Tag: scarcity

Seven Factors Bitcoin Investors Should Watch In 2023

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The below is an excerpt from a recent year-ahead report written by the Bitcoin Magazine PRO analysts. Download the entire report here.

Bitcoin Magazine PRO sees incredibly strong fundamentals in the Bitcoin network and we are laser-focused on its market dynamic in the context of macroeconomic trends. Bitcoin aims to become the world reserve currency, an investment opportunity that cannot be understated.

In our year-ahead report, we analyzed seven notable factors that we recommend investors pay attention to in the coming months.

Convicted Bitcoin Investors

We can put investor conviction into perspective by looking at the number of unique Bitcoin addresses holding at least 0.01, 0.1 and 1 bitcoin. This data shows that bitcoin adoption continues to grow with a growing number of unique addresses holding at least these amounts of bitcoin. While it is entirely possible for individual users to hold their bitcoin in multiple addresses, the growth of unique Bitcoin addresses holding at least 0.01, 0.1 and 1 bitcoin indicate that more users than ever before are buying bitcoin and holding it in self-custody.

Unique bitcoin addresses continues to grow across the board.

Another promising metric is the amount held by long-term holders, which has increased to almost 14 million bitcoin. Long-term holder supply is calculated using a threshold of a 155-day holding period, after which dormant coins become increasingly unlikely to be spent. As of now, 72.49% of the bitcoin in circulation is not likely to be sold at these prices.

Long-term holder supply reached 72.52% of the circulating bitcoin supply.

There is a large subset of bitcoin investors who are accumulating the digital asset no matter the price. In a December 2022 interview on “Going Digital,” Head of Market Research Dylan LeClair said, “You have people all over the world that are acquiring this asset and you have a huge and growing cohort of people that are price-agnostic accumulators.”

With a growing number of unique addresses holding bitcoin and such a significant amount of bitcoin being held by long-term investors, we are optimistic for bitcoin’s advancement and rate of adoption. There are many variables that demonstrate the potential for asymmetric returns as demand for bitcoin increases and adoption increases worldwide.

Total Addressable Market

During monetization, a currency goes through three phases in order: store of value, medium of exchange and unit of account. Bitcoin is currently in its store-of-value phase as demonstrated by the long-term holder metrics above. Other assets that are frequently used as stores of value are real estate, gold and equities. Bitcoin is a better store of value for many reasons: it is more liquid, easier to access, transport and secure, easier to audit and more finitely scarce than any other asset with its hard-cap limit of 21 million coins. For bitcoin to acquire a larger share of other global stores of value, these properties need to remain intact and prove themselves in the eyes of investors.

Estimations of global stores of wealth.

As readers can see, bitcoin is a tiny fraction of global wealth. Should bitcoin take even a 1% share from these other stores of value, the market cap would be $5.9 trillion, putting bitcoin at over $300,000 per coin. These are conservative numbers from our viewpoint because we estimate that bitcoin adoption will happen gradually, and then suddenly.

Transfer Volume

When looking at the amount of value that was cleared on the Bitcoin network throughout its history, there is a clear upward trend in USD terms with a heightened demand for transferring bitcoin this year. In 2022, there was a change-adjusted transfer volume of over 556 million bitcoin settled on the Bitcoin network, up 102% from 2021. In USD terms, the Bitcoin network settled just shy of $15 trillion in value in 2022.

Bitcoin transfer volume was higher than ever in USD terms.

Bitcoin’s censorship resistance is an extremely valuable feature as the world enters into a period of deglobalization. With a market capitalization of only $324 billion, we believe bitcoin is severely undervalued. Despite the drop in price, the Bitcoin network transferred more value in USD terms than ever before.

Rare Opportunity In Bitcoin’s Price

By looking at certain metrics, we can analyze the unique opportunity investors have to purchase bitcoin at these prices. The bitcoin realized market cap is down 18.8% from all-time highs, which is the second-largest drawdown in its history. While the macroeconomic factors are something to keep in mind, we believe that this is a rare buying opportunity.

The realized cap drawdown in 2022 was the second largest in bitcoin’s history.

Relative to its history, bitcoin is at the phase of the cycle where it’s about as cheap as it gets. Its current market exchange rate is approximately 20% lower than its average cost basis on-chain, which has only happened at or near the local bottom of bitcoin market cycles.

Current prices of bitcoin are in rare territory for investors looking to get in at a low exchange rate. Historically, purchasing bitcoin during these times has brought tremendous returns in the long term. With that said, readers should consider the reality that 2023 likely brings about bitcoin’s first experience with a prolonged economic recession.

