There is now an audio version of this article available on my YouTube channel if you want to have something to lull you to sleep. Go check it out!
- Investing is the vehicle for changing your life
- If you keep cash in the bank you are in fact losing money
- Market value does not have to match intrinsic value
- “Crypto is all speculation”
- Financial institutions, companies, and even countries have started getting into crypto
- Investing is all about narratives
I often get asked by friends & family about crypto, and I always say to them that I’d rather not advise on whether or not crypto is a good investment, but simply that there is a lot happening out there that I think people should at least be informed about. That is all.
My reticent to talk about crypto is based on my view that there are certain fundamental points, some of which are less related to crypto and more related to macro-economics, that people should understand first before they dive into the world of cryptocurrencies. But I would always struggle to find a good link I could refer them to that had all that fundamental knowledge in one place.
So on that note I thought I’d put together a comprehensive guide to everything I’ve learnt in my last two years in crypto that have shaped me. Consider these to be my “aha” moments. But I emphasize that I am not intending this to be an argument for or against crypto. If anything this is an argument for staying informed.
1. Investing is the vehicle for changing your life
My goal when I started investing in stocks, and later crypto, was to scrape together enough for a down payment on an apartment. Prior to this I was trying to save up, and due to living in an expensive city, I calculated it would take me many years to get to the point where I could afford even a 1 bed apartment in an okay-ish neighborhood.
I looked enviously at some of my peers who had been smart enough to start saving since college (or university as we say in the UK). And that’s the message we hear growing up, that we should get ourselves a savings account and start building up a nest egg.
We tend to see saving as a low risk option. We might not earn much but we’re not losing our money either. Savings account used to give 4-6% interest, however these days with interest rates historically low, it’s more like 0.5%. We’ll talk more about the true cost of saving in the next section, but suffice to say, saving is a way of staying where you are. If I continued to save, I would eventually have enough for a down payment, but I’d be many years down the line, and with a mortgage, I’d be tying myself up in life-long debt.
As the saying goes the poor spend, the middle-class save, and the wealthy invest. It’s a bit of a patronizing sentence, but getting to it’s core, it’s saying that the only way to really change your life from a financial perspective, is to invest. It is how the rich get richer and widen the gap between them and the rest of society.
Investing could be in stocks, gold, property, crypto, bonds or something else. I started off in stock market trading but then got into cryptocurrencies.
Stocks and crypto can be riskier in the short term but tend to offer better returns in the long term, and so the ability to stomach the dips is important, and it’s easier to stomach the dip when you have a greater financial cushion. Crypto markets are highly volatile, and the first 3 months of investing in crypto was the most stressful. But I found that as the my financial cushion grew, investing became less stressful, which in turn allowed me to invest more. I’d rephrase the old adage that it takes money to make money to it takes money, to take risks with money.
Now let me say that this is under the context of a market that is trending upwards. Stock markets, and other markets tend to offer better returns than cash in the long-term, but a lot of them have peaks and troughs along the way (known as a bull market when going up, and bear market when going down), and each of these cycles then have their of peaks and dips (which present good buying/selling opportunities to the savvy). As I’m not a financial advisor I won’t go into this further though we will cover the Bitcoin cycle theory at the end of this blog post.
But my main point here is that it was a mindset change for me to realize that in general, saving keeps you as you are, and investing is the vehicle to a better your life. Now I don’t want this to be a crypto-hype story, but I also don’t want to leave you hanging; so let me just say after two years of crypto investing I can now comfortably afford to buy an apartment.
2. If you keep cash in the bank, you are in fact LOSING money.
When it comes to investing, a lot of people shy away from it as it’s complicated. You have to make a decision on what the right asset to invest in is, and everyone has competing views. You’re just an ordinary Joe or Jane, and you don’t want to be dealing with all that. Best just to keep the cash in your bank account, right?
Sadly, in the words of the Rocky 4 movie, there’s no easy way out. There’s no short cut home. Regardless of ones desire not to have to think about these things, leaving your cash in the bank is actually you making an investment decision, and not necessarily a great one at that. And it’s all down to inflation.
