The Bitcoin Deer - Issue #1
Your daily dose of news & information on everything Bitcoin, delivered to your inbox every morning for an easy read with a cup of coffee/tea.
Welcome to the very first release of ‘The Bitcoin Deer,’ a newsletter which covers the latest news and information on all things bitcoin, delivered to your inbox most mornings for a quick and easy read with your cup of coffee. We hope you enjoy this release of issue #1.
What We Cover in Issue #1:
Why Newsletter?
Innovation in Bitcoin
Bitcoin Market Stats
Daily News
On-chain Market Analysis
Recommended Readings/Pods
Meme of the day
WHY NEWSLETTER?
Why a newsletter, you ask!? Here are some reasons.
We live in a clown world
MSM is gaslighting us
‘Crypto’ & ‘Blockchain’ VCs keep getting more cringe about web-3
Youtube ‘Crypto’ & ‘Blockchain’ traders & influencers are cringe
Information asymmetry in bitcoin is insane still after 12+ years
We care to educate, spread whatever knowledge we have & help
We’re bitcoiners through & through and want people to understand the innovation for what it is - The greatest innovation of 21st century, a hope & tool for human freedom
The Fourth Turning is here & life is not going to get any easier for non-bitcoiners. Maybe we can help out & bring onboard a few more!?
“If not now, then when? If not us, then who?”
So let’s get started.
INNOVATION IN BITCOIN
We start today by highlighting the innovation in bitcoin. This is critical since there is so much misleading noise around the “crypto” and “blockchain” circles all of the time. These narratives are often lazy and misinformed. Understanding the fundamentals behind Bitcoin helps us to cut through the oversimplified, overhyped noise.
So what is the innovation in bitcoin? We like the definition taken from Allen’s recent paper (see here). The innovation in bitcoin is the following:
the proof-of-work algorithm
the difficulty adjustment
the native monetary unit (bitcoin) that is able to emerge by itself.
Socially, the innovation is an immutable and uncheatable distributed ledger
If you want to learn about the history of developments by cypherpunks in the 1990s & early 2000s that eventually led to Satoshi Nakamoto’s bitcoin project in 2008, you’ll find no better article to read than this one by Alex Gladstein, link below.
https://bitcoinmagazine.com/culture/bitcoin-adam-back-and-digital-cash
We’ve additionally written a whole article going through these concepts and more about energy markets. If you’d like to give it a read, here it is:
BITCOIN MARKET STATS
Next, let us look at some bitcoin market stats through the BitBo Dashboard (https://bitbo.io/ ).
Bitcoin Current Price in Dollar Terms (10/15/21 morning) ~$61.5k
*Bitcoin’s price is a lagging indicator of people’s understanding of what money is*- pinned tweet here.
1 cuck buck (USD) buys you ~1630 sats
*This is helpful to track over time and familiarize ourselves with as sats become the standard*
Hash rate ~142 EH/s
*Hash rate is the total computing or processing power being contributed to the bitcoin network, and it also serves as bitcoin’s tie to the physical world by energy expenditure*
Bitcoin’s hash rate has made a tremendous recovery over the last few months after the bitcoin mining ban enforced by China. The network has shown immense resilience against such an attack and has checked off another attack vector showing its incredible strength, level of decentralization and how strong the economic incentives are. I call it “game theory on steroids.” See the hash rate chart from the entire year below. This will presumably go down as one of the most cited and important charts over the years to come as it represents the biggest geopolitical blunder of the Chinese nation state in the 21st century. More than 1/3rd of the hash rate has now migrated to the US in what has been the biggest migration of miners in bitcoin’s entire history.
Next, we’ll look at some Lightning Network (LN) market stats. LN is a second layer protocol on top of bitcoin, which scales the base settlement layer by facilitating payments & transactions. We’ve made detailed threads on LN before and continue to provide a weekly update on the subject separate to this newsletter. Find below links to full articles and references on LN-
Network Capacity ~3080
*This is the total amount of bitcoin locked on the LN network to facilitate payment flow*
LN has gone exponential in pretty much all metrics of growth over the last year or so, with the network capacity being no exception, as it’s risen to above 3000 bitcoin or (~$180m). LN seems to definitely be on track in gaining widespread adoption over the coming years and is something to keep an eye on and track. We should note that the network capacity on LN is another supply side shock on bitcoin the asset, although not substantial right now, but will be interesting to see how much gets locked up over the coming years.
Number of Channels ~76,729
*Number of channels opened between nodes on LN to facilitate payment flow*
Number of Nodes ~27,993
DAILY NEWS
BREAKING NEWS : VALKYRIE’S BITCOIN STRATEGY ETF APPROVED BY US SEC
US SEC has approved the first US Bitcoin Futures exchange traded fund (ETF) as of today, October 15th 2021, in what is a huge moment for the industry after years of waiting in anticipation. The proposal by Valkyrie named ‘Bitcoin Strategy ETF’ is based on futures contracts and was filed under mutual fund rules that SEC Chairman Gary Gensler said provide “significant investor protections.” Four futures backed Bitcoin ETFs could begin trading on U.S. exchanges this month, with deadlines for applications from all of them approaching.
