BTC017: Bitcoin Onchain Analytics & Timing w/ Charles Edwards (Bitcoin Podcast)

Charles Edwards, a quant investor and creator of popular Bitcoin metrics like Hash Ribbons and Trade King, approaches the valuation of Bitcoin using a combination of fundamental and technical analysis, as well as considering various inputs such as on-chain data, sentiment, and price behavior. He believes that all of these factors contribute to the overall supply and demand equation that sets the price for Bitcoin. Edwards, who was once skeptical of technical analysis, now recognizes its value and incorporates it into his investment strategy. He also shared his background in value investing and how he applied that approach to Bitcoin, ultimately expanding it to include various types of analysis.

Identifying the bottom of Bitcoin's market cycles can be an effective strategy for buying at the best possible price. The Hash Ribbons metric, which identifies when inefficient miners are shutting down during market downturns, has been a useful indicator for this purpose. Bitcoin's massive upside potential due to its low global adoption makes determining market tops more challenging, but other metrics like Hodler Waves, Grayscale premium, and dynamic NVT can provide valuable insights. Ultimately, the bottoming of supply is a more reliable indicator for trend reversals in Bitcoin's market cycles.

Bitcoin's production cost, which considers the electrical cost of mining and other business expenses, can serve as a floor for the Bitcoin price due to the miners' operations. This is based on the idea that miners will shut down their operations when the Bitcoin price falls below their production cost. This concept is supported by historical data, as this has only happened a few times in Bitcoin's history, and it can be a strong buy signal, especially in the current macroeconomic environment. In the article "Bitcoin's Production Cost," Charles discusses this idea in greater detail. Additionally, Bitcoin's price chart shows a strong correlation with Metcalfe's law and the Linde effect, further emphasizing the importance of the miners and their energy consumption in setting the Bitcoin price floor.

Bitcoin is currently leading the decentralized monetary space, and its price is influenced by various metrics such as production cost and energy value. The energy value metric, which maps the energy input in jewels almost 1 to 1 to Bitcoin, has consistently reverted the price for the last 10 years. However, it's important to note that prices can extend above energy value during market cycles, and investors should look out for factors such as dropping hash rates, miners unloading coins, and high multiples to determine potential market tops. Additionally, the macroeconomic backdrop, including the end of a 100-year debt cycle and potential currency collapse, could favor Bitcoin as a safe-haven asset.

The economic situation we're in presents both opportunities and risks for investors, depending on their time horizon and risk tolerance. Some experts believe that policies to manage debt down and monetary printing could lead to a beautiful deleveraging scenario, while others predict a collapse of fiat currencies and hyperinflation. In such an environment, stocks could experience significant volatility, with potential for both gains and losses. Bitcoin, on the other hand, is seen as a great long-term option to navigate inflation and potential currency collapses, but it comes with the risk of large downswings or even collapses. Ultimately, investors need to consider their personal risk tolerance and time horizon when deciding where to allocate their funds. The TIP Mastermind community and Yahoo Finance can help investors stay informed and make informed decisions.

Bitcoin's price movements follow a 4-year cycle, and the current bull run is likely to continue, potentially reaching $300,000. This prediction is based on various metrics, including energy values, stock to flow ratio, and Fibonacci sequences. The speed of price appreciation is faster than previous bull markets due to institutional buy-in and monetary inflation. However, the exact price bounds are uncertain and depend on economic stimulus. It's important to trust data and historical trends until proven otherwise, rather than relying solely on narratives. The 4-year cycle is likely to continue, but a large drawdown may occur at the end due to the actions of long-term Bitcoin holders.

The speaker believes that as Bitcoin becomes more institutionalized and distributed, the volatility and impact of individual sell-offs or market events will diminish. He also suggests that the key components of Bitcoin, such as its supply model and hash rate, are pre-programmed and can be analyzed, making price movements more predictable over time. The speaker also mentions the possibility of a "melt up" event in Bitcoin due to a lack of trust in traditional systems, but finds it difficult to predict when that might occur. Lastly, the speaker discusses the contango trade, where Bitcoin is deposited for a loan and then shorted on a perpetual futures contract to earn an interest-free return. Despite the cost of storage being near nothing, this trade exists due to the potential for higher returns from the short position.

The Bitcoin market sees an average funding rate of 0.01% per day, which compounds to around 12% annually. However, this rate can vary greatly depending on market conditions, with higher rates observed during bull runs and lower rates during bear markets. This funding rate is significant because it impacts the incentives for traders engaging in Bitcoin perpetual swaps, where they can effectively borrow and lend Bitcoin. When traders engage in these swaps, they can lock up their Bitcoin as collateral to receive a larger amount to trade with, while also earning interest on the borrowed Bitcoin. This trade, which is essentially a form of lending, is considered zero-risk as long as the platform is reliable. The resulting supply reduction from locked-up Bitcoin can contribute to increased demand and higher prices. Recent data shows a significant increase in the amount of Bitcoin being pulled off exchanges, which is a bullish sign. This trend may be driven, in part, by institutional investors and long-term holders locking up their Bitcoin in these swaps. However, the strength of this trend may be waning, as the percentage of Bitcoin holders with more than 2 years of tenure has peaked and begun to decline, potentially indicating a change in hands. Overall, the trend of Bitcoin being locked up in perpetual swaps is an important factor to consider in understanding the current market dynamics and potential price movements.