Yeah we all know that inflation is what makes prices go up. And if our salaries only go up in line with inflation then our pay has really just stayed the same. That’s about the extent of most people’s thoughts about inflation.
But what inflation really symbolizes, is the decreasing value of your cash relative to everything else around it. In order words if you hold on to your cash for too long, it will be worth less and less as everything you might want to buy with it, houses, cars, gas, price of food, vacations, gets more and more expensive.
Now in a good year, a modest amount of inflation is desired by central banks and they try and influence it through interest rates and other mechanisms. The system is designed to discourage you from hoarding cash and encourage you to either purchase or invest. This is why its generally better to invest in something than watching you cash decrease in value over time.
But we’re not in a good year. We are in an extra-ordinary year in which central banks have injected TONS of surplus cash into the monetary system. They’ve tried to pretend this wasn’t causing inflation to go up even faster, but recently they’ve started having to backtrack on that as evidence is coming that shows inflation is rising rapidly, with some commentators saying that real inflation is running at 12%.
Central banks are caught in a quandary. They could raise interest rates, in which case you’d start to see slightly better returns on leaving cash in your bank. But that could have other negative ramifications for a fragile economy. So everyone is watching to see what central banks do.
From my non-financial advisor point of view, it seems cash is like ice cubes, and its better to re-invest in something, gold, stocks, property, crypto… anything than continue to watch it melt.
That being said, there is one situation where cash is king. And that’s when stock markets crash. In this case, cash is worth more against stocks. Against gold, less so – gold is seen as a traditional safe haven if stock markets crash. Property – that’s a safe place too (you may have heard about the hot housing market right now) unless there’s a housing market crash too, which could be caused by central banks raising interest rates because of inflation which then leads to more people defaulting on their mortgages.
As for crypto – well some say a cryptocurrency such as Bitcoin is an alternative to gold, a safety asset to turn to if stock markets crash, or due to fears of inflation. There is only a finite amount of Bitcoin, 21m, that will ever get created after all.
But I feel it’s got its own unique properties. Crypto would likely crash if there’s any panic in the stock market but then it does then tend to rebound quicker.
The main point I’m making here is that we should all at least be aware of the decreasing value of cash over time, and how people try and retain monetary value, through investing rather than saving; regardless of the choice of investing vehicle we decide to use.
3. Market value does not have to match intrinsic value
How do you determine the monetary value of a company or even a house? There are several ways financial analysts and realtors use to answer this, but really only one of them is ultimately right, and that is, it’s the amount that someone is willing to pay for it, also known as the market value.
There is also a notion of intrinsic value – or to put it simply, what we think something is really worth if we are being rational. For companies for example, that can be calculated by looking at what we think the future profits of the company might be and then determining the value of that in todays terms (known as the DCF method).
In a rational world you’d expect market value and intrinsic value to be the same, after all who would pay more for a company than what analysts think its worth, or inversely why would sellers sell for a price less than what something is worth?
But this is very common in both the financial and housing markets, and this difference comes down to macro-economic factors and individual needs. The chart below shows the average market price (top line) vs the average calculated intrinsic price (bottom line) for the London Stock Exchange (see research by Karavias, Spilioti, and Tzavalis)
Here we see that the market price was consistently above the intrinsic price, even during the financial crisis of 2008. The gap can be attributed to sentiment, and it can widen or decrease over time.
So what’s the connection to crypto here?
Well when thinking about crypto, there is great debate above how much of it is driven by sentiment vs. intrinsic value. In my mind it depends on which type of coin we are talking about, I would argue that coins solving real world issues definitely have intrinsic value, where as coins such as Bitcoin, are more driven by sentiment. But that sentiment is driven by mathematics as we will discuss next.
4. “Crypto is all speculation, it has no inherent value or use case“
This is the sweeping statement made by those that don’t really understand crypto. It’s an easy one to make – here is what such a person knows:
- Bitcoin was a bubble a few years back, there was immense hype, and then it crashed and a lot of people lost their money
- Cryptocurrencies are digital coins made out of thin air on computers. There’s no inherent value.
