Cryptocurrencies

[Blake Hampton]

[jfan]

Here is an article from Professor George on this topic in the globe and mail. 

 

 

bitcoin-globe.pdf

[TwoCitiesCapital]

1 hour ago, jfan said:

Here is an article from Professor George on this topic in the globe and mail. 

 

 

bitcoin-globe.pdf 119.32 kB · 3 downloads

 

They said the same thing about the payouts from Mt Gox.

 

Not sure if/when those payments started, but was my understanding distributions were being made in December. Coins that have been tied up for a decade plus and the market hasn't crashed yet... instead it was rising. 

[Fly]

23 hours ago, TwoCitiesCapital said:

 

Part of me believes this. 

 

The other part of me thinks this might be where the traditional book bust cycle gets broken - or perhaps it gets broken AFTER this cycle. 

 

If this does take on a staple approach in investors' portfolios of 1-5%, and as the halving becomes less impactful relative to daily traded volume, I expect the traditional boom/bust cycle over 4 years may be significantly more muted as consistent/passive flows come in as a base of demand. 

 

I don't have strong conviction here - but it does make me wonder if this is a game changer relative to it's prior history. 

 

I'm just concerned with the amount of BTC that will be centralized into Coinbase wallets for the purposes of ETF holdings. Centralized point of failure is always an issue, but beyond that what will be the use case for BTC if it is all tied up in ETF holdings? Will we be able to move beyond store of value and back to medium of exchange? This is why I think we see a dramatic rise in BTC price, but then reach a saturation point where this becomes a concern followed by another bust cycle. 

[ValueArb]

4 hours ago, blakehampton said:

 

I will now add drug legalization to my list of risks for Bitcoin;)

[james22]

On 1/11/2024 at 10:41 AM, TwoCitiesCapital said:

MSTR will probably trade for the value of its BTC reserves plus a small premium for the software business going forward of I had to guess. Just dunno how that compares to the current share price. 

 

Now -29% YTD.

 

Don't what what fair value is either, but seems it's getting there pretty quickly.

[ValueArb]

On 1/11/2024 at 9:41 AM, TwoCitiesCapital said:

 

Haven't looked, but at one point they were at a massive premium to the BTC they held per share. 

 

Many of these crypto names were taken as proxy exposure since we couldn't get an ETF. It wouldn't shock me if the scarcity premium is wrung out of a few of them now that BTC can be owned directly. 

 

MSTR will probably trade for the value of its BTC reserves plus a small premium for the software business going forward of I had to guess. Just dunno how that compares to the current share price. 

 

On the MSTR thread I've posted that I think its still close to a 50% premium to the value of its BTC holdings if you calculate taxes owed. In all fairness, my math was done on my fingers and in my head so not verified. 

 

And i think there is a good chance it trades at a significant discount to the value of its reserves. First because there is no longer any need to own MSTR if you want BTC exposure. So its likely going to lose a lot of those holders who can sell MSTR for more than it's BTC holdings value right now, and buy an ETF to get more BTC for the same dollar. 

 

Secondly, I think the software business value has diminished significantly. Operating earnings have crashed the last few years, and it might have very little value now. I've seen Berkshire Hathaway trade under book, it wouldn't be unusual for MSTR to decline past book value as BTC owners rotate out creating a lot of negative momentum. 

[james22]

2 hours ago, ValueArb said:

I've seen Berkshire Hathaway trade under book, it wouldn't be unusual for MSTR to decline past book value as BTC owners rotate out creating a lot of negative momentum. 

 

Here's hoping.

[SharperDingaan]

7 hours ago, jfan said:

Here is an article from Professor George on this topic in the globe and mail. 

 

 

bitcoin-globe.pdf 119.32 kB · 7 downloads

 

Lot of very twisted logic in this article.

 

Every day, BTC demonstrates that its fundamental value is > 0; it just isn’t valued as the PV of future cashflows. However much we might like it to be.

 

Miners are incentivized to borrow against their holdings, not sell them. All else equal the unrealized gain from progressive halving’s, offset the realized interest expense. Over time miners collectively accumulate a large enough % of total BTC, to ensure they are part of whatever cartels may develop, in the post 21M BTC world.

 

Miners are incentivized to transfer beneficial ownership via OTC derivatives and exchange traded options/futures; not sale of the BTC itself. The ‘float’ is purely paper BTC, and the speculators problem; the miner simply collects a premium and walks away until the BTC is returned at the end of the contract.

