Tag: Bitcoins

Reviewing the past week

The past week was relatively interesting.

The 10-year bond yield went down about 0.25% from the beginning to the end of the week. Likewise, the long part of the yield curve also dropped (prices rose) and a whole flurry of the usual interest rate sensitive subjects got taken up VERY sharply. I’ll just give a few of them, but you get the idea – these four are from very different industries:

(But also take a look at REI.un.to, CAR.un.to, etc. – also dramatically up over the past few trading days).

REITs, lumber, sugar, and fast food. All of these are yieldly and leveraged. Don’t get me started on other components of the fixed income markets either, but I’ll throw in the 30-year US treasury bond yield:

There is a cliche that in bear markets, bull trap rallies are the sharpest. This is usually the case because short sellers are a bit more skittish than in the opposite direction.

My suspicion is that the bears on the long side of the bond market got a bit too complacent.

The calculation of the risk-free rate is a very strong variable in most valuation formulas. If you can sustain a 5% perpetual risk-free rate, there is no point in owning equities that give a risky 4% return. The price of the equity must drop until its yield rises to a factor above 5% (the number above 5% which incorporates the appropriate level of risk).

So what we see here is the strong variable (risk-free rates) moving down and hence the valuation of yieldy and leveraged equities rising accordingly, coupled with some likely short squeeze pressure on the most leveraged entities.

There are likely powerful undercurrents flowing in the capital markets – the tug-of-war with the ‘higher for longer, inflation is here to stay’ crowd competing with the ‘Economy is going bust, the Fed has to lower rates!’ group.

The last chart, however, I must say was not on my bingo scorecard for 2023 – Bitcoin is up over double from what it was trading at the beginning of the year:

I should have just pulled a Michael Saylor and gone 150% on Bitcoin. Go figure.

This will be interesting – Bitcoin

Bitcoin is taking a dive:

Today’s price action so far:

This looks like a margin-propelled crash with today’s 20% takedown. From peak (US$65,000) to trough today is just over a 50% haircut, and not many people have the intestinal fortitude to handle such a drop – especially when they are leveraged.

The question going on in my mind is cross-margining – have people collateralized loans with their Bitcoin holdings? If so, what else are they going to be forced to sell as a result of today’s price drop?

Always be conscious that a trade involves a swap of asset for cash; the amount of cash nor the amount of asset changes on net. Only the valuation of the asset in question changes.

Now you have the people speculating on BTC from the middle of February to yesterday all underwater; the people that speculated from the beginning of 2021 to the middle of February are roughly in a break-even position; while you still have a dedicated ‘fan base’ holding prior to that – all trading against each other in one massive zero-sum game. The only person that really doesn’t have much choice in the matter is Microstrategy (MSTR), who’s CEO cannot possibly reverse his decision as right now he appears to be willing to be the last bagholder.

Availability Bias and financial markets

Seemingly half of the economy (tourism, restaurants, entertainment/sports, etc.) have been taken away with the onset of COVID-19.

So what else can people do when they are locked away in their basements? Invest in Bitcoin.

Because I mentioned Bitcoin, I will show you a chart on how much you’ve missed out:

Do you feel jealous? Resentful that others are making money while you’re not?

Just because I brought up the issue, it went into your attention and naturally you gravitate towards an availability bias – it is on your attention so it is of higher concern.

Here’s another issue.

Back on November 27th, you could have picked 9, 15, 35, 41, 42, 45, 46 on the Lotto MAX and claimed $55 million! You missed out! Feel regret? You can take solace in the fact that others did not win on the missed fortune that was available.

Or perhaps Trillium Therpeutics (TSX: TRIL) or AcuityAds (TSX: AT)?

You’re missing out!

What about Galaxy Digital (TSX: GLXY) or Electrovaya (TSX: EFL)?

Are you feeling resentful you’re not making these 500% gains in the markets?

I hope you see where I am getting at here – there are 1,340 securities on the TSX (common stock, preferred shares, warrants) that are trading. 617 of them had a positive price return. 413 of them had a price return of 10% or greater. Likewise, 416 of them had a price return of -10% or lower.