The link to the bloomberg article from yesterday is here:
We should note that this would be a “futures backed ETF” rather than a spot backed ETF where you could hold actual BTC. Issuing this ETF is a good step, but it basically offers a product to financial institutions to exploit massive arbitrage opportunity as the futures will trade at a large premium in bull phases of the market cycles and these funds get to capture those returns. Multiple new intermediaries need to be added who all make profits on this product: the ETF provider, the clearing house, the futures broker, the administrator, the auditor, the law firm, and the CME and hedge fund arbs.
Matt Hougan, CIO of Bitwise, explains the difference between the two products in this twitter thread below:
Fee structure Risk: With a futures backed ETF, you’ll have to roll over the futures which would cost 5-10% per year in fees. Add to that 1-2% of management fees.
Dilution Risk: Such ETFs cannot hold 100% in bitcoin futures and most would target 85% in bitcoin, so the remaining 15% would most likely be built up of bonds (yikes).
Tail Risk: Remember what happened with oil futures back in March 2020 where they went negative. Depending on position sizing, liquidity, etc., there are events in which things can break similarly to what happened with oil futures back in 2020. Something to be aware of.
Risk Summary: So investors choosing to get exposure to bitcoin via such products will take a 6-12% fee hit, face 15% dilution risk vs owning 100% of their funds in bitcoin otherwise & face tail risks like the ones that happened with oil futures.
So why has the SEC not allowed a direct spot bitcoin ETF? Matt covers this in the thread, but, in short, the concern that the SEC has previously outlined to Bitwise was regarding the need to have a “regulated market of significant size” which allows price discovery like other commodity ETFs. But CME already leads price discovery for bitcoin and the market has matured significantly over the last 2+ years since this argument came up. A direct bitcoin ETF should make logical sense giving how much better of a product it is for investors compared to the futures backed one. We’ll wait and see what happens on this end closely over the next few months to years, as these products can take time to be approved.
Anyways, even a futures backed ETF for bitcoin is a step in the right direction and gives an option for investors looking for any option to get exposure to bitcoin and who are incapable of holding spot directly and custody it themselves. For the average person out there, it is much more advisable to learn to buy bitcoin directly and safely custody it themselves.
ON-CHAIN MARKET ANALYSIS
UTXO Age Distribution Analysis & HODL Waves
In issue #1, we’ll cover UTXO Age Distribution & HODL waves and use that on-chain metric to analyze what’s happening to bitcoin’s supply on open market and where the price could be headed next.
I wrote a detailed thread on this metric last week, find the link below and I recommend reading if trying to learn on-chain.
Some people have been asking me to write in depth about on-chain metrics like I did about LN node before. It's a new field of data analytics which excites people and there's wide interest to learn. So i went and got a glassnode sub to graph some metrics and help out as i can.Bitcoin's accounting structure is made up of UTXOs - Unspent Transaction Outputs. A UTXO is created when any amount of bitcoin is last used in a transaction. All UTXOs are hence timestamped by the block/tx in which they are/were created.
For example, if I move my bitcoin today, which i bought in March 2020, the time stamp of that UTXO would change from 18+ months old to 1 day old. Since bitcoin maintains a public record of the ledger, these UTXOs and their age distributions can be analyzed and studied to ascertain market participants behavior.
A HODL wave is created when a large amount of UTXOs are spent on the way up to a price high in bitcoin's market cycles, as seen previously. I recommend reading the entire thread if you desire to learn it in depth.
Now, let's look at the current market cycle HODL wave and see if we can pick up on a few things. I'm looking from Dec 2017 to today. As of Oct-2021 UTXO % that has not moved for-
>10y : 12.3%
>7y : 19.2%
>5y : 22.7%
>3y : 35%
>2y : 45%
>1y : 53.8%
>6m : 73.7%
>3m : 85%
>1m : 92.1%
That means close to 85% of bitcoin’s supply has not moved in over 90 days. When have you come across a commodity with such strong hodlers before and couple that with the fact that producing the incremental bitcoin is only getting harder and harder over time with supply issuance getting halved every four years, next one only a few years away. And combine all of that with markets today where the Fed is printed 120B+ in QE monthly and 40% of all US dollars in existence have been printed over the last 1+ year, inflation being at all time highs although touted as being transitory due to supply chain issues. You’re outlining a recipe for a massive supply shock & price appreciation in bitcoin over the coming months that’ll be one to behold.
This is one example of how on-chain metrics can help analyze behavior of market participants and provide insights. We plan to cover a lot more of them routinely over the coming weeks.
RECOMMENDED PODS/READINGS
Before we wrap up, I’ll point to some pods/readings that I have personally listened to over the last few days or week and we recommend to you as well if you’re looking for options for your next roadtrip, your next hike or while cooking your next dinner. We got you covered.
MEME OF THE DAY
One last thing before we wrap up issue #1, we cannot end without pointing one of the memes floating around on bitcoin twitter. Bitcoiners are meme-ing bitcoin into global reserve currency/asset status live on the internet everyday and it makes for some of the most entertaining conversations and exchanges on the bird app, where bitcoiners live and hangout. Here’s one ‘pepe’ you’ll see a lot over the coming months.
We’ll see you in the next issue. Until then, stack hard my deer, stack as your life depends on it, because it truly does. Cheers!