 

Price as a function of volume vs float is valid; but its actual + paper BTC volume, vs actual + paper float. Perceived prospects driving volume and exchange traded net open interest driving float. Miners producing BTC, and hedging via sale of exchange traded options/futures; gains/losses settling in cash(vs BTC) every expiry.

 

The reality of course is create a mania, and BTC should fly. We just need to keep in mind, that it doesn’t mean the mania has to occur all at once, and all on day 1!

 

SD

Edited January 12, 2024 by SharperDingaan

[jfan]

1 hour ago, SharperDingaan said:

 

Lot of very twisted logic in this article.

 

Every day, BTC demonstrates that its fundamental value is > 0; it just isn’t valued as the PV of future cashflows. However much we might like it to be.

 

Miners are incentivized to borrow against their holdings, not sell them. All else equal the unrealized gain from progressive halving’s, offset the realized interest expense. Over time miners collectively accumulate a large enough % of total BTC, to ensure they are part of whatever cartels may develop, in the post 21M BTC world.

 

Miners are incentivized to transfer beneficial ownership via OTC derivatives and exchange traded options/futures; not sale of the BTC itself. The ‘float’ is purely paper BTC, and the speculators problem; the miner simply collects a premium and walks away until the BTC is returned at the end of the contract.

 

Price as a function of volume vs float is valid; but its actual + paper BTC volume, vs actual + paper float. Perceived prospects driving volume and exchange traded net open interest driving float. Miners producing BTC, and hedging via sale of exchange traded options/futures; gains/losses settling in cash(vs BTC) every expiry.

 

The reality of course is create a mania, and BTC should fly. We just need to keep in mind, that it doesn’t mean the mania has to occur all at once, and all on day 1!

 

SD

I haven't dove deep into the public miners that out there but did quickly glance at Riot's and Marathon's 10-K. It doesn't seem to me that they do much hedging of their BTC to "sell their BTC" without dipping into their BTC treasury. Riot does hedge their power-purchase agreements and sells BTC to pay for employee compensation and likely capital purchases.

 

 

Marathon has this in their filings and doesn't have any hedging/derivatives at first glance.

 

Arguably, if their cost of mining is far less than $40K/bitcoin, and the market BTC price is dependent on least efficient miner, then these mining companies should be profitable even when the market price dives. Furthermore, they could selling their profitable BTC over time to obtain more efficient mining equipment without ever needing to hedge and likely still get to hodl most of their mined BTC. 

 

For fun, I did check out how many 140 Th/s miners I would need to have a chance to mine a block within 1 year. It would take 100 miners to mine a block in 301 days. With the state-of-the-art most efficient miner costing $14/Th, the start up cost would be $196K + operating costs. 

SoloChance.com - Solo Mining Chance Calculator

 

wrt to Professor George's article, despite his stance on that only cash flowing businesses can have intrinsic value, I am glad that he did some research on how the BTC network functions, and am hopeful that he continues to dig further. Everyone has to start somewhere.

[ValueArb]

5 hours ago, SharperDingaan said:

 

Lot of very twisted logic in this article.

 

Every day, BTC demonstrates that its fundamental value is > 0; it just isn’t valued as the PV of future cashflows. However much we might like it to be.

 

Miners are incentivized to borrow against their holdings, not sell them. All else equal the unrealized gain from progressive halving’s, offset the realized interest expense. Over time miners collectively accumulate a large enough % of total BTC, to ensure they are part of whatever cartels may develop, in the post 21M BTC world.

 

Miners are incentivized to transfer beneficial ownership via OTC derivatives and exchange traded options/futures; not sale of the BTC itself. The ‘float’ is purely paper BTC, and the speculators problem; the miner simply collects a premium and walks away until the BTC is returned at the end of the contract.

 

Price as a function of volume vs float is valid; but its actual + paper BTC volume, vs actual + paper float. Perceived prospects driving volume and exchange traded net open interest driving float. Miners producing BTC, and hedging via sale of exchange traded options/futures; gains/losses settling in cash(vs BTC) every expiry.

 

The reality of course is create a mania, and BTC should fly. We just need to keep in mind, that it doesn’t mean the mania has to occur all at once, and all on day 1!