Macroeconomic Environment

As we move into 2023, it’s necessary to recognize the state of the geopolitical landscape because macro is the driving force behind economic growth. People around the world are experiencing a monetary policy lag effect from last year’s central bank decisions. The U.S. and EU are in recessionary territory, China is proceeding to de-dollarize and the Bank of Japan raised its target rate for yield curve control. All of these have a large influence on capital markets.

Nothing in financial markets occurs in a vacuum. Bitcoin’s ascent through 2020 and 2021 — while similar to previous crypto-native market cycles — was very much tied to the explosion of liquidity sloshing around the financial system after COVID. While 2020 and 2021 was characterized by the insertion of additional liquidity, 2022 has been characterized by the removal of liquidity.

Interestingly enough, when denominating bitcoin against U.S. Treasury bonds (which we believe to be bitcoin’s largest theoretical competitor for monetary value over the long term), comparing the drawdown during 2022 was rather benign compared to drawdowns in bitcoin’s history.

As we wrote in “The Everything Bubble: Markets At A Crossroads,” “Despite the recent bounce in stocks and bonds, we aren’t convinced that we have seen the worst of the deflationary pressures from the global liquidity cycle.”

In “The Bank of Japan Blinks And Markets Tremble,” we noted, “As we continue to refer to the sovereign debt bubble, readers should understand what this dramatic upward repricing in global yields means for asset prices. As bond yields remain at elevated levels far above recent years, asset valuations based on discounted cash flows fall.” Bitcoin does not rely on cash flows, but it will certainly be impacted by this repricing of global yields. We believe we are currently at the third bullet point of the following playing out:

Source: Dylan LeClair

Bitcoin Mining And Infrastructure

While the multitude of negative industry and worrying macroeconomic factors have had a major dampening on bitcoin’s price, looking at the metrics of the Bitcoin network itself tell another story. The hash rate and mining difficulty gives a glimpse into how many ASICs are dedicating hashing power to the network and how competitive it is to mine bitcoin. These numbers move in tandem and both have almost exclusively gone up in 2022, despite the significant drop in price.

Bitcoin mining difficulty continues to rise.

Bitcoin hash rate continues to rise.

By deploying more machines and investing in expanded infrastructure, bitcoin miners demonstrate that they are more bullish than ever. The last time the bitcoin price was in a similar range in 2017, the network hash rate was one-fifth of current levels. This means that there has been a fivefold increase in bitcoin mining machines being plugged in and efficiency upgrades to the machines themselves, not to mention the major investments in facilities and data centers to house the equipment.

Because the hash rate increased while the bitcoin price decreased, miner revenue took a beating this year after a euphoric rise in 2021. Public miner stock valuations followed the same path with valuations falling even more than the bitcoin price, all while the Bitcoin network’s hash rate continued to rise. In the “State Of The Mining Industry: Survival Of The Fittest,” we looked at the total market capitalization of public miners which fell by over 90% since January 2021.

The market cap of all public mining equities has dropped by 9

We expect more of these companies to face challenging conditions because of the skyrocketing global energy prices and interest rates mentioned above.

Increasing Scarcity

One way to analyze bitcoin’s scarcity is by looking at the illiquid supply of coins. Liquidity is quantified as the extent to which an entity spends their bitcoin. Someone that never sells has a liquidity value of 0 whereas someone who buys and sells bitcoin all the time has a value of 1. With this quantification, circulating supply can be broken down into three categories: highly liquid, liquid and illiquid supply.

Illiquid supply is defined as entities that hold over 75% of the bitcoin they deposit to an address. Highly liquid supply is defined as entities that hold less than 25%. Liquid supply is between the two. This illiquid supply quantification and analysis was developed by Rafael Schultze-Kraft, co-founder and CTO of Glassnode.

Bitcoin’s illiquid supply continues to grow.

2022 was the year of getting bitcoin off exchanges. Every recent major panic became a catalyst for more individuals and institutions to move coins into their own custody, find custody solutions outside of exchanges or sell off their bitcoin entirely. When centralized institutions and counterparty risks are flashing red, people rush for the exit. We can see some of this behavior through bitcoin outflows from exchanges.

In 2022, 572,118 bitcoin worth $9.6 billion left exchanges, marking it the largest annual outflow of bitcoin in BTC terms in history. In USD terms, it was second only to 2020, which was driven by the March 2020 COVID crash. 11.68% of bitcoin supply is now estimated to be on exchanges, down from 16.88% back in 2019.

Exchanges saw a massive decrease in the bitcoin balances on their platforms.

Bitcoin balance on exchanges decreased in 2022.

