Ecoinometrics - February 10, 2021
Bitcoin's ABZ...
There is a mistake commonly made by Bitcoiners and critics alike. They get bogged down into too many details and hypotheticals instead of focusing on the big picture.
But there is an easy cure for that. Just know your Bitcoin ABZ…
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Bitcoin’s ABZ
This ABZ framework doesn’t come from me. I’ve heard the idea from Shaan Puri. It boils down to the following.
If you want to achieve anything, you shouldn’t get caught into the details of what are all the steps needed to get there. In fact there are only three things that matter at any given time:
A = Where you are
B = What’s your next step
Z = What’s your end goal
Simple.
Here is an illustration by Jack Butcher:
You need to know what state you are in to get a clear assessment of the situation. That’s A.
You need an end goal otherwise you have no general guide for what to do and you end up doing random things. That’s Z.
In between the starting point and the desired goal infinitely many things can happen. Some of those things will be in your control. Others won’t.
But if you start to worry about that infinite amount of scenarios and account for all possible futures you are more likely than not to get stuck at the planning stage.
Instead you can just focus on what’s the next step that puts you on the general direction of the end goal. That’s B.
When you have reached B just repeat the same process. At least you are moving forward.
At this point you are probably wondering if this newsletter is about finance or self improvement…
Don’t worry. I swear this is connected to Bitcoin.
Of course Bitcoin is not a person or organization with set goals. It is a decentralized network. It has no will of its own.
But it was built with a purpose and the participants in the network are collectively shaping its future.
Thus I’d argue that you can apply this ABZ framework to understand the situation and think about what’s to come next.
So what’s Bitcoin’s ABZ?
The Z certainly exists on a scale. Depending on who you ask the end goal is between:
Bitcoin is the world’s currency aka hyperbitcoinization.
Bitcoin is a global store of value with a status more or less equivalent to a global reserve currency.
The A is relatively clear. At this point Bitcoin is an emerging store of value:
It has the technological properties of a store of value.
The dominant narrative is describing it as digital gold.
A growing number of people are using it as a reserve asset.
When you put the market cap of Bitcoin in context this A state kinda fits.
Bitcoin is up there with the FAANGs / mega cap stocks. My guess is that many investors are focusing on Bitcoin more as an asymmetric bet than a pure store of value play.
That’s totally fine. This is what you expect to happen during the adoption phase. The network grows and its value grows exponentially.
This is not the time to worry about the price stability of your store of value.
In view of the Z end goal the potential growth is far from being realized which means that yes indeed Bitcoin is an asymmetric bet.
What’s B then? What’s the next step?
Remember, we don’t want to look too far ahead. We want something that is reasonable, something that can happen in a relatively short time frame and doesn’t involve building on layers of hypotheticals.
You can insert your own B here. But I’m gonna tell you what I think.
I think a reasonable step B is for Bitcoin’s market cap to flip Apple.
That’s the correct direction if your end goal is Z:
Apple is the most valuable company in the world. Seeing BTC rise above that level would be a clear psychological signal that it is more than just “something like a penny stock“ or “money for buying drugs over the internet“.
As you can see on the chart, what comes above Apple is definitely falling in a different category. Federal Reserve balance sheet, AUM of the largest global money manager, total size of the above ground gold market. That starts to feel more like money.
This step B is achievable because:
To flip Apple, one BTC needs to be worth $123k. Based on the growth trajectory of the previous halving cycles and where we are right now this valuation is plausible.
The market dynamic started by Michael Saylor with MicroStrategy is driving this movement. With the additional institutional interest coming in, you don’t need to wonder what will fuel the growth of the market during this cycle.
So if you are trying to judge how Bitcoin is doing, measure its success against that B target. There will be times to worry about what comes next when we get there.
Until then hodl and stack sats.
CME Bitcoin Derivatives
There are lots of different ways to trade Bitcoin these days:
Spot BTC.
The Grayscale Bitcoin Trust.
MicroStrategy, Tesla and a whole lot of other companies with exposure to BTC.
The Bakkt futures.
The crypto exchanges derivatives products.
And we have the cash settled CME derivatives of course.
But as far as I can tell the CME is overwhelmingly used for one single trade: the basis trade.
I’m talking about it every week but for those who are reading this for the first time the idea is simple.
The CME futures are trading at a premium over the spot BTC market.
If you are long the spot BTC and short the CME futures your position on Bitcoin is neutral. Meanwhile you are pocketing the premium.
The result is that the smart money looks like it is extremely short Bitcoin on the futures data. But more likely this is just one half of a neutral position.
Since this is all that’s going on I feel that there is no point doing any deep dive on the CME trading activity these days. But of course we should keep an eye on it to see if the situation changes.
With Tesla’s announcement and the giant green candle that followed it isn’t surprising to see that there was a jump in trading activity in the past couple of days. Nothing unusual.
Last week’s Commitment of Traders report shows more liquidations of all sorts of positions. What’s notable is that the asset managers within the smart money are back to being neutral Bitcoin.
My guess is that they had a good run on the few long positions that they started building after the halving and it is now time to take profit.
The trading activity on the CME options market continues to be a snoozefest. My take on it is that:
Most traders don’t feel like they need to buy puts in this bull market.
Since no one knows how high and how fast BTC will rise this year, the call sellers that do so to generate yield probably don’t feel like selling much right now.
I don’t have any insider information on what’s going on in the options market these days but those are at least plausible explanations for the lack of activity during this bull market.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
Done? That’s great!
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