 

SD

I was in Marathon a couple years ago, I started by shorting it convinced it was likely a scam, then went long when I calculated their earnings would likely explode from their planned expansion. Neither worked out well because I used LEAPS for both. But it was pretty hilarious to have simultaneous bets MARA would either drop below $7 or blast past $40.

 

One thing that became clear is their capital allocation strategy was terrible. They never sold any bitcoin, which was incredibly dumb on its own. They even borrowed to buy more which is far dumber. Obvious if BTC went up they’d make more money by holding and borrowing to buy more. But they’d already make a lot of money in that scenario. But if BTC has a serious downswing where they struggled to profitably mine it holding BTC compounded the loss of cash flow by potentially forcing them to liquidate BTC at its lows to keep the doors open. And leverage made that scenario even more likely.

 

And it seems clear a big reason they did it is because of social pressure from the BTC community frowning on miners liquidating BTC, and sellers were risking potentially losing priority on new rigs they were buying. There is a disgusting self centered religion in crypto where large participants are guilted into holding as part of a corrupt conspiracy to keep the price higher. It’s little different than Wall Street bets convincing poor retail investors to supply buying volume to their shitcos so the pumpers can exit at a profit. 

 

This and the rampant wash trades are reasons why all forms of crypto, including Bitcoin, are still far from having fair trustworthy markets.

[wachtwoord]

19 hours ago, Fly said:

 

I'm just concerned with the amount of BTC that will be centralized into Coinbase wallets for the purposes of ETF holdings. Centralized point of failure is always an issue, but beyond that what will be the use case for BTC if it is all tied up in ETF holdings? Will we be able to move beyond store of value and back to medium of exchange? This is why I think we see a dramatic rise in BTC price, but then reach a saturation point where this becomes a concern followed by another bust cycle. 

 

Yeah it's ridiculous Coinbase is the custodian for all (?) ETFs. It's like it's bring setup to fail with a single point of failure (centralization).

[SharperDingaan]

Coinbase custodianship is a non-issue.  Assume that a Coinbase today, has a very generous 60% of the current BTC custodian market, measured as the area of a medium pizza. Mainstream BTC-ETF's get created all across the US, Europe, Asia, S America, ME, etc => the pizza grows into an XXXL, and institutions primarily custodian with their existing custodians - to whom BTC, ETH, etc. is just another security. Coinbase ends up with a small fraction of the XXXL pizza, and we have multiple very capable custodians reducing the risk for everyone.

 

BTC-ETFs are simply a 2nd level application, that both gets around the 21M BTC limit, and the high costs of transacting directly . Buy BTC directly and there are only 21M; buy BTC-ETF's that buy up the 21M BTC, and there are as many units as the BTC-ETFs collectively choose to issue. A BTC-ETF that issues 1,000 units per 1 BTC, reduces the price/unit to USD 4.70 vs USD 47,000 => cheaper prices, increasing demand for the BTC-ETF, increasing demand for BTC itself => raising the price of BTC.   

 

Whales transfer beneficial ownership of BTC to BTC-ETFs via a derivative, a copy of which the custodian holds (and the regulator can see). BTC inflation protection remains (max 21M), as it is independent of the number of units the BTC-ETF issues (21 Billion+?). No change to existing crypto wallets/exchanges etc, other than economic cost/benefit of continued participation. And continued holding of that existing wallet? => now based almost entirely on its intrinsic value to its owner 

 

Very elegant solution.

 

SD  

Edited January 13, 2024 by SharperDingaan

[TwoCitiesCapital]

1 hour ago, SharperDingaan said:

Coinbase custodianship is a non-issue.  Assume that a Coinbase today, has a very generous 60% of the current BTC custodian market, measured as the area of a medium pizza. Mainstream BTC-ETF's get created all across the US, Europe, Asia, S America, ME, etc => the pizza grows into an XXXL, and institutions primarily custodian with their existing custodians - to whom BTC, ETH, etc. is just another security. Coinbase ends up with a small fraction of the XXXL pizza, and we have multiple very capable custodians reducing the risk for everyone.