These metrics of an increasingly illiquid supply paired with historic amounts of bitcoin being withdrawn from exchanges — ostensibly being removed from the market — paint a different picture than what we’re seeing with the factors outside of the Bitcoin network’s purview. While there are unanswered questions from a macroeconomic perspective, bitcoin miners continue to invest in equipment and on-chain data shows that bitcoin holders aren’t planning to relinquish their bitcoin anytime soon.

Conclusion

The varying factors detailed above give a picture for why we are long-term bullish on the bitcoin price going into 2023. The Bitcoin network continues to add another block approximately every 10 minutes, more miners keep investing in infrastructure by plugging in machines and long-term holders are unwavering in their conviction, as shown by on-chain data.

With bitcoin’s ever-increasing scarcity, the supply side of this equation is fixed, while demand is likely to increase. Bitcoin investors can get ahead of the demand curve by averaging in while the price is low. It’s important for investors to take the time to learn how Bitcoin works to fully understand what it is they are investing in. Bitcoin is the first digitally native and finitely scarce bearer asset. We recommend readers learn about self-custody and withdraw their bitcoin from exchanges. Despite the negative news cycle and drop in bitcoin price, our bullish conviction for bitcoin’s long-term value proposition remains unfazed.

For the full report, follow this link to subscribe to Bitcoin Magazine PRO.

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Craig Deutsch,Dylan LeClair And Sam Rule

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January 15, 2023
Our Relationship To Money Helps Us Understand Bitcoin

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This is an opinion editorial by Mark Maraia, an entrepreneur, author of “Rainmaking Made Simple” and a Bitcoiner.

“What Is Your Relationship To Money?”

I’d argue that’s a more intimate question for many than “Are you happily married?”

I’m sure most readers have never thought deeply about their relationship to money. Those raised with a scarcity mindset will never have enough. This is usually learned from parents and family at a very young age. It is also reinforced by fiat. If you are losing 7.7% of your purchasing power every year, you are likely to foment a mindset of scarcity. Those raised with or those who cultivated an abundance mindset were programmed differently. Either way, your mindset around and about money is ultimately a choice; you can alter or rewrite the program. For some people, this is easy. For others, it’s nearly impossible. And there are people who have plenty of money, but still aren’t happy.

In our modern world, there are many who believe that money is essential to life. There are some who go overboard and idolize money. They worship making it and they worship the people who make lots of it. If you have or earn ample amounts of money, count your blessings. A man or woman who has few needs lives more freely and abundantly than the rest.

Most of us have a special — often invisible or unexamined — relationship to money. For some, it gives them their whole reason for being in this world, while for others it’s a means to an end. As we observe events like Prime Minister Justin Trudeau’s freezing of Canadian truckers’ bank accounts or Biden’s theft of Russian reserves, we start to realize some chilling realities about the nature of money. If you don’t have physical possession of the monetary asset, all you have is an IOU, and that IOU is very tenuous if the ruling authorities decide your words or actions don’t comport with their worldview. Usually, the IOU is from the bank or credit union where you have deposited “your” money. The only thing is: It’s not “your” money once it’s deposited into the bank.

Bitcoiners are fond of saying, “Not your keys, not your coins.” What many people who aren’t Bitcoiners don’t stop to consider is that the money in their bank account isn’t really theirs. Zoltan Pozsar, global head of short-term interest rate strategy at Credit Suisse, makes the case that we’ve entered a new era of Bretton Woods III, which involves inside money and outside money and claims that commodities will underlie international monetary affairs. Inside money is money which has a middleman, such as a bank. All the money that you hold is essentially an IOU. Outside money is money that is outside of the banking system. It cannot be taken from you through denying you access to an account, nor can they inflate it away.

Money you earn for the work you do is proof of work. If you’re fortunate, you earn more than you need for everyday living. In the paper money era, that meant you traded your precious time, labor and life energy for green paper strips and little metal disks. Today you trade your precious time, labor and life energy for pixels on a computer screen. When viewed through that lens, one begins to realize that money is just a symbol. If all we have is an IOU with a bank, all kinds of mischief is possible from governments and banks. This may include bailouts, bail-ins and outright theft. This is deeply troubling. Our reliance on state-issued currencies means our wealth can be confiscated with a keystroke or the stroke of a pen.

The question at the outset can be further broken down into two very important and personal questions:

What Is Your Relationship To The U.S. Dollar?

I grew up very fortunate. I lived in a home that always had food on the table, a roof over our heads and the privilege of not having to ever worry about money. A classic middle-class upbringing through high school. I went to a public school and a private college, where I paid for half my education and worked as a professional once I got out of school.

