March 31, 2021

Will Clemente on Bitcoin Analytics | The Pomp Podcast

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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

Will Clemente (@WClementeIII) is a Finance Major at East Carolina University, and a rising Bitcoin analyst
Host – Anthony “Pomp” Pompliano (@APompliano)

Motivated by quick profits, Will started in finance after the March 2020 market crash.
- His first realization: Value investors mistakenly assume money is sound. In reality, no investor can fight the Fed
  - This is why growth and momentum strategies have outperformed value investing in the recent years
Will’s Bitcoin learning resources include:
- Podcasts: The Investor s ’ Podcast, Stephan Livera, What Bitcoin Did, and The Pomp Podcast (Checkout the Podcast Notes from all these shows)
- The Bitcoin Standard by Saifedean Ammous

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

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

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
- Miners have stopped selling freshly minted bitcoins
- 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

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

Specul a tive 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