Everybody likes to talk about the grand slam home run that won the world series (here is a video for you Toronto people, albeit one away from a grand slam), but few talk about the hitter that can hit a consistent 0.300, or even worse, the person that gets called up from the minor leagues and gets 1 hit for 28 at-bats before the person he replaced got off the disabled list and said person got sent back down again.

While Bitcoin and Telsa are highly entertaining, they suck up attention in a manner that breeds resentment. Minimize the human psychology behind it by thinking about the feasibility of predicting the next Lotto MAX numbers (and all the more power to you if you can crack that algorithm!).

Bitcoins taking a hit

Today was the first day since the Coronacrisis where Bitcoin took a huge dive:

Speculating on reasons, I’ll offer three potential factors (it is likely a blend of these and other hidden factors):

1. US Thanksgiving resulted in all the automatic buying (ETFs and the like) taking a vacation, resulting in a demand drop and thus price correction.

2. A typical market reaction that occurs when things rocket up continuously for about two months – you get plenty of long players (FOMO!) and a lot of them decide at once to suddenly cash in their chips. Subsequently you get supply dumps of everybody’s trailing stops getting hit which causes a mini-cascade as we have seen. Happens with momentum stocks as well.

3. Speculation that the US Treasury Secretary will make privately held bitcoin wallets illegal. Most people own bitcoins through intermediaries (mainly crypto exchanges), but remember that the whole origin of bitcoin was to decentralize monetary policy. It is a myth that Bitcoin is anonymous – rather it is completely the opposite, with all transactions completely transparent for all to see. The blockchain database is just over 300 gigabytes at present and is available for anybody to download. The bitcoin wallet addresses don’t have peoples’ names on them, but presumably there will eventually be an association made unless if the transactions are done very carefully (i.e. with two parties that aren’t caught up in the usual electronic monitoring sweeps of large value transactions).

Transactions in bitcoins are also internalized off the blockchain and batched until some point where it is economical to post them on the chain itself. This is what practically happens as transactions cost about US$5 to post. This will get more and more expensive over time.

There are a couple analogies I can think of to the speculation of outlawing Bitcoin private wallets: Forbidding people to own (paper) cash without it being deposited into a bank, or forbidding people to own gold. These two were functionally the same thing since when (large scale) gold ownership was forbidden in 1933, US dollars were directly interconvertible into gold at US$20.67/troy ounce.

Another analogy is the pervasive usage of free web-based email providers and communication privacy. Even if you use an external email service, if you communicate with any individuals on a standard (obviously subject to government monitoring) web-based email services, your communication is going to be compromised by virtue of one side of the communication chain being monitored. Essentially the US Treasury is trying to forbid email communications between any individuals that do not use one of the sanctioned services.

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Finally, it is well known that Microstrategy (Nasdaq: MSTR) adopted a treasury policy of holding bitcoins and their CEO gave an interview on CNBC today. The narrative is fairly well known, but at around 1:30 in the interview, the following words were said:

“What they don’t understand is bitcoin is a monetary network. And as a monetary network it is capable of storing and channeling energy over time without power loss.”

The words “storing and channeling energy over time without power loss” triggered my physics background on perpetual motion machines.

Indeed, crypto currency networks are huge consumers of energy. The amount of power being dumped into semiconductors keeping the bitcoin transaction network alive is very high. I’m not saying this is a good or bad thing (there are many other uses of electric power which are wasteful), but Bitcoin is structurally designed to incentivize more and more consumption (the larger the share you have of the network, the higher the chance you have of mining a block of bitcoin, or confirming a transaction for a fee) and hence one of the fundamental limitations of bitcoin will be how much silicon and electricity can be thrown into what (I claim) is the monetary equivalent of stacking one pile of rocks into a corner and then moving them to the other side of the room, repeated many times over.

Since cooling costs are one of the major costs of running a data centre, will it be a structural competitive advantage if you operate your data centre in a country that has very low average temperatures (can use outdoor air ventilation for cooling), coupled with being next to your own privately held nuclear reactor? Siberia anybody?