I was so fortunate to grow up never really thinking much about money. It was low on my list of priorities and remains that way to this day. I rarely worried about having enough and generally took money for granted. Yes, in the early days of my career, I lived paycheck-to-paycheck, but I had savings — modest though they were — and parents who were a financial backstop. A family banker of last resort, as it were.

That upbringing was both a blessing and a curse. Why a curse? Because I never gave money much thought. Aside from the unspoken values my parents modeled, I was never taught about money, our banking system or our financial system. Those of us living in the U.S. enjoy the additional privilege of having the world’s reserve currency in our pocket. That privilege is one most Americans take for granted.

Link to embedded tweet.

While the U.S. dollar today is still considered the world’s strongest currency, it is no longer a reliable store of value. Even the most privileged people begin to take notice after watching the Federal Reserve and our government put absurd amounts of money into circulation.

All Americans alive today grew up with the dollar as the world’s reserve currency. To most, that means nothing. Most of us can probably remember the first time someone handed us a $5 bill or some other denomination when we were young and we felt a rush and thought. “Wow, I’m rich!”

Do you have strong feelings of pride over the U.S. and its founding ideals? Could that influence how you see the dollar? Do you have feelings of shame over the forever wars we’ve fought since Vietnam? While it may seem irrelevant, those feelings will dramatically impact your relationship to the country’s currency.

Are you a money manager in a hedge fund? Are you a millennial? Are you a boomer? Are you a venture capitalist? Each will shape your relationship with the world’s most desirable fiat currency. Do you see your bank account or access to capital as a source of safety, a source of security or a source of power? Do you see having a bank account as a privilege? These are all symbols. The majority of people in the world are unbanked. As we’re learning in 2022, these symbols are losing their luster and are highly illusory.

Enter a new kid on the block that was quietly brought into existence on January 3, 2009.

What Is Your Relationship To Bitcoin?

A huge percentage of people in the Western world are dismissive of it. Like all new technology, we find it hard to trust something we don’t understand. Until we have no choice. Canadian truckers were not interested in bitcoin until they needed to be. I believe we have now entered a period in which the transgressions of the fiat system leave us with no choice but to learn more about bitcoin.

This is a guest post by Mark Maraia. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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Mark Maraia

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November 19, 2022
Bitcoin’s Absolute Scarcity Changes Your Life

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This is a transcribed excerpt of the “Bitcoin Magazine Podcast,” hosted by P and Q. In this episode, they are joined by Knut Svanholm to talk about how Bitcoin can improve all facets of your life and the ways Bitcoin works as a weapon of peace.

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Listen To The Episode Here:

Knut Svanholm: I realized yesterday while browsing YouTube, that Pink Floyd’s “The Wall” movie had a huge impact on how I view the world. I saw that when I was 16 and it was pretty profound. I thought it was pretty profound at the time. If you remember that movie, I like them because it was like no other movie. The storytelling is very different from a linear movie, but it starts with this guy whose father died in the war. And there’s a powerful line about, “That’s when Her Majesty’s Royal Command took my daddy from me. That’s so tough; some institution has the right to take someone else’s life and order them to die for a higher cost and what that does to the generations that follow. Of course after that, there’s the whole school system thing where you have this meat grinder factory mashing people together into voting cattle. So I think, in hindsight, that movie probably had a big impact on how I view the world and how I detest collectivism.

More than that, I grew up in the countryside with a liberty-minded father. I sailed the Seven Seas. I worked on a toll ship for eight years, and I saw a lot of different countries. Even when I was a kid, I lived abroad a couple of times: half a year in Mozambique when I was like 10 or 11 and in Tanzania and some other places. I guess I was less inclined to believe whatever national lies were around at the time.

Remember the 1980s in Sweden; we had no commercial TV channels and no commercial radio channels. It’s all state owned and it is still to this day, to a large extent. There’s a subsidy system that big media companies get the money from the state, and of course they don’t bite the hand that feeds them. So there’s that. But in the ‘80s, it was really cut off from the rest of the world. We got to watch cartoons once a year during Christmas Eve. That’s when we got to see Donald Duck once a year. So that’s how growing up in Sweden in the ‘80s was. It was pretty, pretty dark in hindsight. I guess all of those things influenced my thinking.

Q: I want to talk about time preference. For our audience members who maybe don’t understand this, could you help them understand what’s the difference between a high and low time preference?

Svanholm: A high time preference is when you prioritize quick satisfaction, when you don’t delay gratification. So if you’re robbed of everything you own, you adopt a high time preference because you need to, because you need food to survive and you need shelter to not — in most places — you need shelter not to freeze to death at night. So you become a high-time-preference individual that prioritizes short-term gains which also makes you prone to crime and bad decision making, short-term decision-making.