These two facts is what gives rise to the idea that crypto is all speculation and gambling. Sure you can make a lot of money, just like you can go to Vegas and make a lot of money.
This however is too simplistic an argument to make. There are certainly a lot of crypto projects that do fall under this view, but they tend to be smaller cap coins. Let’s instead take a look at some of the bigger projects shall we:
Bitcoin: Imagine a dripping water faucet (or tap as we say in the UK) that keeps dripping water. Drip. Drip. Drip. Drip. Drip, at a steady constant rate every 10 minutes. To begin with its dripping big globules of water each time; And tiny tiny people down in the sink basin are collecting up these drops of water and trying to convince others to buy it off them. Naturally some people are excited by this magical water that comes from nowhere, but others aren’t, so there’s some demand, it might get popular for a while, but then it might die down, there’s just a natural ebb and flow of popularity, and that leads to a natural ebb and flow of price.
But after a set amount of time, 4 years to be precise, an invisible hand that nobody controls, turns the taps by half, resulting in the size of each drop of water being reduced by half. And after another 4 years, the tap turns by half yet again and the drops reduce in size by a half yet again, and this process repeats.
So the interesting question is this: What would we expect to happen to the market price for these water droplets, down in the basin, as the supply steadily dries up?
Now in this bizarre metaphor of mine, the water droplets represents a certain amount of Bitcoin being produced. Bitcoin is produced every 10 minutes, and the amount produced decreases by half every 4 years, thanks to the in built mathematical algorithm.
So on the one hand, Bitcoin is this magical money that’s being produced out of nowhere (or rather a mathematical faucet) that ebbs and flows in popularity; but on the other hand it’s becoming harder and harder to come by. So really the Bitcoin price is a battle between what dries up faster – interest in Bitcoin, vs. the availability of Bitcoin.
Well we don’t have to wonder about this too much – we can actually see it in action, in what is possibly the greatest chart of all time.
This chart shows the price of Bitcoin with each green or red bar representing the monthly price. And as it’s a logarithmic scale, don’t be fooled by the bars on the right. They are the same size or even greater than the bars on the left.
Each blue vertical line representing the moment the Bitcoin tap go turned by half and Bitcoin supply reduced.
This chart spans the years 2012 through to the middle of 2021, and looking across this chart, each strong upward movement represents immense optimism and hype around Bitcoin, CNBC reports, your friends talking about it, something about going to the moon, and all the hoopla, and each red bar represents the end of the world for Bitcoin, I was a fool to buy it, it’s all gambling, it’s a scam, get out, get out, get out!
But you see – the mathematics, does not care about these micro-movements. The only thing that matters, is what dries up faster? Interest in Bitcoin, or the supply of Bitcoin? That’s the question we should be asking and according to this chart its the latter.
Interest in Bitcoin could wane for a variety of reasons – governments banning it, debate over its energy use, other cryptocurrencies becoming more popular and so on.. so it’s not necessarily a slam dunk. But at least take a moment to appreciate the beauty of this charts. Mathematics at the macro level, and human greed and fear at the micro level. Absolutely fascinating.
Now let’s combine this thought with what we said earlier about inflation. When you are trying to find an asset to store your monetary value in, or “monetary energy” as Michael Saylor likes to say, so that it retains its value many years into the future, do you invest in:
a) company stocks where you are placing a bet on the future success and growth of specific companies
b) index funds that track the stock market – where you’re not having to pick the right stocks. So as long as the economy does well and doesn’t enter a recession then your portfolio should do well.
c) property – which has been going up rapidly in recent time but could potentially have a correction in the future
d) gold, where the price now is slightly higher now than it was 10 years ago, and it had dipped in the intervening years before recovering. But it does get harder and harder to mine which makes it scarce (although we don’t know what the true limit is) and it has been valued by humanity for a very long time
e) cash where we know its naturally decreases in value over time relative to these other assets, and even more so these days due to the money printing
or Bitcoin – this mathematical faucet, which we know has a max limit of 21m coins and we know that it will be harder and harder to come by in the future.
