A Bull Case For Bitcoin

by | Jul 16, 2022

While much of the cryptocurrency space now believes Bitcoin is an old and decrepit crypto that is doomed to lose its dominance in the space, I disagree. This sentiment is generally driven by a desire for their own preferred cryptocurrency of choice to prevail, it’s a belief driven by greed and/or idealistic values that hold no rationale in the real-world.

Just because I hold the view that cryptocurrency transactions should have privacy built in, does not mean Monero is going to become the new crypto of choice. Or, just because Solana is cheap, fast and has great smart-contract functionality, does not mean it will replace Bitcoin.

If you want cheap and fast transactions, we have second-layer solutions to provide that like the lightning network, which I discussed in the last mid-month newsletter.

Those who criticise bitcoin for its primitive and simplistic nature fail to understand that it is this ‘primitive and simplistic’ nature that keeps it king. While thousands of other projects experiment with new technologies and functionalities, bitcoin continues to plod along slowly, carefully and without urgency. The crypto space needs the stability of Bitcoin in order for other projects to try out new things. Bitcoin is the backbone of cryptocurrency (unpopular opinion for many, but if you disagree, I’d love to hear from you).

But it’s more than this. If you disagree with my views on Bitcoin, there is also the infrastructure already in place that promotes bitcoin as king. BTC is the most common base asset for any trading pair on any cryptocurrency exchange. BTC has been accepted in the mainstream financial space with Future markets, options and perpetual swaps. And while these things are all what we were trying to get away from with when Bitcoin grabbed our attention – it is what it is and the facts care little for our ideologies.

One common issue raised about Bitcoin, is its power intensive mining infrastructure. However, this is a non-issue really when you consider how much energy the traditional banking system uses when you account for all the employees all over the world travelling each day to work, all the office buildings and infrastructure it requires to run. But also in the case of bitcoin, the market will naturally race towards the most efficient forms of power available, innovating new renewable energy sources as they go. Also, most who truly understand the benefits of sound money, consider the energy consumption a fair trade-off.

Now we shall take a brief look at some bitcoin technical data:

In reference to the above chart, if you take a look a the bottom pinky/purple line, this is the Cumulative Value Days Destroyed (CVDD) which has historically picked the bottom of the market.

What is CVDD?

When coins pass from old investor to new investor, the transaction carries a USD value and also destroys an amount of HODL time by the previous holder. CVDD is the cumulative sum of this value-time destruction as a ratio to the age of the market and divided by 6 million as a calibration factor.

Based on historical bottoms (which isn’t a certainty for the future, but indicates probabilities), the lowest bottom would be around $15k in this cycle, if indeed we get a bottom in the next few weeks.

BUT, we should also note that the historical TOP was not met in this bull run. The dashed green line, called the TOP CAP is the Average cap multiplied by 35. This has historically called the top. The last bull missed the top cap by more than 40%.

With this in mind we should be prepared for an unusual play out at the bottom.

An automatic reaction is to think maybe the bottom will be less destructive than previous, because the TOP was less spectacular than is the norm – however, this assumes the TOP was missed because of it being cut short, rather than a real change in the dynamics of the crypto space and the greater economic climate.

Another interesting chart to look at is how much gain per dollar invested into bitcoin (2 year average).

What this tells us is that in the past ten years, if you had invested at any point in bitcoin, the worst return you would get over a two year period was jus 25%, and the best return you would have got was 385%. These kind of returns are hard to find in just about any other asset. While I’d expect the gain per dollar average to decline over time as we move forward, I would expect this to remain a positive return for at least another decade.

I’d also just like to quickly recap on the bitcoin hash-rate, again I covered this in our mid-month newsletter for our VIP subscribers, so for you guys apologies for the reiteration:

Price discovery in the markets is important, but it is also cyclic and driven by emotion, particularly in the short term. To get a better understanding of how price discovery may behave one year, five years and even ten years from now it may be better to take a look at Bitcoin at a protocol level.

So, let us take a look at the Bitcoin Hash Rate.

As you can see the Bitcoin hash rate has continued to grow steadily over the past few years with little sign of relief. Just a couple weeks ago on 12th June 2022 we saw the hash rate hit an all-time high of 231 EH/s, at the same time Bitcoin price began to plunge below $25k.

Hash rate has little to no correlation to bitcoin price in the short term, it does however give us an idea of miner sentiment of the network looking forward. Just to show you how uncorrelated these two datapoints are, here is a pretty chart for you:

The only correlation here, is that over time, they both go up.  

It is also worth noting that the cost of production for a single bitcoin has just dropped by about 20% in the past few weeks as old mining technology gets switched off and new, more efficient rigs get turned on. For most of 2022 the cost of mining a single Bitcoin has hovered around the $20k area. This has dropped in the past few weeks to $15k, allowing miners to continue to sell Bitcoin as a profit.

You would be right in assuming that the production cost of mining a single Bitcoin typically guards the floor market price for bitcoin. In the past this has been true at least, with the market price bottoming at the production cost.

We should also bare in mind, that the next Bitcoin rewards halving is less than two years away. Production costs will double once more as mining rewards get cut in half to 3.125BTC per block. While much of the media is in panic mode over the mining situation hitting breaking point, as market price pulls down ever closer to cost of production, I believe the network is as healthy as its ever been. These cycles ensure the mining infrastructure stays as efficient as possible, it culls those that over-leveredged themselves in the bull market and ensures older and less efficient tech-miners get switched off.

Finally, let us take a look at how this correction from bitcoins ATH compares with historical corrections.

As you can see from the chart above, the value of bitcoin is currently down 70% from its all-time high. So, how does this compare to previous corrections?

Based on historical corrections from all-time highs, we may not be that far off the bottom. The largest ever correction ever, was 86.9%, if we were to repeat this again now, bitcoins bottom would be at $9000.

With this in mind, DCA in to bitcoin right now would be a good strategy . Indeed we may go lower, possibly as low as $13k, but if your time preference is greater than a year for investing, than the risk to buy here is extremely low.

We have allocated 50% to bitcoin in the First-Layer sector of the crypto-space, and we may increase this over the next few weeks depending on where and when the bottom looks to be (if it’s not already).

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