And a low time preference is the opposite of that. That’s when you think about the future and you think about forthcoming generations. You plan ahead and you build something for the future. I believe that a high time preference and a low time preference are on the same scale as fear and love because a high time preference to me is a fearful state of being. And what’s the opposite of fear? The opposite of fear is love. So adopting a lower time preference or being able to adopt a lower time preference because you have more capital and a more certain future that allows you to be more loving to not only your fellow human beings, but to yourself.

I think this is the killer app of Bitcoin, is that it makes us better human beings. It makes us friendlier to one another and also friendlier and more loving to ourselves. We can afford to take care of ourselves and take care of others to a larger extent. My talk was about this to a large extent.

It ties into something my grandfather said, which is, “That which you can do without, you own,” which is something that has been stuck in my mind ever since the first time I heard it. It’s the flip side of “Your possessions end up owning you.” Because if you can control your mind to the extent that you don’t crave things anymore, then you own those things that you don’t crave, in a sense. For instance, I would never buy a Lambo regardless of how much bitcoin I have or how wealthy I become. I don’t crave Lambos. In a sense, I own all the Lambos because I control my urges. I think Bitcoin is like a gateway drug to that insight.

Sooner or later Bitcoiners come to the realization that they don’t need that much shit in their life. Material things matter less and less the longer you are in Bitcoin. And it’s going to be very interesting to see how this plays out because in fiat land, as we know, in order to become rich or when you do become rich, you buy a load of shit lingling and crap that you don’t need, and I think this reverses on a post hyperbitcoinization. We’ll have an abundant future without over consumption because we won’t crave as much shit as we do now. I think that’s the real killer thing here.

Q: I wanna try to unpack that a little bit. There’s a question behind all of this, and I’ll start with a question, which is: Do you think people recognize that when they use fiat money, it inflates so regularly, so they need to be spending it constantly? Versus with bitcoin, I think all of us recognize the value proposition of spending our bitcoin today is far greater than if we were to hold it and then spend it in the future.

Svanholm: I don’t think they realize it on a conscious level, but that’s what it does to people. People who acquire assets and take on big loans win the fiat game. That’s how you win. You buy a ton of shit, including houses, for instance. Real estate is a shitcoin. I saw some metric from the U.S. that over half of the real estate bought in the U.S. last year was not for people to live in themselves, but for an Airbnb use.

So it’s becoming this, “You’ll own nothing and you’ll be happy” playing out in front of our eyes. But I prefer that “You’ll owe nothing and be happy” future of Bitcoin because just replace one letter and and you get the Bitcoin future, which is you accumulate capital first and then you consume — if you’re willing to part with your bitcoin. The longer you hold your bitcoin, the more you realize how valuable they really are.

That’s where I come to the second prediction about the future. I’ve experienced it even now because I’ve collaborated with a whole bunch of Bitcoiners and they’ve given me stuff. They’ve given me their services and physical stuff like FractalEncrypt’s art pieces, for instance. They’ve helped me with translations and proofreading and editing and animations and narration, you name it — all for free. We very rarely exchange satoshis with one another. That sort of leads me to the conclusion that us being nice to one another is just Gresham’s Law on a bitcoin standard because we find our stacks to be so valuable so we’re willing to stake our reputational capital instead. That is the less valuable coin if you compare the two. So I think there’s a connection there and that’s why I think that the necessity for money to exist at all goes down in a hyperbitcoinized world.

That’s the real scaling solution. Fewer transactions are necessary. Ironically, this “don’t trust, verify” attitude of Bitcoiners leads to a world in which we can trust one another more. If you compare it to how you interact with your friends and your family, you very rarely exchange money there, too. You help one another without even asking for it.

This is where I think Bitcoin is going or people in Bitcoin are going toward the state where we’re always incentivized to help one another. It’s not only the time-preference thing, but it’s also pumping our bags. We want Bitcoin to succeed, therefore, we want other Bitcoiners to succeed.

This is the main reason that we’re having this conversation right now. We all love Bitcoin and we want others to come on board and enjoy it too. And in the process, we enrich ourselves if we hold some bitcoin, so we’re incentivized to help one another and exchange favors for free.

The funny thing is that doesn’t go away just because we hyperbitcoinize; we still have that. The Bitcoin private key is a key to your heart, literally. We run this mathematical experiment in the back of our heads and we just become better people.

I just find that endlessly fascinating. I can’t stop thinking about it. It gives me hope.

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Bitcoin Magazine

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November 2, 2022