Bitcoin: Why I'm Buying 14-Year-Old Tulips With Both Hands

Summary BTC sentiment is mostly apathetic and negative. Even in light of big catalysts, volumes are stagnating, IV is trending lower, and the price isn't moving much. The fundamental picture is strong, but it only makes sense if you know where to look. On-chain activity does not at all tell the whole story, and I explain why. Bitcoin's utility and development of practical use cases all make it an attractive investment opportunity. Together with Bitcoin's upcoming catalysts, such as the halving in 2024 and the potential launch of a Spot ETF, this makes right now a good time to accumulate BTC. The biggest risk for Bitcoin is really PR at this point. The Bitcoin community must educate more people. That is the only way to adoption. Now is a great time to accumulate Bitcoin ( BTC-USD ). There are many upcoming catalysts for BTC to reward investors over the next year. This article will not go into those much-repeated points. If interested, research the items in this non-exhaustive list of near-term catalysts: - Bitcoin’s Halving in 2024 – Halvings have historically been followed by a price surge. - BTC Spot ETF – Bullish because it creates more liquidity and demand - Institutional Adoption – Institutional adoption means more liquidity and demand as well. It also means more money used to fund the development of financial infrastructure for Bitcoin. - Regulatory Clarity in Crypto – Reduces the barriers due to regulatory uncertainty. Also increases the pace of innovation in crypto. - Mining to Subsidize Green Energy Solutions – This allows BTC to be recognized as an ESG-friendly asset. (Bitcoin always was ESG friendly, hence “to be recognized as” instead of “to become”). This article will talk about the utility that Bitcoin development has been unlocking, and hence economic value rather than price action from supply and demand. Think of this as the fundamentals. Bitcoin’s strong fundamentals should also be overlaid with a sentiment analysis, which will be covered first. As stated, the main takeaway is that right now is probably a great time to accumulate BTC. Tulips Preface Critics accuse BTC of being a bubble, comparing it to the dot-com bubble or to tulips. Tulips/bubble assets don’t last for 14 years, nor do they keep exceeding their previously established all-time high, nor are they assets with clear use cases. In The Bitcoin Thesis That No One Is Talking About, I go deep into an undeniable use case of Bitcoin that is little mentioned. If you keep calling this a bubble or keep claiming “this is beginning of the end of Bitcoin,” your actual conclusion is that the market has been wrong for 14 straight years. “Markets are never wrong – opinions often are.” – Jesse Livermore Of course, there are times when the market-wide time preference shortens. Morgan Housel’s The Psychology of Money explores the rationality (not irrationality) behind bubbles. The simple answer is that investors’ time preference shortens. During bubbles, the next day or week is nearly guaranteed to see a higher price. The time preference of investors collapses from a “normal” focus on a longer term to an abnormal focus on this immediate short term. Abnormal and normal are not denotations of rationality, they are simply a statement that most of the time (normally) time preference is not as short as “until tomorrow.” This is FOMO in its distilled and wholly rational form. Bursting bubbles is the opposite: as time preference lengthens, discounted cash flows become the dominant force of consideration and valuations come back down. “Sentiment shifts” is another name for describing the phenomenon of changing time preference. This understanding is also why I have chosen to subdivide my analysis by time preference, because within these fluctuations are many opportunities. And without at least acknowledging time preference, one’s investment thesis is hopelessly incomplete. When we look at Bitcoin in its entire 14-year history, there are moments of collapsing time preference. But 14 years is long for a persistent short-term time preference while also supporting an asset that is still outperforming nearly everything else over the same time. If these magic internet coins are tulips, then by their age alone they are very special tulips indeed. Sentiment: Poor, Bearish, and Apathetic The crypto bear market has dragged on for nearly two years. BTC is still down 60% from its all-time high in November 2021. A lot of seemingly bullish news has been met with short-lived spikes followed by longs taking profits. BTC has had a tough time breaking through resistance at $30,000 over the last five months. Also, BTC’s trading volume is at five-year lows, signaling an apathetic market. The choppy price action of the last few months has been driven by record-low volumes. When volumes pick up again, the actual direction of the market should be clearer. Record Low Bitcoin Volumes (data.bitcoinity.org) Low volumes in crypto have been making headlines . Most crypto is speculation, so I interpret this as speculative interest slowing down for a big chunk of the industry. Comments in the linked article also suggested the same interpretation. However, it is key to separate the utility of speculation from the utility of Bitcoin. If you believe that Bitcoin has intrinsic utility, then this period of apathy in which the baby is seemingly being thrown out with the bathwater is a great time to accumulate. I am reminded of the bloodbath in REITs over this last year, when astute investors were able to scoop up good deals as the