Now there’s no right or wrong answer here, and there are other types of assets I have not mentioned such as bonds. But I’m not a financial advisor. Although I’m sure they’d say a good approach is to diversify your portfolio across a number of the above asset classes. The point is investing does require comparing assets classes against one another and making investment choices.
Bitcoin, and other some other deflationary cryptocurrencies, do offer something that’s hard to come by with some of these other asset classes – certainty. There is certainty about about how much Bitcoin there is, how much there ever will be, and the rate at which it will get produced. Certainty that the supply of Bitcoin isn’t swayed by a political agenda, a coin can’t be changed, like you can with stock-splits, more can’t be produced by central banks like you can with cash. Bitcoin has certainty almost everywhere except for market sentiment, and as the chart earlier suggested, that is not waning as fast as the supply is shrinking.
There are other types of coins beyond Bitcoin though Bitcoin is by far the most popular. All other coins are collectively known as Alt coins. We will discuss some of these coins next.
Smart Contract Coins
The second type of coin to be aware of are smart contracts coins. Smart contract coins allow for business logic to be codified and executed without the need for a central authority.
So for example, imagine you have this amazing invention, and you want to sell the patent for it, to a mysterious buyer. The buyer is saying they’ll give you a million dollars if you hand over your patent, and you are saying you’ll hand over the patent, if they first hand over the million dollars. How do you resolve this stand-off? Chances are you’ll resort to some middle-man that both parties trust, like a lawyer.
Well with smart contracts that middle-man is code that automatically executes. No one can change the code, no one can stop the code. Once you’ve initiated it, it will do what’s its been programmed to do.
So in this case, if the patent itself was first digitized (as something called a Non Fungible Token, or NFT, which I’ll have to cover in another video), then a smart contract could be set up to execute once you have deposited the NFT for the patent into the smart contract, and the buyer has deposited a million dollars, also digitized as a stable coin (will come on to that shortly). Once the smart contract has both of these it can automatically perform the role of virtual middle man and do the exchange.
Imagine buying or selling stocks, without the need to go through a broker. Imagine millions of dollars being exchanged every day in this manner. Sounds far fetched? Well that is exactly what the Uniswap coin that is built on top of the Ethereum cryptocurrency is doing every day when it allows people to trade coins with each other. It behaves as a cryptocurrency exchange , but without any central authority running the exchange, hence it is known as a decentralized exchange, or DEX.
And yes you heard me right. This is one cryptocurrency (Uniswap) that is built on top of another cryptocurrency (Ethereum). Ethereum can be considered the smart contract platform (and currently the most popular one), and Uniswap is a Dapp (a decentralized application) built on top of it.
And its just one example of the innovation taking place. Borrowing and lending, derivatives trading, trusted information sources, it’s all being re-invented in a world where there is no middle-man, and it’s progressing at faster pace than you can imagine. Decentralized Finance or DeFi as it’s known is a booming area of innovation that threatens to disrupt the finance industry.
And these decentralized applications are not restricted to finance either. You just have to go to the State of the Dapps website to see all the different categories that people are innovating in.
I’ll also give a quick shout-out to my personal coin, Cardano, which is due to become a fully fledged smart-contract coin in September of 2021. There is already a project underway to store educational records of students in Ethiopia on the Cardano block chain, and there are also pilot projects in the food supply chain sector for both beef and wine. VeChain is also another coin in the smart contract category that deserves a mentioned and has numerous real world projects they can point to with partnerships with companies such as Walmart in China.
All this goes to show, that cryptocurrencies are not just about DeFi applications. They are being used to drive blockchain-based innovation across traditional enterprises.
Now as stated up front, I am not saying that you should invest in or not invest in these types of coins. I’m simply saying there are genuine use cases for cryptocurrencies that is driving tangible value today. I feel like Investing in these alternative coins is not too dissimilar to investing in early stage startups. There are hundreds of Alt-coins all competing with one another, some of them are scams so you need to watch out for rug pulls – when they mysteriously disappear. But the three that I’ve mentioned here are genuine projects that are worth looking into, and they by no means the only ones. If you are going to invest in Alt Coins, then as we say in crypto, DYOR – Do Your Own Research.