 

BTC-ETFs are simply a 2nd level application, that both gets around the 21M BTC limit, and the high costs of transacting directly . Buy BTC directly and there are only 21M; buy BTC-ETF's that buy up the 21M BTC, and there are as many units as the BTC-ETFs collectively choose to issue. A BTC-ETF that issues 1,000 units per 1 BTC, reduces the price/unit to USD 4.70 vs USD 47,000 => cheaper prices, increasing demand for the BTC-ETF, increasing demand for BTC itself => raising the price of BTC.   

 

Whales transfer beneficial ownership of BTC to BTC-ETFs via a derivative, a copy of which the custodian holds (and the regulator can see). BTC inflation protection remains (max 21M), as it is independent of the number of units the BTC-ETF issues (21 Billion+?). No change to existing crypto wallets/exchanges etc, other than economic cost/benefit of continued participation. And continued holding of that existing wallet? => now based almost entirely on its intrinsic value to its owner 

 

Very elegant solution.

 

SD  

 

I dunno if ETFs get us "around" the 21 million hard cap any more than subdividing that 21 million into satoshis does. But I do expect greater ease of access to derivatives/leverage as a result which might functionally do something similar. 

 

But I DO think having ETFs trade may remove the unit bias of a whole BTC since most people will not know their exposure denominated in BTC. They'll just know they have x shares or y dollars invested in it which eases the approach of moving from BTC to Satoshi denominations. 

Edited January 13, 2024 by TwoCitiesCapital

[SharperDingaan]

Agreed re the 'framing' issue; but the reality is that owning a whole BTC-ETF unit is a much easier 'sell', than owning a fraction of a BTC (as 'x' number of Satoshi). While functionally there is not much difference ... it's night vs day at the market level. Think 3 markets; (1) The techie preferring to stay in 'cryptoland' (BTC, Satoshi, Wallets, Networks, etc.); (2) Institutions trading the option/futures market, creating the ETF's, creating the markets themselves (carbon trade), custodianship, etc; (3) Joe Sixpack who just wants cheap no-think trading sardines on BTC/crypto in general.

 

Joe Sixpack can now do his thing; but one has to think (in relative terms), there isn't going to be much crossing of 'lanes' into the techie lane. The Satoshi market is essentially a 3rd level application that will come into play once all the 21M BTC have been issued (when buyer/seller have to pay the miner in Satoshi). Lots of ways this could go, but the floor price of a BTC will be 100M x the price of a Satoshi.

 

We live in interesting times.

 

SD

Edited January 14, 2024 by SharperDingaan

[james22]

Can't wait for the synthetic cyrpto offerings that bet on their performance.

[ValueArb]

Why would Tether be more "anonymous" than any other crypto? I'm thinking its popularity is simply because its a stable-coin, meaning the criminals can keep their loot online without worrying about losing any to price volatility. And that might be very important when the Boss wants all of his money back;)

 

https://www.forbes.com/sites/roberthart/2024/01/15/tether-cryptocurrency-becoming-preferred-choice-among-money-launderers-and-scammers-un-warns/?sh=21644af46385

[SharperDingaan]

In theory only the entity putting up the sh1tecoin, and Tether staking BTC against it ... know who is involved; the Tether/BTC leg of the stable coin has no idea. Additionally; should the need arise, it's a lot easier for Tether (and/or its principals) to experience an accident ... and for the staking records to conveniently 'disappear'. Most of this is also under Chinese control ... with very different rules, applied at different levels; the stealing is straight-forward, the living afterwards ... not so much. Macau is a small place.

 

SD   

[linus_md]

On 1/12/2024 at 6:15 AM, jfan said:

On 1/11/2024 at 3:15 PM, TwoCitiesCapital said:

 

My best guess is fair value is around $42k today. By the end of 2024, $100k.

Why should “fair value” increase by 150% in a year?

[james22]

12 minutes ago, linus_md said:

Why should “fair value” increase by 150% in a year?

 

Increased demand.

[TwoCitiesCapital]

1 hour ago, linus_md said:

Why should “fair value” increase by 150% in a year?

 

It depends on if we're talking short-term or long-term sustainable growth. During a hype cycle where BTC goes up 5-20x, the number of users on the network grows which means the value of the network grows by the square of the users. 

 

But not all of those users are long-term. Some are short term speculators who will leave the network when prices inevitably correct which means "intrinsic" value is falling. 

 

I try to take a longer term trend of what I believe the adoption rate will be long term and trim my holdings when the price gets significantly above that. 