market relentlessly punished all REITs simply for being associated with commercial real estate. Likewise, BTC model free implied volatility (ie. a VIX calculation from option prices) is also at 4-year lows. It is likely at all-time lows, but the IV data on T3 Index does not go back far enough. For context, crypto prices generally rise with IV. This feature is different from equities. Such lows in both IV and trading volume should indicate that the crypto bear market is on the precipice of ending. Bitcoin Implied Volatility (T3 Index) Given historical trends, BTC is also at relative lows. Below are two charts that put BTC’s price on a log scale with various annotations. The rainbow chart is a bit like a dynamic RSI that shows oversold and overbought regions. It also annotates the halvings. Rainbow Chart (blockchaincenter.net) The 200 Week Moving Average Heatmap | LookIntoBitcoin with the 200 Week Moving Average shows that BTC rarely stays below its 200 Week Moving Average. The points when it is touching or below this moving average have been great accumulation zones. 200 Week Moving Average + Heatmap (lookintobitcoin.com) These charts all point towards a market that is exhausted and oversold. Though not fully capitulated (one might argue capitulation was last year when BTC bottomed at around $16,000), the sentiment has been negative and apathetic. Public attention this year has been drawn away from crypto and towards trends like AI. The investment landscape has been favoring big tech, semiconductors, and even more recently energy. Again, the logical consequence of this matches up with what we see in the charts: apathy towards BTC and crypto in general as an investment. This is why now is probably a great time to start a dollar cost average accumulation. The sentiment could continue to worsen for a while, but the backstop is the fundamental, intrinsic value of BTC. New use cases have continued to develop over the course of the BTC bear market. Fundamentals: Bitcoin Usage is Uniquely Elusive to the Casual Observer The “fundamentals” of something like BTC is the potential for usage and adoption. BTC aims to be money, and all money is backed by the economy which uses it (note that this is very different from saying the “country that uses it” because economies can easily be international). The reason the USD is the strongest currency is that the collective households and firms which use the USD constitute the largest economic bloc in the world. This is also why countries who try to steer their economies away from using the USD are seen as a threat to dollar hegemony. (Note that being seen as a threat is different from being an actual threat. The dollar hegemony is very strong for reasons deeply embedded in basic international economic principles. I cover those in greater detail here .) The more people using Bitcoin for payments, the stronger BTC’s fundamentals become. This same logic does not quite apply to other cryptocurrencies, especially because many have token models which make them resemble securities. In this case, greater use of the underlying blockchain network may lead to price appreciation in the short term as a function of speculation, but the price cannot be sustained by the cash flows generated in the long term. The problem with Bitcoin usage is that it’s not as clear-cut as amateur analysts think. Some think that because the blockchain is a transparent ledger, they can simply look on chain to see whether adoption is happening. This works for Ethereum, and it is arguably the only good way to objectively measure Ethereum adoption. But it doesn’t work for Bitcoin. Both Ethereum and Bitcoin have started to scale in layers , but they have taken completely different layer scaling approaches. To put it simply: Ethereum uses rollups, which are basically separate transparent blockchains with their own set of transactions and consensus. Thus, “on-chain” activity refers not just to the Ethereum base layer, but also to all the separate rollup blockchains linked to Ethereum. These are all transparent. Bitcoin, meanwhile, has used state channels– like the Lightning Network – as its L2 scaling solution. State channels are not separate blockchains, so they do not have the transparency that Ethereum rollups have. The basic concept of a state channel is that users can share a common on-chain state with each other and then sign updates to change this state. One example of an individual “state” would be how much BTC is owned by either person. At any point, the signed state updates (called “commitments”) can be published to the blockchain, and the corresponding state will be reflected in the main chain. This enables people to do an unlimited number of transactions off-chain, by exchanging commitments with their counterparts, with the option of publishing the results of these transactions on-chain at any time. Without going into details about the tradeoffs between a state channel and a rollup solution, we can clearly see that the state channel solution is much more elusive to the casual observer because it never appears on chain. In fact, after the Bitcoin Taproot upgrade in 2021, it is impossible to tell when a new state channel for the Lightning Network is being opened or closed. Before that, it was possible to tell based on on-chain information that two users were creating a multisignature address to potentially initiate a state channel. Thus, Bitcoin usage has reached a point where no one can truly know how big it has gotten. Where and How To Get an Idea There are a few places to look to get an idea. 1ML is a site that reports the number of channels and how much BTC is locked in these channels. Below is a screenshot of their main dashboard. For clarity, a “Node” helps connect multiple channels so that users who do not have direct channels with each other can still pay each other through a mutual connected user (in this case the Node). 