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Will Clemente on Bitcoin Analytics | The Pomp Podcast

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Key Takeaways

  • Bitcoin’s fixed supply is the missing constant in the financial markets.
  • Bitcoin, as deflationary sound money, incentivizes saving and allows people to get ahead. The world is becoming cheaper for bitcoin holders
  • Previous bitcoin adoption cycles saw a rise in bitcoins deposited on exchanges. By contrast, the current price rise is coupled with diminishing bitcoin reserves on exchanges
  • Investors looking to arbitrage the spreads between futures and spot have to over-collateralize to borrow coins, this collateral is taken off the market and locked in escrow.
    • This is a self-enforcing positive feedback loop: more coins taken off exchanges drive the price and volatility higher, which increases spreads and causes more people to take the trade
  • Speculative attacks involve leveraging a weak currency to acquire a hard currency. An example in action is Michael Saylor issuing debt notes at 0% to acquire more bitcoins
  • Bitcoin lending rates are rising in the free market. We will see complete asset repricing when markets recognize bitcoin yields as the real risk-free rate

Intro

How Will Came Across Bitcoin

Why is Bitcoin Important?

  • Bitcoin grew in a sustainable macro-economic backdrop of quantitative easing, zero or lower interest rates, and calls for Universal Basic Income
  • Bitcoin’s fixed supply is the missing constant in the financial markets.
    • There will only ever be 21 million bitcoins that are issued at a fixed predetermined rate. In contrast to gold’s supply, which can increase with price appreciation

The Bitcoin Renaissance

  • Sound money is essential to human development. Bitcoin, as deflationary sound money, incentivizes saving and allows people to get ahead again
    • The world is becoming cheaper for bitcoin holders
  • Inflationary monetary policy increases economic inequality, savers get destroyed, and owning assets is the only way to stay ahead
    • This manifests in the increasing social unrest

Is this Bitcoin Cycle Different?

  • Previous bitcoin adoption cycles saw a rise of bitcoins deposited on exchanges. By contrast, the current price rise is coupled with diminishing bitcoin reserves on exchanges. Three possible explanations:
    • Investors are aware of the importance of self-custody
    • Arbitrage trades between spot and futures prices, which involves investors locking up bitcoins as collateral and further reducing the available supply
  • 60% of coins haven’t moved in over a year. This period saw a 50% drop in a single day, multiple 20-30% corrections, and several hundred percent price appreciations
    • Additionally, the 40% remaining supply is quickly being taken off the market
      • “I would be terrified not to own some bitcoin right now” – William Clemente

Contango and Over Collateralization

  • Storage costs cause commodity futures to trade at a premium to spot prices. That said, Bitcoin has no storage cost and still trades at a multi-thousand dollar premium to spot price. Two possible reasons:
    • Regulatory restrictions on institutions’ exposure to spot bitcoin
    • It’s easier to get leverage in futures markets
  • Investors looking to arbitrage the spreads between futures and spot have to over-collateralize to borrow coins, this collateral is taken off the market and locked in escrow.
    • This is a self-enforcing positive feedback loop: more coins taken off exchanges drive the price and volatility higher, which increases spreads and causes more people to take the trade
      • This trade is especially attractive to fixed income investors who are dealing with near negative-yielding instruments

The Bitcoin Black Hole Effect

  • Speculative attacks involve leveraging a weak currency to acquire a hard currency. An example in action is Michael Saylor issuing debt notes at 0% to acquire more bitcoins
    • Essentially, it’s the use of free money to acquire a scarce asset with an increasing purchasing power
    • Saylor’s offering at 0% was oversubscribed. Moreover, investors will even buy negative-yielding bonds because they are betting that the yields will go further negative
  • Bitcoin’s supply halves every 4 years, this results in growing adoption and network effects and sucks the monetary premium from all other assets.
    • Akin to a battering ram constantly hammering against the traditional financial system, eventually breaking through
  • Rising rates in a global macro backdrop of infinite QE is dangerous. The Fed will have to keep buying through the fixed income market to keep yields down. Else, everything will unravel.
    • On the other hand, Bitcoin lending rates are rising in the free market. We will see complete asset repricing when markets recognize bitcoin yields as the real risk-free rate
      • The market prices stocks off the treasury yield, currently at 1.5%, whereas bitcoin yields 10%-15%
    • As a result, the current average PE ratio of over 35 will drop to below 5. In other words, a 75-80% correction in the stock market
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Notes By Mostafa Khaled

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