These are coins that are pegged to a real world currency, usually the dollar. USDT and USDC are the two most popular ones. 1 USDT or USDC always equals 1 US Dollar. And they don’t do anything smart either.
So what’s the point of them if they never change I hear you ask? Well the main reason is as they are a digital dollar built you can build smart contract platforms to interact with them automatically. Doing the same with real US dollars would be more cumbersome.
But going back to what I said about savings accounts and how they offer a measly 0.5% interest. Well with crypto savings account such as BlockFi and Nexo you can be earning ~8% interest on your stable coins. Let me rephrase that: You can convert your US dollars into a digital coin that never goes up or down and be earning around 8% interest.
Sounds crazy huh? I won’t go into detail on how they can afford such high interest rates but its to do with the whole lending and borrowing ecology that exists out there in the DeFi space, and you being a liquidity provider.
Central banks have realized the benefits of having a digital programmable coin, that is pegged to a national currency and countries all over are now considering introducing their own central bank digital coins (CBDCs), with China already having introduced one. This would allow them to have a super tight control over the monetary system and have greater levers to pull when looking to influence the market. This can of course lead to infringements on our privacy and liberty if not implemented correctly.
To conclude this section, cryptocurrencies have a range of different use cases, and we’ve covered a lot of them. Yet the majority of people are oblivious to all that is going on.
5. Financial institutions, companies and even countries have cautiously started getting into crypto
Previously we asked the question of whether interest in crypto and Bitcoin in particular, as that is the most popular coin by far and a bellwether for the entire crypto industry, is waning over time. Well what seems to be happening is the opposite. A lot financial institutions, companies, and even governments are starting to adopt crypto in their dealings, albeit cautiously. We’ll go through each one in turn but let’s start of with some news articles to help set the backdrop:
Research by Piplsay, showed that:
- 88% of all investment in cryptocurrencies is done by respondents with a college or a master’s degree
- 38% of Gen Xers, 49% of Gen Y (Millennials), and 13% of Gen Zers, own crypto
- and that of these groups the percentage that were ‘very likely’ to purchase products or services using cryptocurrency was 40% of Gen Xers, 53% for Millennials, and 7% of Gen Zers
What I take away from this is that millennials (those born between 1981 and 1996) are the generation that’s coming into their prime earning years. Financial institutions and companies are not oblivious to that. Gen Z will likely follow once they get into their earning years.
Against this backdrop, financial leaders that may have been skeptical about Bitcoin (most famously Jamie Dimon, CEO of J.P. Morgan) are coming to the realization that it cannot be ignored.
So let’s do a quick tour of these financial institutions:
According to a Financial Times article:
“A survey of 100 hedge fund chief financial officers globally…found that executives expect to hold an average of 7.2 per cent of their assets in cryptocurrencies in five years’ time.”
There are already a lot of digital asset management funds that are heavily invested in crypto, with the 5 largest of these holding over 46bn dollars in crypto. In addition more traditional funds such as the worlds largest asset manager, Blackrock, has started exploring crypto.
Vanguard so far has a skeptical view of crypto stating:
“The fact that cryptocurrencies are not issued by a central bank is actually the very reason why they can’t achieve the quality of other well-accepted currencies…The role of a central bank is precisely to preserve the value of the currency by keeping inflation under control. That’s why prices are more predictable under Federal Reserve management of the U.S. dollar money supply.” (Vanguard)
Fidelity is perhaps the most bullish of traditional Asset Management firms, having launched Fidelity Digital Assets in 2018 offering both custody and trade execution services as well as mining its own crypto. It’s also planning on launching its own bitcoin fund.