1ML Dashboard (1ML) The important thing to remember is that Lightning dashboards like these can never provide the complete picture the way a complete picture can be provided for Ethereum and its rollups. First, these are only the known channels that the Lightning Nodes are aware of. The Lightning Nodes being surveyed are also only the nodes that this website is aware of. Because the code is open source, entire communities can set up their own Bitcoin payments system using Lightning infrastructure and never be known by sites like 1ML. Finally, while we can see how many channels there are, there is no way to tell how many transactions are going through those channels. Each transaction is a state update signed and kept by the users of the channel, so only the users themselves really know their own transaction volume. In contrast, the exact number of transactions, accounts, value, and even the time each event occurred is always known for the Ethereum ecosystem, because one can just add together everything across all the rollups. The Block depicts the number BTC locked into channels over time. Again, these numbers are only what is known. There is almost certainly a non-zero number of unknown channels with BTC that is not counted in this figure. Furthermore, since the Taproot upgrade in late 2021 and the popularization of Lightning over the last three years, the likelihood of more channels being unknown grows higher and higher. Lightning Network Total Known Capacity (The Block) Other Elusive Indications: Fedimint, Ark, ZeroSync Unlike Ethereum, which has largely focused on growing smart contract functionality for on-chain trading, Bitcoin development has largely focused on the more practical use cases for the average consumer, such as payments and personal banking, and nearly always focusing on BTC as the main token. In contrast, Ethereum projects tend to release their own tokens and focus on infrastructure which can be leveraged to shuffle around many different tokens (including and often especially the token the project created) for the purpose of earning yields and conducting highly leveraged trades. Thus, the flavor of innovation is yet another major difference between Bitcoin and Ethereum. Both ecosystems have innovation, but innovative energy is consumed to achieve different objectives. The Bitcoin ecosystem does not regard a high level of programmability as paramount. When I was first learning about crypto, this caused me so much confusion and misunderstanding towards Bitcoin. It seemed that Ethereum projects were very organized and standardized. Each reputable project had its own documentation, a list of smart contract addresses, a whitepaper of how its proposed features can be implemented on-chain, a section explaining the project’s token details, and so forth. Though many Ethereum projects did things very differently and in very creative ways, they all followed the same basic format of being able to somehow facilitate the exchange of tokens on-chain. Initially, I wrote this off as Bitcoin being the older ecosystem where nothing happened. But then the question of why Bitcoin never retreats from its number 1 spot on the crypto market cap ranking became more and pressing. You could say this was me reckoning why the market has been so wrong! I have now come to realize that Bitcoin’s innovations are happening constantly, but just not in a rigidly standardized manner because the simplicity of Bitcoin leaves so much room for different methods of innovation. One example of this is clearly the Lightning Network. Another is something like Rootstock , an EVM smart contract blockchain that is merge-mined with Bitcoin, launched back in 2018. Rootstock has over 50% of Bitcoin’s enormous hash rate securing it, making it the second most secure blockchain and the most secure smart contract blockchain in the world. Much more recent examples are Fedimint , Ark , and ZeroSync . Each one is a unique approach to Bitcoin scaling that is still in the testing phase. Each one is focused on expanding the use case of the BTC token only. To keep this short, I’ll only cover Fedimint, which I think is simple enough to describe both non-technically and concisely. The basic idea of Fedimint is that communities can create their own multisignature wallets and have trusted members of the community be the “guardians” who hold the keys of the BTC in the wallet. Then, the community can mint IOUs against the BTC in the wallet and use a centralized ledger to keep track of IOU transactions, while ensuring things like privacy and full reserve backing. Each community can adjust the parameters to suit their needs. Each instance of a community multisignature wallet with its own BTC IOUs is called an individual Fedimint. The Fedimint protocol is also compatible with the Lightning Network , so Fedimints can be set up to send BTC to other Fedimints via Lightning. It’s clear that Fedimint is another variation of a state channel scaling solution. Unlike Lightning, it uses a trust-based setup. This is okay because Fedimint is intentionally designed for communities – the guardians are members of the community who are known to others and whom others already trust with other things (random examples: babysitting, being a good