In the article, we discussed the relationship between the bear market bottoms of the S&P 500 in 2009 and the NASDAQ in 2002, and the similarities they may have had with the bitcoin bear market over the preceding 15 months.
We go on to describe the performance from those lows to March 2015.
Pantera’s recommendation proved prescient. Bitcoin has returned over 350% since we published the recommendation (similar to the price appreciation experienced by the NASDAQ and the S&P 500 off their lows).
DIGITAL CURRENCIES OVERBOUGHT
The reason to mention our penultimate recommendation is that we have a sense that digital assets are overbought right now. Today’s euphoria over bitcoin, ethereum, and every token sale is the (bi-?)polar opposite of the dejected depression when bitcoin was at $270. Each counterpart to the bullish signals in our Forbes article is maxed out the other way – wild bullishness at the highs, the price well above the fundamentals, and dozens of new tokens surging simply on the announcement of their vaporware.
Let’s check fundamentals. The relationship between bitcoin price and underlying transactional use has been so close that the ratio is fairly stable. (In 30 years of trading currencies, I can’t recall many currencies where the fundamental drivers are so clear and stable.) The graph below shows the ratio bitcoin price per 1,000 daily transactions – essentially what the market is willing to pay to own a share of the protocol for every 1,000 transactions. This may be a helpful guide to determine the short-term valuation in relation to fair value. Currently the price is trading above the high-end of this range, which has predominantly traded between $3.00 and $5.00 per 1,000 daily transactions. At a price of $1,257 it is 2.8 standard deviations from the mean.
This may be helpful to a short-term trader for timing when to buy or sell – or for those entering a long-term position.
The graph below can put the current price in prospective. It displays a linear regression of the price of bitcoin to the number of transactions in the Bitcoin network per day. Since January 2015 the price of bitcoin has a stable positive relationship with confirmed transactions per day. At the current transaction rate (222,994), one would expect the price to be $986 /BTC.
For this relationship to move back in line with the expected values based on the regression line either the price would need to fall 22% to $986 or drift until transactions have grown 33% to reach 295,509. Based on the average annual growth rate, daily transactions are expected to reach a level corresponding to the current price on June 21, 2017.
Disclaimer – For many years I’ve said bitcoin’s going to $25,000+. When it gets there, don’t go saying “You were bearish at a thousand, man.” This is a short-term trading view that the market is ahead of itself – it’s likely to stagnate for a period of months.
Annual transaction growth has compounded at an average rate of 105% for the years 2012 through 2016. Bottom line: the honey badger of money will get right back up. Mt.Gox, multiple dramas, ETF rejection, etc.
In our July 2016 Blockchain Letter we discussed the risks of investing in GBTC. The price of GBTC can vary dramatically from the performance of bitcoin. The risk associated with GBTC lack of tracking can easily wipe out all gains attained by bitcoin.
Since the middle of 2016 bitcoin has returned 78%, an investor who bought GBTC have actually lost money since this time. The price of GBTC has fallen from a price of $119.55 to $117.05.
The graph below shows the performance of bitcoin and GBTC over the past eight months.
The below chart shows the relative outperformance of bitcoin compared to GBTC for the past six-, twelve- and twenty-four-month periods.
SEC BITCOIN ETF DECISION
On March 10th the Security and Exchange Commission denied the application for the Winklevoss Bitcoin Trust ETF. In the order, the SEC found that the proposed fund was too susceptible to fraud, due to the unregulated nature of bitcoin. An ETF allows its investors to invest in the underlying assets of the fund; it requires approval from the SEC prior to offering to the public. Given that the SEC has yet to even rule (publicly) on whether bitcoin is a security, it is not surprising that they denied the application.
The last asset class to receive ETF certification was copper. Copper has been in use for 10,000 years. It was the first metal smelted by humans circa 5000 BC and the first traded on the London Metals Exchange in 1877. Centuries later, and after a many-year effort by a U.S. bank, they won regulatory approval by the SEC for a copper ETF in December 2012. If it took this long for the inert atomic element #29, it’s going to take a long time for a bitcoin ETF to win SEC approval.
Bitcoin is often referred to as “digital gold” or Gold 2.0. Well, digital gold just surpassed old school gold – in price terms. One bitcoin is now worth more than one ounce of gold.
For those of you scoring at home:
- Quantitatively-easible paper money — bad.
- Fixed-quantity, dense gold — better.
- Fixed-quantity, electronic, free, real-time, infinitely-dense, easily-divisible bitcoin — best.
For 5,000 years, gold has been the gold standard of currencies/stores of value. It’s the paper imitations that have eroded in value. In 1970, $1,000 bought over twenty-eight ounces of gold, now it purchases less than an ounce. One bitcoin now purchases more than an ounce of gold.
Over the coming decades, keep an eye on that little gold line! The new gold standard.
Egypt’s ruler Pharaoh Khufu used 20,000 workers/slaves over a 20-year period to build the Great Pyramid – 400,000 man-years invested to build the 6-million-ton pyramid. Then they buried a bunch of gold underneath. Every elementary school kid has snickered at how Neolithic those massive, primitive efforts were
Forty centuries later, Americans bury an even more staggering amount of gold underneath a stone pyramid in Kansas. The U.S. has 8,134 metric tons of gold reserves buried at Fort Knox. That’s $340 billion – with a “b”. The U.S. median personal income is $30,240. Do the math: the U.S. stores the equivalent of 12.3 million years of our citizen’s labor under a stone pyramid.
That’s going to be hard to explain to our grandkids.