 

Historically, a compound rate of 50-100% per annum has proven the sustainable growth trend. So if we get a 5x-10x in 12-18 months, it is probably worth trimming some as the price has far exceeded the adoption trend for the next 2+ years. 

Edited January 15, 2024 by TwoCitiesCapital

[jfan]

6 hours ago, linus_md said:

Why should “fair value” increase by 150% in a year?

For me the biggest drivers are the continued total network hashrate increase along with the halving of the block reward after April. 

 

[giulio]

"a compound rate of 50-100% per annum has proven the sustainable growth trend...we get a 5x-10x in 12-18 months..."

 

Cathie, are you in this room with us?  

[TwoCitiesCapital]

6 hours ago, giulio said:

"a compound rate of 50-100% per annum has proven the sustainable growth trend...we get a 5x-10x in 12-18 months..."

 

Cathie, are you in this room with us?  

 

Tell me how else you've gone from pennies to 40k/coin in 15 years? That's been a 200-300% growth rate per annum.

 

I'm taking a pretty large haircut to what it's demonstrated in its prior history for the intermediate term of its growth - which is actually incorrect to do according to the S curve. Growth might actually accelerate from here. 

 

This is no different than the adoption of the Internet or telephones and etc which demonstrated similar adoption patterns/growth rates. 

 

Edited January 16, 2024 by TwoCitiesCapital

[ValueArb]

Matt Levine on Grayscale

 

Quote

We talked last week about the long-awaited approval of spot Bitcoin exchange-traded funds in the US. It has been widely assumed that these ETFs would be good for the price of Bitcoin: Spot Bitcoin ETFs are a convenient and easy way for normal people (and traditional institutions) to own Bitcoin, and now that they are here, perhaps more people (and institutions) will buy Bitcoin through the ETFs. Demand for the ETFs will drive demand for Bitcoin, because each dollar that flows into the ETFs will ultimately, through arbitrage, go to buying Bitcoins.

But there is another, minimalist view you could take of the ETF approvals:

1. The biggest pot of publicly traded Bitcoins is the Grayscale Bitcoin Trust (GBTC), which we have also talked about a number of times.
2. GBTC’s distinguishing feature, for most of its recent history, has been that you could put Bitcoins in, but you couldn’t take them out. When we talked about it last week, there was about $29 billion worth of Bitcoin in GBTC, and GBTC shareholders could not exchange their shares for Bitcoin.
3. GBTC led the charge for spot Bitcoin ETF approval, sued the SEC to get it done, won, applied to convert into an ETF, succeeded, and last week did in fact convert into an ETF.
4. Now you can take your Bitcoins out of GBTC. That is in a sense the point of the ETF structure. Now GBTC shareholders can sell their shares on the stock exchange, and if there are more sellers than buyers then arbitrageurs and “authorized participants” can deliver GBTC shares to Grayscale and get back Bitcoins.[7]
5. It is possible that the main effect of the launch of spot Bitcoin ETFs would be people taking money out of GBTC — which they have never been able to do before — rather than putting money into GBTC or the other ETFs.

That is, the launch of spot Bitcoin ETFs might be not a way to attract normal people into Bitcoin, but a way to let trapped GBTC investors out.

I’m not sure I’d bet on that as the main story or anything, but Bitcoin prices did fall since the ETFs launched, and GBTC has seen some redemptions,[8] and it would be a very funny story. What if GBTC has just trapped some demand for Bitcoin since 2017, and ETF approval finally released it? Here’s Bloomberg News with, I’m sorry, Anthony Scaramucci:

Bitcoin’s decline since the start of trading of exchange-traded funds that hold the cryptocurrency was driven in part by sales of Grayscale Bitcoin Trust shares, according to SkyBridge Capital founder Anthony Scaramucci.

“There seems to be of lot of selling of Grayscale,” Scaramucci said during a Bloomberg Television interview on Friday.

The hedge fund manager said that his trading desk noted that holders of the shares, which were converted from a trust this week when the US Securities and Exchange Commission signed off on the ETFs, were selling to book losses and shifting to lower fee alternatives.

“Shifting to lower-fee alternatives” should be neutral for Bitcoin — “Selling one Bitcoin product to buy another should not impact Bitcoin’s price, said Zach Pandl, Grayscale’s managing director or research” — but just getting out entirely would lower the price, and GBTC holders haven’t been able to do that for years.