neighbor, dog walking, etc). Any funny business will have steep social costs. This may not seem too useful in countries with strong rule of law. Also, many in the West feel no persistent need to trust the members in their community. But Fedimint is an absolute game changer for the unbanked of the world, and many of these are the exact people who must rely on their communities. Now apply this to what has already been said about Lightning. Fedimint’s transactions are all off-chain. With Taproot, we can’t even know if a new Fedimint is being started. Fedimints can send stuff to each other via Lightning, another off-chain solution. These kinds of technologies will grow Bitcoin adoption. And they are invisible to the casual observer, or the junior analyst looking for on-chain activity. When crypto news platforms are talking more about Ordinals NFTs, BRC-20 tokens, and the ETF than about the development of practical use cases, you can be sure that the masses are not aware of all that is happening. Bitcoin is a global settlement layer, and everything built over it helps increase Bitcoin’s use case and reach. The ecosystem holds the ultimate long-term view: slowly help people around the world gain financial autonomy, slowly let the free market do its job, slowly watch people innovate and take risks without avoidable financial insecurities, slowly have each newer generation understand these benefits, then slowly become the world’s de facto money. Risk The biggest uncertainty today is Bitcoin’s public relations. On the one hand, governments are incentivized to try to hold on to their monetary monopoly. But this is much harder if more people understand Bitcoin. If Bitcoin cannot attract enough public support, then governments may be able to establish some hold over it and reaffirm their monopoly over money. Thus, the risk increases with the number of autocratic regimes (governments who do not have to listen to their citizens) and increases with the number of people who cannot think critically. The former is a falling number, but the latter is a rising number. My suspicion is that as times get worse, mainly due to the state of today’s money, more people will begin to wake up and ask questions like: Why are my savings engineered to lose value ? Why is one entity allowed to print money for free to buy up everything? Why does everyone I know labor for something that costs nothing to create? Why do I have to keep taking financial risks just so I can keep my purchasing power? Why was I taught in school that rising prices are good when everyone I know prefers to have things get cheaper over time? Why do I get taxed and why do we spend so much on tax collection bureaucracies when the government can just print its own money? Why can’t I and my partner afford a house at age 32 when my grandpa had one at age 25 and he was the only income earner, and grandma was already pregnant with their second child (my uncle) at the same time? Oh, and some of these issues are due to bad life choices – not just the fact that the monetary base has expanded by 70x causing the dollar to lose 87% of its value since 1970 – so I’ll also include: Why did I choose to get a worthless degree with no career application? Why did I choose to buy so many expensive Starbucks lattes and gluten free avocado toast? Generally, these questions point one towards the Austrian School, sound money, and, inevitably, Bitcoin. They might also cause one to cut back on lattes (Starbucks (SBUX) might be a good short idea, I don’t know). Ultimately, it’s a big uncertainty how Bitcoin’s public perception will emerge after this time. The regulatory landscape, at least in the U.S., seems more and more crypto friendly, and this has been especially true for Bitcoin. Bitcoin was notably called out as the only crypto that was certainly not a security. Yet, many people still believe it is a ponzi scheme. Those who believe that governments will move to ban it without any regard for the preference of the people are implicitly denying the power of rule of law and constitutional freedoms. They also run the risk of denying the force of the free market, which is a very dangerous bet. The more useful question is whether people themselves will want money that cannot be debased. And this is of course a PR question. The prevailing PR campaign has been to encourage the acceptance of inflationary money and benevolent technocrats who dictate monetary policy from above, all using highly robust “ data dependent ” methodologies, no doubt. Will Bitcoin’s PR campaign – involving sound money , cheaper prices , less leverage, and personal wealth secured by the mere knowledge of 12 words – win any hearts and minds? Who knows. Conclusion There have never been tulips like Bitcoin. I am buying these tulips with both hands because I see the strong fundamentals beneath the surface. More importantly, most other people do not see these fundamentals yet. We can confirm this because many crypto commentators don’t even know where to look when it comes to evaluating Bitcoin’s progress. Even more importantly, the current sentiment is too negative and apathetic to ignore. My recommendation is not for you to take my word on these points, but for you to look and find the truth yourself. I reaffirm my buy rating and would upgrade to strong buy at $20,000. If it falls below that point, I will liquidate some stocks to buy more (unless stocks also happen to be down big). The next several months should be very interesting with all the catalysts listed at the beginning of this article. 2024 looks like a wonderful year for BTC.