Let’s start by acknowledging that Chinese banks make up the biggest banks in the world and they are banned from providing cryptocurrency services. However at the same time the Chinese government is pursuing the creation of its own cryptocurrency, the digital Yuan, so this ban should be seen against the backdrop of China wishing to have total control over its monetary system.
The US banks attitude to crypto can be summed up by these two quotes from Jamie Dimon:
“A lot of our clients are asking, ‘can we help them buy or sell cryptocurrency? And we’re investing in that as we speak.” (Jamie Dimon, May 18th)
“My own personal advice to people is: stay away from it. That does not mean the clients don’t want it…This goes back to how you have to run a business. I don’t smoke marijuana but if you make it nationally legal, I’m not going to stop our people from banking it.” (Jamie Dimon, May 27th)
JP Morgan is launching a Bitcoin fund this summer, it’s competitor CitiGroup is considering something similar. Bank of America is perhaps the most skeptical but sees DeFi as “intriguing“. Goldman Sachs has started a trading Bitcoin and Morgan Stanley already has offers a Bitcoin fund.
US banks were buoyed recently from regulators announcing that banks can provide cryptocurrency custody services to its customers, as well as the fact the SEC does not consider addressing cryptocurrencies a priority for 2021. For all intents and purposes, it seems US regulators do not wish to stifle financial innovation that could see the US leading the world, just like it did with the rise of the internet.
Tesla, and Square both famously hold Bitcoin. But the most famous public company to own Bitcoin is unquestionably MicroStrategy with it’s mega-bullish CEO, Michael Saylor. Just watch this. Pretty bullish I’m sure you’d agree.
A strong argument made by Michael Saylor, who did not pay much attention to Bitcoin until the Covid crisis , is that the options for companies wishing to preserve their wealth is limited. As mentioned earlier, trying to decide what type of asset to use to store monetary value is risky, but Michael Saylor is convinced Bitcoin is the “pristine” investment vehicle for doing so based on it’s 10 year trajectory.
Finally we come onto governments. National governments have flipped-flopped over the years on their attitude to cryptocurrencies. Many have declared a ban, only to quietly reverse the decision later. They are caught between one view of cryptocurrency as being used by criminals and a threat to their national currency, and another view as a new industry that cropping up, similar to the internet, and that banning it would just harm their own economy. (By the way – let me clarify – Bitcoin actually makes it easier for crime agencies to track criminals).
In June of 2021, El Salvador became the first country in the world to accept Bitcoin as legal tender. Within days of this announcement representatives from other countries expressed an interest in following suit. At a state level in the US, Miami has branded itself as a pro-crypto city, and Texas and Wyoming are pro-crypto states.
Having seen how silicon valley grew to dominate the world, governments are understandably wary about being left behind.
6. Investing is all about narratives
We’re nearing the end of our journey through the macro, micro and mathematical forces that shape the crypto markets. The final section will cover some popular theories used to predict the future price of Bitcoin. But before we dive in, a word of caution.
Investing, I’ve learnt, is all about influencing the narrative. This applies to traditional stock markets as well as crypto markets. Read any analyst report or visit Seeking Alpha and you’ll see how people try to influence the market through various narratives about the stock in question. Often there is a battle for mindshare between competing narratives, told by people who have a self-interest. Here are two from the crypto world:
- Bitcoin consumes a lot of energy and is bad for the environment vs. Bitcoin is the best incentive for switching to green energy every created and is good for the environment
- Ethereum transaction fees reflect its popularity and the upgrade to Eth2 will reduce these fees vs. Ethereum transaction fees are out of control and the upgrade to Eth2 is going to be slow and risks delays
I mention this as it’s important to retain a healthy dose of skepticism whenever you read about an investment opportunity.
With that being said, let’s dive into 3 popular theories as to why Bitcoin and cryptocurrencies are going to the moon (to use the crypto parlance). These are a bit more substantial than the narratives above as they are based on data, and can be considered the cornerstone of crypto enthusiasts bullish belief about the crypto market.
Note that price of Bitcoin is especially important m, as the prices of all other cryptocurrencies have a strong correlation to it, albeit sometimes with a lag. Therefore consider Bitcoin price to be a proxy for crypto in general.
