future needs; humanities ability to communication ideas from generation to generation, the propensity of tribalism is a form of punishing and rewarding those that don't conform to consensus values to maximize survival of the species as a evolutionary teaching mechanism) makes me think that successful investing from an individual level will require increasingly more patience (slow down decision-making, more incrementalism in building positions), persistent efforts to learn and understand the few deep factors (in the businesses) that on the balance of probabilities will favor survivability and resilience (thereby maximizing time arbitrage ie target very deep value or very high quality, less in-between), and the 2 analytical skills that are the most important is the ability to change your mind with changing data and ability to filter out useless information. Perhaps, the other implication is that the old adage of time in the market is more important than timing the market is less applicable today. Perhaps, sitting in cash, taking time to really understand what you are buying is more important now, than before.