Understanding various metrics and indicators can provide valuable insights into the current state and future trends of the Bitcoin market. Some key metrics to watch include the network value to transaction ratio (NVT), the May multiple, stablecoin inflows and outflows, and the Grayscale premium. These indicators can help identify potential price bottoms or appreciations, as well as the onset of a topping process. It's essential to combine multiple metrics to get a comprehensive understanding of the market. Additionally, for those interested in trading or investing, it's crucial to have a passion for the field, continuously learn and research, and maintain an open mind to various investing strategies.

Having an open mind and being willing to consider new ideas, even from unexpected sources, can lead to valuable insights in investing and other areas. Preston Pysh shared his experience of being surprised by Bill Miller's discussion of technical indicators in value investing. The world of finance, particularly in decentralized finance (DeFi) and non-fungible tokens (NFTs), presents unique challenges for startups and businesses trying to decentralize and tokenize their models. While the concepts of DeFi and decentralized autonomous organizations (DAOs) are intriguing, the chances of success are slim due to the complexity of the undertaking. NFTs, such as digital art, face challenges with replication and ownership. However, the potential for decentralized businesses run by voting and AI is promising for the future. Overall, it's important to approach new ideas with an open mind and be cautious in investing in them, especially in their early stages.

Public.com offers a high-yield cash account with an APY of 5.1%, which is significantly higher than many other financial institutions. However, it's important to note that this is a secondary brokerage account, and the funds are automatically deposited in partner banks for FDIC insurance. When it comes to financial advice, trust is crucial, and NerdWallet is a reliable source for finding smarter financial products. Regarding the discussion on altcoins and NFTs, the speaker expressed skepticism due to the lack of confidence in their decentralization and sustainability. The speaker found the dividend model for tokenizing stocks more interesting but noted the missing trust, security, and regulation elements. The speaker also raised concerns about the survival of the crypto chains supporting NFTs, as most of them may not make it. In simpler terms, Public.com offers a high-interest cash account, but it's essential to understand the specifics. Altcoins and NFTs are risky investments, and their long-term success is uncertain. Trust is vital when making financial decisions, and NerdWallet can help you make informed choices.

While the concept of tokenizing and monetizing digital assets like art, music, and media is intriguing, the current infrastructure of the internet and encryption technology is not yet advanced enough to make it a reality. The idea of tokenizing everything and creating revenue models for owners is a future possibility, but the challenges of enforcing ownership and preventing copying are significant. Regarding the GBTC premium, it has historically indicated sentiment towards Bitcoin, with undervaluation being a good buying opportunity and overvaluation a sign to derisk. The recent dip below the value of the underlying Bitcoin raises concerns about competition and potential trends, but the data suggests it may be undervalued. The discussion also touched on the strong performance of the fund, which outperformed the Bitcoin hurdle rate significantly in 2020. The fund, which is newly launched for accredited investors, has also shown promising results so far. Overall, the conversation highlighted the potential of digital assets and the challenges they face, as well as the importance of keeping an open mind and following data over narratives.

Trend King, a business managing high net worth investors' assets in cryptocurrency, experienced significant growth and currently manages over $40 million. The subscription model, which includes managed accounts and a recently launched fund, has shown a 608% return since its inception. However, investors should be aware of potential drawdowns, which can reach up to 40%. The model performed well during the 2018 market correction, although backtest results should be taken with caution. Regulatory risk and potential hacking or chain value disruptions are the two main concerns for the future of the cryptocurrency market. Despite the integration of Bitcoin into financial systems and its increasing acceptance, there is still a small chance that a major country could ban it, causing a massive price drop. However, the energy cost floor provided by miners might help bring the price back up.

The impact of a country banning Bitcoin mining on the price depends on the extent of the mining operations in that country. For instance, a significant player like the US could cause a substantial price drop due to the large integration and high mining activity. However, this effect might be temporary, and long-term, individual country actions are unlikely to significantly impact Bitcoin's value due to its decentralized, deflationary, and hard asset properties. People often overlook these essential characteristics and focus on the volatility instead. Bitcoin's journey from a zero market capitalization to potentially becoming a reserve currency or equivalent to gold requires volatility as an inherent part of the process. So, it's essential to recognize the significance of Bitcoin's unique features and the potential long-term implications, despite the short-term price fluctuations.