The Network effect aka Metcalf’s Law
The Network effect is the idea of the power of the network, the bigger it gets the stronger it gets and the more rapidly it can increase.
Metcalf’s law is a quantification of that and was originally devised as a way of valuing the telecommunications network, and states that a network’s value is proportional to the square of the number of its users. It has since been used to measure the value of other networks such as Facebook and Bitcoin. This showed that over 70% of variance in Bitcoin value was explained by applying Metcalfe’s law to increases in Bitcoin network size.
Based on this theory Ethereum is seen as an exciting prospect as it has been found to be following the same pattern of network growth that Bitcoin followed. Cardano also has a strong community and could potentially show exponential growth due to Metcalfs law.
Stock to Flow
The most famous model in the Bitcoin world. This theory is in essence a quantification of the decreasing supply that I described through my water droplets metaphor earlier. Given that we know the rate of the decrease we can come up with some prediction of the impact on price.
The anonymous online user, PlanB, did exactly that when they released the Bitcoin Stock to Flow (S2F) model and then later updated it to the STFX model .
Based on this, traders predict Bitcoin to go above $100k by the end of 2021 as shown in the chart below:
The colors on the chart show the time left until the next halving event with red being the furthest away and light blue being the period of the halving event. After each halving event, the shock of the decreasing supply of Bitcoin takes its time to be felt on the market price.
Update: While at the time of writing (June 2021) there was concern that the Bitcoin price movement was veering away from this model, as of today (23 Aug 2021) it appears to be heading back on track. Click here to check out the latest.
Bitcoin Cycle Theory
The last theory I shall cover is one that tries to predict the price of Bitcoin in the medium term.
Let’s revisit our historical Bitcoin price chart, but blown up (Remember, this is on a logarithmic scale):
Bitcoin cycle theory states that the price of Bitcoin ebbs and flows in a cyclical fashion. After a Bitcoin halving (the vertical blue line), the supply shock of fewer Bitcoin takes around a year to work its way through the system (essentially there are fewer Bitcoin mining rewards to go around and so Bitcoin miners will start to drop out of the game). Eventually the supply shock catches up and it leads to a new Bitcoin high around a year after a halving event.
In that time there can be a false pause halfway through, where people may panic and think it’s about to crash, but then it continues its upwards trajectory. I’ve circled these moments in the chart shown.
After the new All Time High, market sentiment suddenly changes and prices plummet.
Years 2 and 3 after a halving is seen as the best times to accumulate Bitcoin, before the next halving occurs.
At the time of writing people are waiting with baited breath – we are halfway through the bull run and we have had a sharp drop as seen at the end of the chart. This represents Bitcoin losing ~50% of its value.
Is Bitcoin about to plummet further? Or will it follow history and resume its journey for an epic bull run and new All Time Highs? Only time will tell.
Hopefully you’ve found this journey through crypto helpful. We’ve looked at why investing is the vehicle for changing ones life, and due to inflation why it’s a bad idea not to invest in something. We then explored the gap between the intrinsic value of something and its market value, as there’s a debate on how much, if any, intrinsic value cryptocurrencies have and whether it matters.
We then looked at some arguments for why Bitcoin and other crypto currencies have value, as different types of coins have different use cases. Defi applications based on smart contract platforms in particular have the potential to disrupt traditional business models, while central banks are experimenting with their own digital coins.
We also saw how financial institutions, companies and governments were waking up and cautiously getting into crypto. There is a demographic shift towards crypto and no one wants to be left behind. And finally we looked at some of the most popular narratives for why Bitcoin, seen as a bellwether for the entire crypto market, is a good investment; with the caveat that investing is full of competing narratives trying to win mind-share.
I have stayed away from investment advice on crypto and therefore not covered more specific topics to think about such as Proof of work vs Proof of Stake. Though I do cover or plan to cover these topics elsewhere, so definitely hit subscribe.
Regardless of where you end up, I hope I’ve gone some way to giving you a more nuanced view of the crypto market