Gold is out, crypto (or almost anything else) is in – and FOMO

For the first time in ages, the Royal Canadian Mint ETR (TSX: MNT) is trading within a percentage point of its net asset value – prior to this it was trading at a significant premium.

This could be because the price of gold, at least as measured in US dollars, has declined from a high of about US$1,950 during the election to US$1,800 today and suddenly gold is no longer in vogue. It is difficult to prescribe what causes price decreases in gold, but given its perception of a “when everything goes to hell” metal, my guess is that the fallout of the presidential election is alleviating to those that went into gold.

Another solution espoused by monetary doomsday proponents is the purchase of cryptocurrencies.

Here is my current theory of how things will end up.

You’re going to continue hearing more and more about Bitcoin until the last dollar has been sucked up into this global Ponzi vacuum – it’s up about US$1,000/coin today. The price is going to continue to rise because of forced buying (ETFs) and rampant speculation (easy access through financial apps that can be loaded on anybody’s smartphone). You’re going to hear your friends, neighbours, etc., get into the action, and you will be aggravated to hear about fortunes made because they bought half a bitcoin and it went up ten-fold in a month, while you are just sitting on your boring shares of Fortis and Enbridge, clipping quarterly dividend coupons at a hundred times less magnitude.

The disparity in performance going to drive a lot of people insane. Literally insane. Seeing your friend pull up to your doorstep in a Lambo (“Look! I sold some bitcoin!”) while you’ve just made an extra value meal in dividends fuels a lot of psychological resentment. After finishing drag racing on the freeway in your friend’s Lambo, picking up your Big Mac and fries at the McDonalds drive-through with your dividend cheque, you both will then go home and buy some more bitcoins.

All I can suggest to keep your sanity is to go to the library (assuming your local branch hasn’t been shut down by the COVID scourge) and get some history reference books on what happened during the Dutch tulip bulb mania. This is the closest analogy I can think of to the current situation. One difference between the 17th century and today’s era is that in today’s era, things move much, much faster, including Lambos vs. horse carriages. This includes price movement and capital mobility. The Tulip Bulb mania took about 3 years to form, and the crescendo went over about four months of trading. With bitcoin, I would not be shocked that the initial collapse will be a price drop of over 50% in a 1 week period. It will be massively disruptive.

You will also hear at the same time after this price collapse a bunch of people saying this is the greatest chance to get in of all times.

Most people in finance have some knowledge of the Tulip Bulb Mania. However, many less people (including Wikipedia) have a historical knowledge of another great pyramid scheme which brought down the country of Albania in 1997. This made for a very fascinating study although there were few references to it in English. Another difference is that Albania wasn’t exactly a rich country at that time, so the absolute amount of capital sucked into this scheme was relatively limited by comparison, while Bitcoin has a nearly global audience.

History is repeating again, right before your very eyes! What a time to be living.

How do we begin to model this?

Unlike Tulip Bulbs, which trade in discrete quantities, Bitcoin is divisible in units of 100 millionths of a bitcoin, which means anybody will be able to get into the game – with Tulip Bulbs, the purchasing power of one bulb at its peak was massive, which limited the ability for people to get in (they had to put up margin collateral). With bitcoin, anybody with a cell phone and a bank account can get in.

There are about 18.6 million bitcoin outstanding at present, with a good chunk of this (at the onset of creation) apparently not used, and with people losing coins here and there. At US$19,000/coin, the market capitalization of the entire bitcoin set is US$350 billion. I think you can now make a good argument this could go a lot larger before the bottom falls out on this one. I initially thought the market cap of bitcoin would be roughly restricted to the largest cap companies trading on the public exchanges (currently, this would be Apple at around $2 trillion) but for a true mania, shouldn’t it go higher? There’s clearly room to head up to $100k/coin. The question is – how much cash will this suck up before demand stops?

Kind of makes my earlier predictions half a decade ago of a $10k ceiling to be pretty ridiculous, but then again, I never knew Bitcoin would be the vessel of the next tulip mania. Times really haven’t changed.